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On 7 June 2017, over 70 countries and jurisdictions signed the OECD Multilateral Instrument (MLI) designed to combat Base Erosion and Profit Sharing (BEPS). This MLI will bring signatories’ pre-existing Double Taxation Agreements (DTAs) up to the standard established by the 2015 OECD BEPS regulations.


Each of the signatories must now ratify the instrument according to their domestic laws. The instrument will take effect in each country 3 months after the ratification, and it will enter into force 6 months after that. 25 more countries are expected to sign the Multilateral Instrument (MLI) by the end of 2017. 


Signatories can choose which pre-existing Double Tax Agreements (DTAs) to apply the new MLI to. For a pre-existing tax agreement to be “upgraded” by the new MLI, both countries must agree to apply the MLI provisions to their pre-existing DTA.


For example, Germany and Canada are both signatories to the MLI, and already have a Double Taxation Agreement (DTA). After ratifying the MLI, they both must nominate their DTA for the MLI standards to be applied to it. If Germany nominates its DTA with Canada, but Canada does not nominate its DTA with Germany, then the MLI would not be applied to their DTA.


Crucial to the success of the MLI is that signatories nominate most of their DTAs to be upgraded by the MLI. This seems to be the case for most signatories, and the OECD reports 85% of signatories’ DTAs were nominated to be upgraded by the MLI. A small number of countries (Switzerland) have limited the number of nominated DTAs, waiting to see the effect of the MLI before nominating more of their DTAs.


China is no exception and has nominated all its eligible DTAs for the MLI.




We realize all the terminology here can be a little confusing, so we’ll define some of the key terms we use here.


Double taxation and double tax agreements (DTAs)


Double taxation is when an individual’s or company’s income is taxed by two different countries. A double taxation agreement (DTA) specifies which country the individual or company pays the tax to, and which country’s tax laws they follow when paying the tax.


What is Base Erosion and Profit Sharing (BEPS)?


The main purpose of this MLI is to stop Base Erosion and Profit Sharing (BEPS), but what exactly is BEPS? According to the OECD, BEPS: 


Refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no tax locations where there is little or no economic activity.


This results in little-to-no corporate income tax being paid. The OECD estimates significant global tax revenue losses from BEPS. Estimates put losses at 4-10% of global corporate income tax revenue, or $100-240 billion US dollars a year.


Why is this being called a Multilateral Instrument (MLI) instead of a treaty?


A treaty is a new agreement or replaces an old agreement. This Multilateral Instrument (MLI) is not a new treaty itself, but rather modifies over one-thousand pre-existing treaties. From 2013-2015, the OECD created a series of recommendation to combat Base Erosion and Profit Sharing (BEPS). Implementing these changes requires changes to thousands of pre-existing tax treaties.


So instead of creating a new treaty, this MLI will “improve” over one-thousand pre-existing Double Taxation Agreements (DTAs) by implementing the 2013-2015 OECD recommendations. The MLI also includes measures to reduce double taxation, prevent treaty abuse, and conflict resolution mechanisms.


This MLI is much more flexible than a treaty. While it has certain minimum standards, it has many optional provisions, and grants signatory countries significant leeway in implementing them. For example, one optional part of the instrument (that most states, including China, opted out of), is mandatory binding arbitration.


Because this MLI is upgrading existing bilateral treaties, the final form of the MLI will look different country by country. China and Mexico’s upgraded DTA (double taxation agreement) will likely be different than China and Germany’s. Each country can make modifications at any point during the process.    


How does this MLI fight BEPS?


Now that we have defined what Base Erosion and Profit Sharing (BEPS) is, how does this Multilateral Instrument (MLI) help to combat it?


This MLI upgrades existing DTAs by implementing the recommendations from the OECD's Base Erosion and Profit Sharing (BEPS) project. These upgrades will prevent treaty abuse, improve dispute resolution, prevent the artificial avoidance of permanent establishment status, and neutralize the effects of hybrid mismatch arrangements.


Required and optional standards


This MLI has 15 “actions,” 14 of which are required minimum standards. They were jointly developed to tackle tax avoidance, make international tax rules clearer, and create a more consistent regulatory framework. Some of the most important “actions” are:


-Action 2: Hybrid mismatch arrangements. These are arrangements that exploit differences in the tax policies between two or more countries. Hybrid mismatch arrangements are a major issue in many countries. They often lead to unintentional “double non-taxation” or tax deferral.


-Action 6: Regards treaty abuse.  


-Action 7: (An Optional provision) Strengthens the definition of permanent establishment.


-Action 14: Covers Mutual Agreement Procedures (MAP) and MAP arbitration, and how to make them more effective. It contains 17 minimum standard measures and 11 “best practices.”


Action 6: PPT vs LOB


Action 6 is one of the more important actions. It concerns the granting of treaty benefits to undeserving parties or tax cheats. To prevent tax cheats from receiving benefits, it requires a Principles Purposes Test (PPT). In addition, countries can choose to follow a Limitation on Benefits (LOB) rule, or a combined approach with both the PPT and LOB (only 12 countries chose this option). A PPT is more subjective than a LOB rule, so countries that chose the PPT over the LOB will retain more discretion.


A principles purposes test (PPT) checks if the purpose of a business or investment is only made so that they can gain access to the tax benefits under a DTA, often through a shell company (this is known as treaty shopping).  The PPT test will apply to all treaties covered by the MLI, introducing this rule to the over 1,100 treaties already covered by the MLI.


Countries have also largely used the MLI to update their DTA Mutual Agreement Procedures (MAP) in line with the MLI Action 14 minimum standard requirements. In addition, 12 signatories have chosen to supplement the provisions of the PPT with a simplified LOB test (not China or Germany).


Article 14 - Mutual Agreement Procedures (MAP)


A Mutual Agreement Procedure (MAP) allows signatories a means to address their disagreements. While MAP provides a mechanism to resolve disputes, signatories are not actually required to resolve the dispute in any way. A dispute between two signatories, while acknowledged, could easily drag on, unresolved, for years.


Signatories have the option to agree to mandatory binding arbitration, which has a neutral panel of decision makers render a final verdict. This, however, is optional, and many countries (including China and Germany) opted out.


What does this mean for China?


Which DTAs will China Upgrade?


China has 102 DTAs with countries that signed the MLI. China has nominated all of them, but some countries (Switzerland and Norway) don’t want to upgrade theirs with China yet. Other countries that China has a DTA with haven’t signed the MLI yet, though some are expected to soon be. As of now, 49 of China DTAs are ready to be upgraded.


The MLI updates will apply to almost all of China’s major trading partners (notable exceptions of US, Brazil).


What provisions is China opting out of?


A complex agreement, there are several optional provisions it will follow or opt out of on a case by case basis. We’ve highlighted several of the more important provisions China has chosen to reject or follow.


-China will update provisions in its DTAs regarding capital gains of land-rich entities.


-China will include the DTA provision that clarifies DTAs do not restrict a jurisdiction’s right to tax its own residents.


-China will adopt the provisions on dual resident entities.


-China won’t make any of the optional BEPS updates to the permanent establishment (PE) rules.


-Instead of allowing a local resident to reach out to the competent authority of either the contracting state or his own state, China will instead seek, through negotiations, for its DTAs to only allow a local resident to present his MAP case to the competent authority of where he is resident. If the resident’s objection is rejected by the local authority, then a bilateral consultation process with the other authority can start.


-Peer Review of China’s MAP provisions is scheduled to begin in late 2018.




The MLI actions are complicated and vary by country. First, check to see if your country signed, or is expected to sign (the USA is not). Then, which DTAs your country nominated for MLI upgrades. China nominated all its DTAs, and signatory countries nominated 85% of theirs, with only a few countries, like Switzerland, only nominating several of its DTAs. This means if your country signed onto the MLI, its DTA with China was probably nominated.


From there, look into the specifics of your country’s DTA with China. China fully opted out the mandatory arbitration but is willing to enter some of the other optional parts of the MLI if the other country is as well. Because the MLI has many optional components, most, if not all, of the DTAs will vary by country.


Of course, none of this has been ratified yet, and it can be changed before, during and even after ratification during the review process. While it is impossible to perfectly predict what China’s final MLI agreements will look like, Ecovis’ extensive experience dealing with Chinese tax laws, and personal relationships with Chinese regulators, give us a good idea. We’ll closely watch how the MLI continues to evolve in China and keep you informed of any updates.


With Contributions From Phillip Shattan 


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Richard Hoffmann

Richard Hoffmann is a partner at ECOVIS Beijing China. Richard obtained an honors degree in law and worked in Germany, the United States, and China for various prestigious law firms prior to joining ECOVIS. In addition to being a member of the board of ECOVIS International, he is Supervisor for the China business of a respected German company and shares his extensive knowledge to students by teaching commercial law in China at SRH Hochschule Heidelberg. He has published more than fifty articles in international magazines, frequently speaks at high profile events in China and abroad and is often invited as a legal expert by international TV stations. Contact: This email address is being protected from spambots. You need JavaScript enabled to view it.

Ecovis Beijing is the trusted tax and legal advisor to several embassies and official institutions in China. It specializes in mid-sized international companies and is focused on tax & legal advisory, accounting and auditing. If you’re interested in finding out more about tax and legal, don’t hesitate to sign up for our Newsletter, give us a call +86 (10) 6561 6609 or contact us directly via This email address is being protected from spambots. You need JavaScript enabled to view it.
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