The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, known as the BEPS Multilateral Instrument (MLI) and drawn up in Paris on 24 November 2016, is a treaty that allows states to amend their network of bilateral double taxation agreements in one step, instead of renegotiating each agreement individually. Kuwait approved joining it under Decree-Law No. 62 of 2026, while Bahrain's Decree-Law No. (11) of 2024 refers to Bahrain's accession to this treaty under Law No. (2) of 2022, among the legislation recited in its preamble.

Why a "Multilateral" Treaty Instead of Bilateral Renegotiation?

According to the explanatory memorandum of the Kuwaiti decree-law, this treaty responded to the need to "ensure the swift, coordinated and consistent implementation of the treaty-related BEPS measures in a multilateral framework", and the "need for an effective mechanism to implement the agreed changes in a synchronised and effective manner across the existing network of income tax treaties without the need for bilateral renegotiation."

Structure of the Treaty: Seven Parts and Thirty-Nine Articles

According to the same explanatory memorandum, the treaty comprises thirty-nine articles spread across seven parts: scope and interpretation of terms; then hybrid mismatches (transparent entities, dual resident entities, and methods for elimination of double taxation); then treaty abuse; then avoidance of permanent establishment status; then improving dispute resolution; then arbitration; and finally final provisions.

Tax Purpose and Preventing Treaty Abuse

Among the most notable provisions of the third part are the "purpose of a covered tax agreement" and "methods for preventing treaty abuse" — provisions that prevent double taxation treaties from being used to obtain tax benefits not intended by the treaty's original parties, including so-called "treaty shopping" arrangements aimed at benefiting from a treaty through residents of a third jurisdiction with no direct connection to it.

Mandatory Arbitration as a Dispute Resolution Tool

The treaty's sixth part, titled "Arbitration", is devoted to a mandatory arbitration mechanism used when a case cannot be resolved through the mutual agreement procedure between the competent authorities within a set period. Its first article provides that this part applies only between parties that opt into it, while its second article establishes the obligation to mandatory arbitration in cases where both parties have chosen to apply this part. Whether two particular states subject their bilateral treaty to this part depends on each one's choice at signature or ratification.

What Does the Treaty Change in Existing Bilateral Agreements?

The Kuwaiti explanatory memorandum stated that the objective is to "ensure that the interpretation of existing double taxation agreements for the avoidance of double taxation on income... does not create an opportunity for non-taxation or reduced taxation through tax avoidance or evasion" — meaning the treaty introduces protective amendments into the existing double taxation agreements themselves, rather than replacing them with an independent tax treaty.

Legal References

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