“Multilateral Convention on the Implementation of Measures relating to Tax Treaties to Prevent Base Erosion and Profit Shifting” will enter into force for China on 1 September 2022russonxiao
The “Multilateral Convention to Implement Tax Treaty Related to Prevent Base Erosion and Profit Shifting (hereinafter referred to as the MLC), commissioned by the Organization for Economic Cooperation and Development (OECD) and led by the Group of Twenty (G20), aims to revise existing bilateral tax treaties as a package and implement the recommendations of the Base Erosion and Profit Shifting (BEPS) Action Plan outcome relating to tax treaties. As of 30 June 2022, 97 countries or territories, including China, have signed the MLC. The MLC will enter into force for China on 1 September 2022.
The main elements of the MLC include the proposed outcomes of BEPS Action Plan II (Eliminating the effects of hybrid mismatch arrangements), BEPS Action Plan VI (Preventing the improper granting of agreed preferences), BEPS Action Plan VII (Preventing artificial circumvention of what constitutes a permanent establishment), BEPS Action Plan XIV (Making dispute resolution mechanisms more effective), and the option by the MLC Parties to make reservations and notifications. By making reservations or notifications, the MLC Parties determine the scope of the MLC’s amendments to their existing tax treaties and specific provisions. The text of the MLC and the list of reservations and notifications made by China to the MLC are available on the website of the State Administration of Taxation.
The MLC “integrates” national tax treaties, bringing together tax treaties negotiated between countries to address abusive agreements, creating a seamless web of cooperation to address global BEPS issues and reduce tax disputes between countries. To implement the MLC, the OECD has set up a quality control system, requiring each country that wishes to join to meet a minimum standard – the BEPS Sixth Action Plan Minimum Standard – and will conduct an annual “peer review “to urge countries to take action as soon as possible.
The main tools of the MLC are the Principal Purpose Test (PPT) and the Limitation of Benefit Clause (LOB).
What is a PPT?
The PPT provision is one of the core tools to address tax treaty abuse and refers to the fact that tax authorities should not grant treaty benefits to non-residents if they believe that one of the main purposes of an arrangement or transaction is to obtain treaty benefits and that such an arrangement is contrary to the object and purpose of the tax treaty. It increases the uncertainty of the tax outcome for the taxpayer.
What is the LOB?
The LOB provisions are effectively a “whitelist” system designed to grant tax treaty benefits only to qualified entities and not to “paper” companies seeking to extract tax benefits. The MLC proposes a whitelist of:
- governments and their subsidiaries
- listed companies
- non-profit organizations and pension funds
- headquartered companies
- entities whose income is derived from active business activities
- entities with 50% control of the above-whitelisted entities
- equivalent beneficiaries who hold 75% of the above-whitelisted entities
- and other circumstances deemed eligible by the tax authorities
The whitelist does not include tax arrangements such as holding companies and financing companies, which are commonly used by non-residents and excludes the risk of abuse of the agreement by these entities.
The OECD recommends that each country proceeds with the revision of bilateral tax treaties and the development of its anti-avoidance legislation following its national circumstances and concerning the model agreements and the tools of the MLC.
In recent years, China has been effective in this regard, with Chapter 6 of the Enterprise Income Tax Law providing for a series of anti-avoidance measures, including transfer pricing, capital weakening, cost sharing, controlled foreign enterprises, etc. These are mainly some specific anti-avoidance arrangements, along with the General Anti-Avoidance Administration Measures (for Trial Implementation) stipulated in Decree No. 32 of the State Administration of Taxation.
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