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Under the OECD BEPS Multilateral Instrument (MLI), which feature applies to a Covered Tax Agreement once both contracting jurisdictions have ratified it and the provision is not reserved against?

The Principal Purpose Test is read into the Covered Tax Agreement. It denies treaty benefits where obtaining that benefit was one of the principal purposes of an arrangement. The MLI amends treaties alongside existing text; it neither terminates them nor changes withholding rates.

  1. AThe treaty is automatically terminated and replaced by the OECD Model Convention
  2. BThe Principal Purpose Test (PPT) is read into the treaty to deny treaty benefits where obtaining the benefit was one of the principal purposes of an arrangementCorrect
  3. CThe treaty rates of withholding tax are reduced to nil
  4. DThe treaty becomes applicable only to residents of OECD countries

Explanation

The MLI modifies Covered Tax Agreements without bilateral renegotiation. The PPT, a minimum standard under BEPS Action 6, denies a treaty benefit if obtaining it was one of the principal purposes of the arrangement, unless granting it accords with the treaty's object and purpose. The MLI does not terminate treaties or cut rates to nil.

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