On June 7, 2017, Korea signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting ("Multilateral Instrument" or "MLI") at a signing ceremony hosted by the OECD in Paris.

The purpose of the MLI is to enable jurisdictions to swiftly modify their bilateral tax treaties to implement measures under the BEPS Project endorsed by G20 Summit held in November 2015. A total of 68 jurisdictions (including 33 OECD members, China, and India) signed the MLI. However, the United States did not participate in the signing.

A particular bilateral tax treaty will only be amended by the MLI where both parties are signatories to the MLI and have made a notification that the MLI applies to the treaty. Tax treaties between MLI signatories will be automatically updated without separate bilateral negotiations.

Among Korea’s 91 tax treaties, 45 tax treaties1 will be affected by the MLI. The main content of the MLI and the MLI provisions adopted by Korea is as follows.

I. Main Content if MLI and MLI Provisions Adopted by Korea

Articles 1 and 2 of the MLI prescribe the scope of application, and Articles 3 to 26 prescribe the content of the BEPS Project to be reflected in tax treaties covered by the MLI. Korea has adopted only the following minimum standards under the BEPS Project: "Purpose of a Covered Tax Agreement" (Article 6); "Prevention of Treaty Abuse" (Article 7); "Mutual Agreement Procedure" (Article 16); and "Corresponding Adjustments" (Article 17).

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* Article 17 is a best practice (corresponding adjustment by tax treaty) which is one of the means to implement the minimum standards (each jurisdiction is required to implement a corresponding adjustment by domestic law or tax treaty).

Accordingly, once the MLI comes into effect for Korea’s tax treaties, a tax treaty benefit will be denied where one of the principal purposes of an arrangement or transaction is to obtain the benefit. Also, where a taxpayer encounters taxation which is not in accordance with the intended application of the tax treaty provisions, the taxpayer can present the case to the competent authority of each jurisdiction.

When signing the MLI, Korea has adopted only the minimum standards mandatorily required to be implemented, and if necessary, will consider the possible application of the other BEPS measures contained in the MLI that are not minimum standards. The other MLI provisions are as follows.

- (Article 3) Transparent Entities

- (Article 4) Dual Resident Entities

- (Article 5) Application of Methods for Elimination of Double Taxation

- (Article 8) Dividend Transfer Transactions

- (Article 9) Capital Gains from Alienation of Shares or Interests of Entities Deriving Their Value Principally from Immovable Property

- (Article 10) Anti-abuse Rule for Permanent Establishments Situated in Third Jurisdictions

- (Article 11) Application of Tax Agreements to Restrict a Party’s Right to Tax Its Own Residents

- (Articles 12 to 15) Artificial Avoidance of Permanent Establishment Status

- (Articles 18 to 26) Mandatory Binding Arbitration

II. Domestic Procedures

Korea will ratify the MLI in accordance with its domestic procedures. The MLI will enter into force three months after five jurisdictions have deposited their instrument of ratification with the OECD. Each of Korea’s 45 tax treaties, which will be modified by the MLI, will take effect three months after both Korea and its bilateral treaty partner have deposited their instrument of ratification to the OECD.

III. Responsive Measures

With the signing of the MLI by a large number of jurisdictions, tax issues for companies carrying out cross-border transactions have become more complicated and difficult, because the relevant tax law, the applicable bilateral tax treaty, and the MLI should be comprehensively reviewed. Accordingly, before carrying out cross-border transactions or making international investments, it is recommended that companies accurately examine tax issues with the help of international tax experts, thereby reducing unexpected risks.