In brief - Treasury has released the Treasury Laws Amendment (OECD Multilateral Instrument) Bill 2018, to amend the law to implement the OECD Multilateral Convention to Implement Tax Treaty related Measures to Prevent Base Erosion and Profit Shifting (the Convention), otherwise referred to as the Multilateral Instrument
As with other relevant international agreements, the International Tax Agreements Act (1953) will be amended to include a reference to the Convention. Section 5 of the Act will make the Convention the substantive law of Australia "according to its tenor".
The Convention is the culmination of a long period of Base Erosion and Profit Shifting (BEPS) and transfer pricing considerations by the OECD.
The 2013 Action plan on base erosion and profit shifting identified a 15 point action plan to counter BEPS. The need to develop a multilateral instrument was identified in the action plan.
One of the elements of the Convention is to address hybrid mismatches
A hybrid is an organisation that is characterised as a corporation by one jurisdiction, a transparent entity by another jurisdiction. A hybrid instrument is an obligation classified as equity by one jurisdiction, and as debt by another jurisdiction.
Due to the differing classification of entities in different jurisdictions (eg pass through/transparent in one entity but not in the other) or differential characterisation of instruments and the active/passive income issue, hybrid mismatches can occur when, in particular, taxation arbitrage opportunities are used to achieve double non-taxation or deduction/non-inclusion.
In the less likely event that a hybrid/reverse hybrid creates double taxation, that is relatively easily dealt with under a DTA (double taxation agreement) eg Virgin Holdings SA v Commissioner of Taxation  FCA 1503; Undershaft (No 1) Limited v Commissioner of Taxation  FCA 41.
Article 3 of the Convention modifies the operation of covered tax agreements (DTAs) and provides for rules to reduce the incidence of hybrid double non-taxation or deductible/non-inclusion scenarios.
Article 4 provides that where under a DTA, a person other than an individual is a resident of more than one jurisdiction, the competent authorities shall endeavour to determine by mutual agreement the jurisdiction of which such person shall be deemed to be a resident for the purposes of the DTA.
Part III of the Convention provides mechanisms to combat treaty abuse
Article 7 provides that part of a DTA may be (in effect) disallowed (having regard to all of the facts and circumstances) where obtaining the benefit was one of the principal purposes of any arrangement or transaction that resulted indirectly or directly in that benefit, unless it can be established that granting the benefit under the DTA would be in accordance with the object and purpose of the relevant DTA (this has some parallels with Part IVA of the ITAA 1936, and specifically s177D).
The relevant authority may grant the benefit if, after having granted the relevant person a chance to be heard, the relevant authority determines that the benefits would have been granted in the absence of the transaction or arrangement.
Article 7.8 provides that except otherwise provided a resident of a party to a DTA shall not be entitled to a DTA benefit unless such resident is a "qualified person".
Article 7.9 defines a qualified person as:
(a) an individual;
(b) a relevant contracting jurisdiction or a political subdivision/local authority;
(c) a company or other entity if the principal class of its shares is regularly traded on a recognised stock exchange;
(d) a person other than an individual that is a non-profit or is treated as a separate person under the taxation laws; and
(e) a person other than an individual if the person owns, directly or indirectly, at least 50% of the shares of that person for at least half of the 12 month period including the time when the benefit would otherwise be accorded.
Article 7.11 provides that a resident who is not a qualified person shall be entitled to a benefit under a DTA if at least half of the 12 month period (including the time when the benefit would otherwise be accorded), persons that are equivalent beneficiaries own directly or indirectly at least 75% of the beneficial interest of the resident.
Article 8 provides that:
(a) any provisions of a DTA that exempt dividends paid by a company resident of a jurisdiction from tax or limiting the rate at which such dividends may be taxed;
(b) provided that the beneficial owner or the recipient is a company which is a resident of the other jurisdiction and which holds a certain amount of the capital, shares, voting power or similar of the company paying the dividends;
(c) it will only apply if the ownership conditions are met throughout a 365 day period, including the day of the dividends.
This aims to prevent artificial temporary shifts in order to take advantage of arbitrage opportunities.
Article 9 provides that:
(a) provisions of a DTA providing that gains derived by a resident of a jurisdiction from the alienation of shares or other rights of participation may be taxed in the other party of the DTA,
(b) (provided that the shares derived more than a certain part of their value from immovable property situated in the second jurisdiction),
(c) will apply if the relevant value threshold is met at any time during the 365 days preceding the alienation, and
(d) will also apply to shares or comparable interest such as interest in a partnership or trust in addition to any shares or rights already covered.
Article 10 provides an anti-abuse rule for permanent establishments situated in a third jurisdiction.
It provides that:
(a) where an enterprise of jurisdiction A derives income from jurisdiction B and jurisdiction A treats such income as attributable to a permanent establishment of the enterprise situated in a third jurisdiction, and
(b) profits attributable to that permanent establishment are exempt from tax in A, then
(c) the benefits of the DTA shall not apply to any item of income on which the tax in the third jurisdiction is less than 60% of the tax that would be imposed in A if the permanent establishment were situated in A.
This is designed to prevent third jurisdiction arbitrage/abuse.
Rules designed to prevent the artificial avoidance of permanent establishment status
Article 12 provides rules to prevent the artificial avoidance of permanent establishment status through commissionaire arrangements and similar strategies.
It expands the meaning of "permanent establishment" in the OECD model to include where:
(a) a person is acting in a contracting jurisdiction which is a party to a DTA on behalf of an enterprise,and
(b) (in doing so) habitually concludes contracts or habitually plays the principal role leading to the conclusion of contracts that are:
(i) routinely concluded without material modification by the enterprise;
(ii) where the contracts are in the name of the enterprise or for the transfer of the ownership of or for the granting of the right to use property owned by the enterprise or for the provision of services by that enterprise.
Article 12.2 provides that the rule against artificial avoidance will not apply where the person in the jurisdiction carries on business as an independent agent and acts for the enterprise in the ordinary course of a business.
However, where that person acts exclusively or almost exclusively for one or more enterprises to which it is closely related, that person shall not be considered to be an independent agent.
This may have some impact upon insurance arrangements for foreign insurers via coverholders or agents but may have an impact upon larger brokers whose practices may fall within the definition: see eg Tariff Reinsurances Limited v Commissioner of Taxes (Victoria) 21 (1938) CLR 194; Taisei Fire & Marine Ins Co v Commissioner 104 TC 535 (1995).
It may also have a significant impact upon agency/distribution agreements relating to an agent in Australia which routinely arranges offshore supply to onshore entities.
Article 13 provides that a party may apply rules to prevent the artificial avoidance of permanent establishment status through specific activity exemptions.
Rules against the splitting up of contracts in large projects
Article 14 provides rules against the splitting up of contracts in building sites, construction projects, installation projects or other specific projects identified in relevant provisions of a DTA, and supervisory or consultancy activities in connection with such a place, where these activities are carried on during one or more periods, where aggregate exceeds 30 days.
This provision will be important in respect of large infrastructure projects where contract splitting has led to beneficial tax treatment.
Part V provides for improving dispute resolution, and Part VI provides for arbitration.
Despite recent high profile cases in Australia relating to transfer pricing, a subset of base erosion and profit shifting [Chevron Australia Holdings Pty Ltd v Commissioner of Taxation  FCA 1092 and SNF (Australia) Pty Ltd v Commissioner of Taxation  FCA 635], it is unclear whether any real or useful lesson can be drawn from them.
However, it is clear that the Convention, which will require significant work on the part of companies, entities and the ATO, will have a much more dramatic impact.