- The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting became effective for China on 1 September 2022.
- In anticipation of the changes to the existing China tax treaties as early as January 2023, multinational enterprises should act with extra caution when entering a specific arrangement or transaction, especially the principal purpose test which may lead to denial of treaty benefits.
China’s State Taxation Administration (STA) released STA Public Notice [2022] No. 16 (PN 16) on 1 August 2022 to clarify certain matters related to the entry into force of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS) (MLI) and the commencement of the application to certain tax treaties. The MLI became effective for China on 1 September 2022.
As of 30 June 2022, the MLI applies to 47 tax treaties1 signed by China upon the completion of the entry into force procedures of the MLI by both contracting parties of the tax treaties. It’s anticipated that more countries and regions will sign the MLI and complete the entry into force procedures and thus, the scope of the MLI applicable to China’s existing tax treaties will be further expanded.
In accordance with Article 35 (commencement of application) of the MLI, the date on which the provisions of the MLI will have effect to the tax treaty is normally determined by the latest of the date of entry into force of the MLI for that contracting jurisdiction. For example, the effective dates of the MLI for Singapore and China are 1 April 2019 and 1 September 2022 respectively. According to the provisions of Article 35.1 of the MLI, the application of the MLI to the tax treaty between China and Singapore is as follows:
- For withholding taxes on payments to or attributable to non-residents, the MLI is applicable to taxable events from 1 January 2023 (i.e., the first day of the next calendar year following 1 September 2022).
- For all other taxes, the provisions of the MLI would apply on taxes levied on or after the tax period of 1 March 2023 (i.e., six calendar months from 1 September 2022) or later.
Impact on existing tax treaties
According to the complete list of final reservations and notifications published by the Chinese Government, China has adopted two types of recommendations in the MLI. For instance, the BEPS minimum standard clauses, which include non-taxation or reduced taxation through tax evasion or avoidance, and the principal purpose test clause to deal with treaty abuse. In addition, China has adopted other non-mandatory clauses such as the preamble language intended to further expand the economy and strengthen tax cooperation, the provisions of tax treaties that do not restrict the taxation of resident countries, and the rule of dual resident entities. If the contracting party of the tax treaty also adopts the corresponding recommendation in the MLI that has entered into force, the MLI will modify the corresponding provisions of the existing tax treaty.
In anticipation of the changes to the existing China tax treaties as early as January 2023, multinational enterprises should act with extra caution when entering a specific arrangement or transaction, especially the principal purpose test which may lead to denial of treaty benefits. It’s imperative to rationalize the global business structure from a multilateral perspective to avoid double taxation for cross-border investments and ensure certainty on tax positions.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Tax Services Limited, Hong Kong
- Jane Hui
- Becky Lai
Ernst & Young (China) Advisory Limited
- Vickie Tan, Shanghai
- Walter Tong, Shanghai
- Patricia Xia, Shanghai
- Andrew Choy, Beijing
- Ho Sing Mak, Shenzhen
Ernst & Young LLP (United States), China Tax Desk
- Min Fei, New York
- Ryan Lu, New York
- Alvin Li, New York
- Lucy Wang, Chicago
- Kenny Guo, Chicago
- Diana Wu, San Jose
Ernst & Young LLP (United Kingdom), China Tax Desk, London
- Cyril Lau
- Jaclyn Hu
Ernst & Young LLP (United States), Asia Pacific Business Group, New York
- Chris Finnerty
- Gagan Malik
- Dhara Sampat
- Bee-Khun Yap
Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago
- Pongpat Kitsanayothin
