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

Last Updated: 12 July 2019
Article by Alfred Chan

The following is Part 3 of the above captioned article that specifically deals with How contracting jurisdictions apply Article 16 to their CTA's.

Table 1 is reproduced to show 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)

Article 16(5)(b): Reservation for second sentence of Article 16(1) - time limit for taxpayer to present MAP request

Article 16(5)(b) provides that

"for the second sentence of paragraph 1 not to apply to its Covered Tax Agreements that do not provide that the case referred to in the first sentence of paragraph 1 must be presented within a specific time period on the basis that it intends to meet the minimum standard for improving dispute resolution under the OECD/G20 BEPS package by ensuring that for the purposes of all such Covered Tax Agreements the taxpayer referred to in paragraph 1 is allowed to present the case within a period of at least three years from the first notification of the action resulting in taxation not in accordance with the provisions of the Covered Tax Agreement;"

It is observed that no contracting jurisdictions in table 1 above have made reservation for the second sentence of Article 16(1).

In respect of a CTA that contains a provision that provides that a case referred in the first sentence of Article 16(1) must be presented within a specific time period that is shorter than three years, the second sentence of Article 16(1) shall apply to replace it. However, it is observed that all of the selected contracting jurisdictions in table 1 do not have a CTA that contains such a provision.

The CTA containing a provision to present a case within a time period of at least 3 years

In respect of the CTAs that contain a provision that provides that a case referred in the first sentence of Article 16(1) must be presented within a specific time period that is at least three years from the first notification that the person affected is not taxed in accordance with the provisions of the CTA, the second sentence of Article 16(1) shall not apply accordingly.

Australia, China and Japan do not reserve their right under Article 16(5)(b). Pursuant to Article 16(6)(b)(ii) of the MLI, Australia has notified the OECD Depositary that the Australia-China CTA (Article 24(1), second sentence) and the Australia-Japan CTA (Article 27(1), second sentence) contain such a provision. [1]

The CTA not containing a provision to present a case within a time period of at least 3 years

In contrast, the CTAs listed below do not contain a provision that "the case referred to in the first sentence of Article 16 must be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the Covered Tax Agreement": -

1) Australia-Canada CTA,

2) Australia-Singapore CTA, and

3) Australia-UK CTA

1) In respect of the Australia-Canada CTA, the second sentence of Article 16(1) of the MLI shall apply in the absence of such a provision.

The synthesized text of the second sentence of Article 16(1) of the MLI and Article 24(1) of the Australia-Canada CTA will be read as follows:

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. The case must be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the Covered Tax Agreement.

The above synthesized text is produced by (i) the alternative rule that Canada has opted in for pursuant to Article 16(5)(a); (ii) the second sentence of Article 16(1) that has been added to the end of the alternative rule, pursuant to Article 16(4)(a)(ii) in the absence of a provision of a CTA describing the time period within which such a case must be presented.

2) In respect of the Australia-Singapore CTA, Article 20 does not contain a provision that provides that a case referred to in the first sentence of Article 16(1) must be presented within a specified time period that is at least three years from the first notification that he is not taxed in accordance with the terms of the CTA. In the absence of such provision, Article 16(4)(a)(ii) of the MLI provides that the sentence "the case must be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the Covered Tax Agreement" shall be added to the end of the first sentence of Article 20 of the Australia-Singapore CTA. The second sentence of Article 16(1) shall apply to the CTA where both Parties make a matched notification.

The synthesized text of the Article 16(1) of MLI and the Article 20 of the Australia-Singapore CTA will be read as follows: - [2]

1. Where a taxpayer considers that the action of the competent authority in one of the Contracting States has resulted, or is likely to result, in double taxation contrary to the provisions of this Agreement, he shall be entitled to present the facts to the competent authority in the Contracting State of which he is a resident and,

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, he 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 he 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. The case must be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the Covered Tax Agreement.

[note that the second sentence of Article 16(1), as underlined above, is added to the end of the first sentence of paragraph 1 of Article 20, to which the alternative rule has been applied.]"

3) The same holds for the Australia-UK CTA, under which both Parties do not make reservation for the first sentence of Article 16(1).

The synthesized text of the paragraph 1 of Article 16 (MLI) and the Australia-UK CTA will be read as follows: -

1. Where a person who is a resident of a Contracting State considers that the actions of one or both of the Contracting States result or will result for that person in taxation not in accordance with this Convention, that person may, irrespective of the remedies provided by the domestic law of those States concerning taxes to which this Convention applies, present a case to the competent authority of the either Contracting State of which that person is a resident or, if the case comes under paragraph 1 of Article 25 of this Convention, to that of the Contracting State of which that person is a national. The case must be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the Covered Tax Agreement [added to the end of the first sentence]"

Article 16(5)(c): Reservation for second sentence of Article 16(2) - disregarding time limit when implementing a resulting mutual agreement

The Australia-China CTA and the Australia-Japan CTA all contain a provision that disregards any time limit when implementing a resulting mutual agreement in the same manner as the second sentence of Article 16(2). The above-mentioned two CTAs are compatible with the second sentence of Article 16(2) in the MLI.

In contrast, the Australia-Canada CTA (provisional as Canada has not confirmed its position), the Australia-Singapore CTA and the Australia-UK CTA do not contain a provision that provides that any agreement reached by the CAs shall be implemented notwithstanding any time limits in the domestic law of the contracting jurisdictions. These three CTAs are not compatible with the second sentence of Article 16(2) in the MLI. In this regard, the compatibility clause Article 16(4)(b)(ii) provides that the second sentence of Article 16(2) shall be added to the aforesaid CTAs in the absence of such a provision.

Reservation

However, it is noted that Canada has unilaterally opted out of the second sentence of Article 16(2) of the MLI, pursuant to Article 16(5)(c)(ii). Therefore, Australia has included Singapore and the UK, both of them making no reservation under Article 16(5)(c)(ii), in the list of notification to the Depositary that the respective CTAs do not contain the second sentence of Article 16(2), pursuant to Article 16(6)(c)(ii). The second sentence of Article 16(2) shall apply to the Australia –Singapore CTA and the Australia-UK CTA respectively because the other Party to the CTA also makes a matched notification.

Coming into effect

Pursuant to Article 35 of the MLI, the Australia-Singapore CTA and the Australia-United Kingdom CTA shall take effect with respect to the taxable period that begins on or after a period of 6 calendar months from the latest of the dates on which the MLI comes into force.

Table C – information from the OECD Depositary [3]

Date of signing

Date of ratification

Date of entry into force

Australia

7th Jun 2107

26th Sept 2018

1st Jan 2019

Singapore

7th Jun 2017

21st Dec 2018

1st Apr 2019

United Kingdom

7th Jun 2017

29th Jun 2018

1st Oct 2018

Singapore's entry-into-force date is 1st Apr 2019 while Australia's entry-into-force date is 1st Jan 2019. The latest date is 1st April 2019. The UK's entry-into-force date is on 1st Oct 2018 while Australia's entry-into-force date is 1st Jan 2019. Therefore, the latest date is on 1st Jan 2019.

Article 16(3)

Paragraph 3 of Article 16, for which no reservation is permitted under Article 28(1), contains two sentences. It provides that

"The competent authorities of the Contracting Jurisdictions shall endeavor to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Covered Tax Agreement. They may also consult together for the elimination of double taxation in cases not provided for in the Covered Tax Agreement."

The first sentence of Article 16(3)

In respect of the first sentence of Article 16(3), Australia notifies that following CTAs do not contain a provision that the competent authorities of the Contracting Jurisdictions shall endeavor to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Covered Tax Agreements: the Australia-Canada CTA, the Australia-China CTA and the Australia-Singapore CTA. Accordingly, the first sentence of Article 16(3) shall apply in the absence of such a sentence as described in Article 16(4)(c)(i), pursuant to Article 16(6)(d)(i).

The synthesized text of Article 16(3) of the MLI and the third paragraph of Article 24 of the Australia-Canada CTA shall be read as below:

3. The competent authorities of the Contracting States shall jointly endeavour to resolve by mutual agreement [added] any difficulties or doubts arising as to the interpretation or [added] application of this Convention.

The synthesized text of Article 16(3) of the MLI and the corresponding provision of the Australia-China CTA shall be prepared in the same manner. The Australia-Singapore CTA contains no such provision as the first sentence of Article 16(3). Therefore, the first sentence of Article 16(3) shall be added to the Australia-Singapore CTA.

The second sentence of Article 16(3)

In respect of the second sentence of Article 16(3), Australia notifies that following CTAs do not contain a provision that the competent authorities of the Contracting Jurisdictions shall endeavor to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Covered Tax Agreements: the Australia-China CTA and the Australia-Singapore CTA. Accordingly, the second sentence of Article 16(3) shall apply in the absence of such a sentence as described in Article 16(4)(c)(ii), pursuant to Article 16(6)(d)(ii).


[3] http://www.oecd.org/tax/treaties/beps-mli-signatories-and-parties.pdf

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