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Action 2 and the Multilateral Instrument: Is the Reservation Power Putting Coordination at Stake?

In order to address tax arbitrage on hybrids arrangements, Action 2 of the Action Plan on Base Erosion Profit Shifting requires coordination on the modification of both levels domestic provisions and tax treaties. In this sense, the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting includes three provisions (Articles 3, 4 and 5) related to the hybrid mismatch arrangements. However, as these provisions may be subject to reservations, the coordination requirement may not be verified, undermining its effectiveness. Through an empirical analysis, this article shows that the signatories present a low commitment to these provisions. After explaining the coordination requirement in light of Action 2 recommendations and the need to modify tax treaties, the authors describe Articles 3, 4 and 5, and test such coordination. As the signatories of the Multilateral Instrument often reserve the right to apply one or more of these provisions, the reservation power is putting coordination at stake.