China: Application Of Article 16 (Mutual Agreement Procedure) Under The MLI To The Covered Tax Agreements (Part II)

Last Updated: 12 July 2019
Article by Alfred Chan

The following is Part 2 of the Application of the MAP Article in the MLI to the Covered Tax Agreements that specifically deals with How contracting jurisdictions apply Article 16 to their CTA's.

Table 1 - Reservation made under Article 16(5)

The following table shows the reservations, denoted by the letter "R", on Article 16 made under Article 16(5) by some selected Signatories and Parties, as per the information from the MLI database's matrix of options and reservations, which the OECD Depositary received on 28th June 2019. Note that this section illustrates how Article 16 works in practice from an Australian perspective.

Jurisdiction

Status

16(5)

16(5)

16(5)

16(5)

(a)

(b)

(c)(i)

(c)(ii)

Australia

Definitive

Canada

Provisional

R

R

China (PRC)

Provisional

R

Hong Kong (China)

Provisional

Japan

Definitive

Singapore

Definitive

R

United Kingdom

Definitive

R = reservation made by the contracting jurisdiction provisionally or definitively

1) Article 16(5)(a): Reservation for the first sentence of Article 16(1)

  • Reservation group (R): Canada, China, Singapore
  • No-reservation group (non-R): Australia, Hong Kong, Japan, and the U.K.

2) Article 16(5)(b): No reservation is made for the second sentence of Article 16(1)

3) Article 16(5)(c)(i): No reservation is made for the first sentence of Article 16(2)

4) Article 16(5)(c)(ii): Only Canada reserves its right for the second sentence of Article 16(2)

Table 2 – The bilateral tax treaty relations with reference to the reservation made under Article 16(5)(a)

Australia

Canada

China (PRC)

H. K.

Japan

Singapore

U.K.

Reserve

Reserve

Reserve

Australia

Y

Y

X

Y

Y

Y

Canada

Reserve

Y

Y

Y

Y

Y

Y

China (PRC)

Reserve

Y

Y

X

Y

Y

Y

Hong Kong

X

Y

X

Y

X

Y

Japan

Y

Y

Y

Y

Y

Y

Singapore

Reserve

Y

Y

Y

X

Y

Y

U.K.

Y

Y

Y

Y

Y

Y

"Y" denotes that there is a bilateral tax treaty between the two contracting jurisdictions. "X" denotes that no bilateral tax treaty has been signed between the two contracting jurisdictions.

Article 16(5)(a): Reservation for first sentence of Article 16(1) - Access to MAP

It is useful to reproduce Article 16(5)(a) here before we go ahead to analyze how this reservation work with reference to the information in Table A and Table B given above. Article 16(5)(a) provides that

"A Party may reserve the right:

a) for the first sentence of paragraph 1 not to apply to its Covered Tax Agreements on the basis that it intends to meet the minimum standard for improving dispute resolution under the OECD/G20 BEPS Package by ensuring that under each of its Covered Tax Agreements (other than a Covered Tax Agreement that permits a person to present a case to the competent authority of either Contracting Jurisdiction), where a person considers that the actions of one or both of the Contracting Jurisdictions result or will result for that person in taxation not in accordance with the provisions of the Covered Tax Agreement, irrespective of the remedies provided by the domestic law of those Contracting Jurisdictions, that person may present the case to the competent authority of the Contracting Jurisdiction of which the person is a resident or, if the case presented by that person comes under a provision of a Covered Tax Agreement relating to non-discrimination based on nationality, to that of the Contracting Jurisdiction of which that person is a national; and the competent authority of that Contracting Jurisdiction will implement a bilateral notification or consultation process with the competent authority of the other Contracting Jurisdiction for cases in which the competent authority to which the mutual agreement procedure case was presented does not consider the taxpayer's objection to be justified;"

Reservation positions

It is noted that Canada, China and Singapore (the reservation group) have made a reservation under Article 16(5)(a) on the application of the first sentence of Article 16(1) to their CTAs, meaning that a person requesting an MAP must present his case to the CA of the contracting jurisdiction of which he is a resident, or if the case comes under the provision relating to non-discrimination based on nationality, to that of the contracting jurisdiction of which he is a national (the alternative rule).

On the other hand, Australia, Hong Kong, Japan and the U.K. have not made such a reservation (the non-reservation group). In respect of the application of the first sentence of Article 16(1) to the Australia-Japan CTA, a person who requests a MAP can present his case to the CA of either contracting jurisdiction. The same holds for the bilateral CTAs for Australia-UK with respect to the first sentence of Article 16(1), but not for Australia and Hong Kong as they have not signed any double tax treaty.

It appears that in respect of the application of the first sentence of Article 16(1) to the CTAs, Australia and Singapore have adopted different positions (one from the reservation group while the other from the non-reservation group). The same holds for the application of the first sentence of Article 16(1) to the Australia-Canada CTA and the Australia-China CTA; and similarly to the Japan-Canada CTA, the Japan-China CTA, and Japan-Singapore CAT, to the UK-Canada CTA, the UK-China CTA, the UK-Singapore CTA, and to the Hong Kong-Canada CTAs.

Hong Kong and Singapore have not signed any double tax treaty, except for a tax treaty for airline and shipping income. Hong Kong and China (PRC) have signed an arrangement for the avoidance of double taxation, but it is not a CTA. Politically Hong Kong is part of China. China includes Hong Kong as a signatory of the Multilateral Convention on 7th June 2017, pursuant to Articles 28(4), 28(7) and 29(4). China is the responsible party for Hong Kong extending its list of CTAs, entering a new reservation if the extension is first to fall into the scope of such a reservation, and giving notifications to the Depositary pursuant to Article 29(5), Article 28(4) and Article 29(2) respectively. Before we proceed, it is useful to take a look at paragraph 3 of Article 28 (Reservations) of the MLI. It reads:

"3. Unless explicitly provided otherwise in the relevant provisions of this Convention, a reservation made in accordance with paragraph 1 or 2 (of Article 28 - Reservations) shall:

(a) Modify for the reserving party in its relations with another party the provisions of this Convention to which the reservation relates and to the extent of such reservation;

(b) and Modify those provisions to the same extent for the other Party in its relations with the reserving Party."

Here Article 28(3) contains two important principles. First, a reservation is made on a unilateral basis. [1] Unless explicitly provided otherwise, the reservation entered by a contracting jurisdiction will take effect on all Parties to the MLI. Second, unless explicitly provided otherwise, a reservation is reciprocal between the Parties to the MLI with respect to the application of the MLI to existing CTAs. That is, it does not work only one way, but works both ways. In general, a reservation shall apply symmetrically.

Relation between a reserving contracting jurisdiction and non-reserving contracting jurisdiction

Since one of the Parties to the bilateral CTAs between the Australia and Canada reserves its right not to apply the first sentence of Article 16(1) to all of its CTAs, as is the case of the Australia-Canada CTA, a person who requests a MAP does not have access to the CA of either contracting jurisdiction. Instead, he can only choose the alternative rule Canada has adopted. However, the same person can present his MAP request to the CA of either [emphasis added] contracting jurisdiction if Canada is later to withdraw its 5(a) reservation pursuant to Article 28(9), which reads that "[a]ny Party which has made a reservation in accordance with paragraph 1 or 2 (of Article 28) may at any time withdraw it or replace it with a more limited reservation by means of a notification addressed to the Depositary". Note that Australia is not permitted to make additional reservation to bring it in line with Canada, except for the situation described under paragraph 5 of Article 29 - Notifications. Article 28 of the MLI only works in one direction in making changes to the scope of the reservation. The reason why a Party is not permitted to expand the scope of its reservation but is allowed to drop its reservation or replace a reservation with a more limited one is that by withdrawing its reservation, the Party will be moving closer to the full adoption of the MLI, and not moving away from it.

In respect of the Australia-Canada CTA, Canada reserves its right for the first sentence of Article 16(1) of the MLI not to apply to its Article 24(1) of its CTA. Pursuant to Article 16(5)(a) of the MLI, the alternative rule shall apply to the first sentence of paragraph 1 of the Australia-Canada CTA.

The synthesized text of the first sentence of paragraph 1 of Article 16 and that of Article 24(1) of the Australia-Canada CTA will be read as follows (including the strikethrough texts):

Article 24 Mutual Agreement Procedure

1. Where a resident of a Contracting State considers that the actions of the competent authority of one or both of the Contracting States result or will result for him in taxation not in accordance with this Convention, he may, without prejudice to the remedies provided by the national laws of those States, present his case in writing to the competent authority of the Contracting State of which he is a resident.

1. Where a person considers that the actions of one or both of the Contracting Jurisdictions result or will result for that person in taxation not in accordance with the provisions of the Covered Tax Agreement, irrespective of the remedies provided by the domestic law of those Contracting Jurisdictions, that person may present the case to the competent authority of the Contracting Jurisdiction of which the person is a resident or, if the case presented by that person comes under a provision of a Covered Tax Agreement relating to nondiscrimination based on nationality, to that of the Contracting Jurisdiction of which that person is a national; and the competent authority of that Contracting Jurisdiction will implement a bilateral notification or consultation process with the competent authority of the other Contracting Jurisdiction for cases in which the competent authority to which the mutual agreement procedure case was presented does not consider the taxpayer's objection to be justified.

In respect of the Australia-China CTA, the alternative rule shall apply in the same manner as described above because China has provisionally reserved its right for the first sentence of Article 16(1) not to apply to the provision of its CTAs. The same holds for the Australia-Singapore CTA. as Singapore also definitively reserves its right for the first sentence of Article 16(1) not to apply to its CTAs under Article 16(5)(a)


[1] Reservation does not require acceptance, but reservation for the arbitration Articles under Part VI of the Convention require acceptance under paragraph 2 of Article 28 of the MLI.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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