Focus on multilateral convention to implement tax treaties

By Apollo Xiao and Shaji Ravendran, AllBright Law Offices

On 25 May 2022, China deposited an instrument of ratification with the Organisation for Economic Co-operation and Development (OECD) about the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI), which took effect on 1 September 2022.


The original purpose of the bilateral tax treaty is to prevent double taxation. The Base Erosion and Profit Shifting (BEPS) initiative was a series of 15 actions designed to counter the aggressive tax planning techniques being used by multinational companies to shift their profits away from high-tax jurisdictions and into low-tax jurisdictions. Actions 1-14 of the BEPS initiative highlighted problems with the global tax regime and suggested potential solutions involving changes to the wording of the model tax treaty and other practices. Action 15 of the BEPS initiative was the creation of an MLI which would implement the tax-treaty related changes recommended under actions 1-14.


The convention will impact some tax treaties and some of their provisions. Each jurisdiction can make its own choice.

  • Apollo Xiao, AllBright Law Offices
    Apollo Xiao
    Senior Partner
    AllBright Law Offices

    Each jurisdiction can select the tax treaties to which the MLI will apply, and such treaties are referred to as covered tax agreements (CTAs). Treaties that are not listed as CTAs will remain unaltered and unaffected by the MLI. The number of China CTAs is 100. The most likely reason for the exclusion of some treaties is that they were signed recently and so already incorporate the outcomes of the BEPS project.

  • Each jurisdiction may decide whether to accept certain articles of the MLI or choose between different options contained within the MLI. If there is a mismatch between the choices of MLI provisions by the signatory states to any particular bilateral treaty then, in most cases, the provisions chosen will have no effect on that bilateral tax treaty.


After the ratification of the MLI, it will be more difficult to gain treaty benefits, so it is vital for Chinese entities with operations overseas to undertake their own internal compliance checks to ensure that they are still entitled to treaty benefits. These checks should include the following:

  • Assess the current provisions under the relevant bilateral tax treaty;
  • Check whether both jurisdictions have ratified the MLI and if the tax treaty is a CTA. The original bilateral tax treaty will remain the same if both conditions are not met;
  • Check whether the treaty contains any provisions that need to be amended or replaced by MLI articles. If not, then the treaty provisions will still be effective;
  • Check if there is any mismatch between the ratification documents of both countries in relation to specific provisions;
  • If there is no mismatch, then check how the MLI’s articles will amend or replace provisions of the tax treaty;
  • Assess whether the amendment or replacement will have adverse effects on the entity’s ability to gain treaty benefits; and
  • If there is an adverse impact, adjusting the company’s tax structure and plans is necessary.

Enterprises need to focus on the impact of the two most important changes: the principal purpose test (PPT) and tax residency.


Shaji Ravendran, AllBright Law Offices
Shaji Ravendran
Legal Consultant
AllBright Law Offices

The MLI states that a benefit under the CTA shall not be granted in respect of an item of income or capital if it is reasonable to conclude that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is in accordance with the object and purpose of the CTA. The MLI also states that the above-mentioned provision shall apply in place of, or in the absence of, provisions of a CTA.

This means that it will be more difficult to obtain tax benefits after the MLI comes into force. Therefore, when an enterprise makes an arrangement or transaction, it should pay attention to its purpose and keep relevant documents.


In some of China’s older tax treaties, an enterprise that is a resident of both contracting states shall be deemed to be a tax resident of the state where its head, main office or effective management is situated.

The MLI states that under this circumstance, the relevant tax authorities shall enter into a mutual agreement to determine the residency of the entity having regard to the place of its effective management, incorporation or establishment and any other relevant factors. In the absence of agreement on residency or tax benefits, such an enterprise shall not be entitled to any relief or exemption from tax provided by the CTA.

No CTAs in China are subject to this provision. Therefore, relevant entities that may be regarded as residents in more than one country should immediately clarify their residence status. Otherwise, they run the risk of being unable to access treaty benefits during potentially protracted negotiations between the tax authorities in China and the other state.


The other changes brought about by the MLI are as follows:

  • Alterations to the mutual agreement procedure;
  • Alterations to the treaty preamble;
  • Alterations to the provisions relating to dividends; and
  • Alterations to the provisions governing the taxation of capital gains made from shares and similar interests in entities that derive their value principally from immovable property.

As the OECD continues to introduce new initiatives, the MLI may be further changed. Therefore, enterprises should pay close attention to these alterations and follow-up changes, evaluate the impact of the new provisions on their operations, and make timely adjustments.

Apollo Xiao is a senior partner and Shaji Ravendran is a legal consultant at AllBright Law Offices. Elsy Liang, a senior associate at AllBright Law Offices, also contributed to the article

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