MLI - Mutual Agreement Procedure [ 中文 ]

PART I - Published Articles

Application of Mutual Agreement Procedure (MAP): India, Russia, the United Kingdom [read] 

To combat base erosion and profit shifting (BEPS) practices and enhance the cooperation in international taxation, member countries that have committed themselves to the OECD/G20 Inclusive Framework on BEPS (the IF) need to follow the recommendation of the BEPS package. To ensure that the OECD/G20 BEPS packages are implemented at the country level, the member countries of the IF are required to take actions to meet the minimum standards of the BEPS package that includes "Making Dispute Resolution Mechanism More Effective" documented under Action 14: 2015 Final Report. [read]

 

PART II - Further Analysis

[a] Mutual Agreement Procedure (MAP)

• What is MAP?
• Scope of MAP

[b] Analysis of Provisions and Reservations under Article 16 (MAP)

[c] How Some Selected Contracting Jurisdictions Apply Article 16 to the Provisions of their CTA's

• From an Australian perspective [here]
• From a Japanese perspective [here]
• From a Singapore perspective [in construction]
• From a United Kingdom perspective [here]

[d] Arbitration Article (in construction)

[e] MAP Profile by Jurisdictions

 

 

 

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[Update on: 2021.2.21]

 

Application of the Mutual Agreement Procedure article: India, Russia, and the United Kingdom

- This article is published by Tax Notes International on 15th Feb 2021 [pdf]

 

1. Background of Mutual Agreement Procedure (MAP)

 

To combat base erosion and profit shifting (BEPS) practices and enhance the cooperation in international taxation, member countries that have committed themselves to the OECD/G20 Inclusive Framework on BEPS (the IF) need to follow the recommendation of the BEPS package. To ensure that the OECD/G20 BEPS packages are implemented at the country level, the member countries of the IF are required to take actions to meet the minimum standards of the BEPS package that includes “Making Dispute Resolution Mechanism More Effective” documented under Action 14: 2015 Final Report. ^[1]

 

In this regard, countries are required to adopt the 2017 version of the OECD Model Tax Convention (Model Tax Convention) that incorporate the improvement of dispute resolution mechanism when they negotiate and conclude tax treaties.

 

Paragraph 1 of Article 25 – Mutual Agreement Procedure of the Model Tax Convention reads:

1. Where a person considers that the actions of one or both of the Contracting States result or will result for him in taxation not in accordance with the provisions of this Convention, he may, irrespective of the remedies provided by the domestic law of those States, present his case to the competent authority of either Contracting State. [Emphasis added.]

 

For many years, the tax agreements concluded on the basis of the 2014 or earlier versions of the OECD Model Tax Convention do not permit a person to present his mutual agreement procedure (the MAP) request to the competent authority (the CA) of either contracting jurisdiction. Article 27(1) of the India-United Kingdom double tax agreement is a case in point, which reads:

Where a resident of a Contracting State considers that the actions of one or both of the Contracting States result or will result for him in taxation not in accordance with this Convention, he may, notwithstanding the remedies provided by the national laws of those States, present his case to the competent authority of the Contracting State, of which he is a resident. [Emphasis added.]

 

As noted, the provision of article 27 of the India-United Kingdom DTA is at odds with the 2017 version of the MAP article of OECD Model Convention that incorporates the objective of the OECD/G20 BEPS measures to implement the minimum standard: “improving dispute resolution”.

 

2. Multilateral Instrument - Article 16(1)

 

Article 16(1) of the Multilateral Convention to Implement the Tax Treaty Related Measures to Prevent BEPS (Multilateral Instrument, or the MLI), which is aimed at closing the gaps in international tax rules under Action 15: 2015 Final Report of the BEPS project, [2] replicates the wordings of paragraph 3.1 of the Action 14: 2015 Final Report. Article 16(1) will be applied alongside the existing tax treaties between countries, subject to any reservation made.

 

The first sentence of article 16(1) of the MLI reads:

“[w]here 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, that person may, irrespective of the remedies provided by the domestic law of those Contracting Jurisdictions, present the case to the competent authority of either Contracting Jurisdiction.” [Emphasis added]

 

3. The Alternative rule

 

To allow flexibility and satisfy the minimum standard requirement, article 16(5)(a) of the MLI permits a Party to reserve its right not to apply the first sentence of Article 16(1) to its CTAs by adopting the alternative rules for the first sentence of Article 16(1). Article 16(5)(a) reads:

 

“A Party may reserve the right:

 

1. 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 (the CA) 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;” …[emphasis added.]

 

The emphasis portion of paragraph (a) of Article 16(5) introduces an administrative remedy to ensure that an aggrieved person enjoys a right that is no less than if he is taxed in accordance with the CTA that meets the minimum standards under the OECD/G20 BEPS Inclusive Framework.

 

4. The application of the MAP articles

 

The table below shows the respective position of India, the Russian Federation, and the United Kingdom on article 16(1) and article 35(4) as per extracts from the database of the OECD Depositary as of 15^th January 2021. [3]

 

	Dispute Resolution	Entry into Effect
Main articles	Article 16(1): Where a person considers that the actions of one or both of the Contracting States result or will result for him in taxation not in accordance with the provisions of this Convention, he may, irrespective of the remedies provided by the domestic law of those States, present his case to the competent authority of either Contracting State.	Article 35(4): Notwithstanding the preceding provisions of this Article, Article 16 (Mutual Agreement Procedure) shall have effect with respect to a Covered Tax Agreement for a case presented to the competent authority of a Contracting Jurisdiction on or after the latest of the dates on which this Convention enters into force for each of the Contracting Jurisdictions to the CTA [text-A], except for cases that were not eligible to be presented as of that date under the CTA prior to its modification by the Convention, without regard to the taxable period to which the case relates. [Emphasis added]
Reservations	Article 16(5)(a) provides that a contracting jurisdiction may reserve its right for the first sentence of article 16(1) not to apply to its CTAs, if it adopts the alternative rule specified under article 16(5)(a).	Article 35(6) provides that a contracting jurisdiction may reserve its right for article 35(4) not to apply to its CTA.	Article 35(7)(a) provides that a party may reserve its right to replace text-A in article 34(4) with the texts described in article 35(7)(a)(i)
	Article 16(5)(a) adopted?	Article 35(4) adopted?	Article 35(7)(a) adopted?
India	Yes	Yes	No
Russia	No	No	Yes
United Kingdom	No	Yes	No

 

5. Reservations under article 16 and article 35

 

The United Kingdom has adopted Article 16(1) of the Multilateral Instrument (the MLI) without reserving its right under Article 16(5)(a) of the MLI while India has reserved its right under Article 16(5)(a) for article 16(1) not to apply, which provides that a taxpayer is permitted to present its MAP case to the competent authority of either contracting jurisdiction.

 

In the case of a clash between the choices of the two parties to the MLI, the alternative rule that the reserving party has chosen shall apply. Paragraph 3 of article 28 (Reservations) of the MLI replicates Articles 21(1)(a) and (b) of the Vienna Convention on the Law of Treaties (1969). Article 28(3) reads:

 

“Unless explicitly provided otherwise in the relevant provisions of this Convention [the MLI], a reservation made in accordance with paragraph 1 or 2 (of Article 28) 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; and

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

 

Article 28(3) contains two principles. First, unless explicitly provided otherwise, a reservation made on a unilateral basis will not only have an effect on the CTA between the reserving party and the other party, but also have an effect on other CTAs that the reserving party has nominated in accordance with either paragraph (1)(a) of article 2 (Interpretation of Terms) on the day when it deposited the Instrument of Ratification or paragraph 5 of article 29 (Notifications) after it has ratified the MLI. The main exception to this rule is that a reservation to apply the arbitration articles under Part VI of the MLI requires acceptance under article 28, paragraph 2 of the MLI. Second, unless explicitly provided otherwise, a reservation is reciprocal between the Parties to the MLI with respect to the application of an Article or a provision of the Article 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.

 

Note that the United Kingdom is not permitted to make a new reservation under article 16(5)(a) in order to bring its position on reservation in line with the one that India has adopted. However, the first sentence of article 16(1) shall apply should India later withdraw its reservation in accordance with article 28(9). The rationale for permitting a jurisdiction to withdraw (but not add or increase) a reservation is to achieve the object and purpose of the BEPS package is that contracting jurisdictions can move close to the MLI provisions that modify the CTAs but not further away from them.

 

Neither India nor the United Kingdom has reserved their right under article 35(6) for article 35(4) which provides that the parties shall adopt the entry-into-force date as the entry-into-effect date for taxpayer that requests for a mutual agreement procedure under article 16(1).

 

6. Application of article 35(4) and article 16(1) to the India-U.K. CTA, subject to reservation under article 16(5)(a)

 

The legal texts of article 35(4) reads:

(4) Notwithstanding the preceding provisions of this Article, Article 16 (Mutual Agreement Procedure) shall have effect with respect to a Covered Tax Agreement for a case presented to the competent authority of a Contracting Jurisdiction on or after the latest of the dates on which this Convention enters into force for each of the Contracting Jurisdictions to the Covered Tax Agreement, except for cases that were not eligible to be presented as of that date under the Covered Tax Agreement prior to its modification by the Convention, without regard to the taxable period to which the case relates.

 

The synthesized text of Article 35(4) and the India-UK CTA reads as follows: [4]

 

“In accordance with paragraph 4 of Article 35 of the MLI, Article 16 of the MLI has effect with respect to this Convention for a case presented to the competent authority of either contracting jurisdiction the Contracting State of which he is a resident [per article 16(5)(a)] on or after 1 October 2019 [per article 35(4), note], except for cases that were not eligible to be presented as of that date under this Convention prior to its modification by the MLI, without regard to the taxable period to which the case relates.”

 

Note: The United Kingdom deposited its instrument of ratification on 29^th June 2018, the entry into force date of its CTAs was on 1^st Oct 2018, which is the first day of the month following the expiration of a period of three calendar months beginning on the date of the deposit by the Signatory of its instrument of ratification, in accordance with article 34(2) of the MLI. India deposited its instrument of ratification on 25^th June 2019, the entry into force date was on 1^st Oct 2019. Therefore, “[T]he latest of the dates on which the MLI comes into force for each of the Contracting Jurisdictions to the Covered Tax Agreement” per article 35(4) was on 1^st Oct 2019.

 

7. Application of article 35(4) and article 16(1) to the Russia-U.K. CTA, subject to reservation under article 35(7)(a)(i)

 

7.1. The synthesized text of Article 16(1), as modified by article 16(4)(a)(i), and article 25 of the Russia-United Kingdom CTA reads as follows:

 

25(1) Where a resident of a Contracting State considers that the actions of one or both of the Contracting States result or will result for him in taxation not in accordance with the provisions of this Convention, he may, irrespective of the remedies provided by the domestic law of those States, present his case to the competent authority of either Contracting State the Contracting State of which he is a resident or, if his case comes under paragraph (1) of Article 24 of this Convention, to that Contracting State of which he is a national [per article 16(1), article 16(4)(a)(i); notes].

 

Notes for the above-synthesized texts [per article 16(1) and article 16(4)(a)(i)]:

 

• Article 16 is the compatibility that modifies the application of Article 16(1) to the CTA.
• Article 16(4)(a)(i) provides that the first sentence of article 16(1) shall apply in place of the first sentence of article 25 (Mutual Agreement Procedure) of the Russia-United Kingdom CTA, given that both Russia and the United Kingdom do not make reservation under article 16(5)(a).
• Both Russia and the United Kingdom have complied with the notification requirement in accordance with article 16(6)(a) of the MLI.
• Article 16(6)(a) notifications were given by Russia and the United Kingdom on the respective dates when each of them deposited the Instrument of Ratification in accordance with paragraph (1) of article 29 – Notification of the MLI. [5]

 

7.2. The Russian Federation has reserved its right under article 35, paragraph (7)(a), which provides that:

 

“A Party may reserve the right to replace:

1. the references in paragraphs 1 and 4 [of article 35] to "the latest of the dates on which this Convention enters into force for each of the Contracting Jurisdictions to the Covered Tax Agreement"; and
2. {skipped for clarity sake};

with references to "30 days after the date of receipt by the Depositary of the latest notification by each Contracting Jurisdiction making the reservation described in paragraph 7 of Article 35 (Entry into Effect) that it has completed its internal procedures for the entry into effect of the provisions of this Convention with respect to that specific Covered Tax Agreement".

 

It is noted that the United Kingdom has adopted article 35(4) while Russia has adopted the modified version of article 35(4). Russia’s choice shall prevail in the Russia-United Kingdom CTA.

 

7.3. The synthesized text of Article 35(4) and the Russia-United Kingdom CTA reads as follows:

 

“In accordance with paragraph 4 of Article 35 of the MLI, Article 16 of the MLI has effect with respect to this Convention for a case presented to the competent authority of either contracting jurisdiction [per article 16(1),and article 16(4)(a)(i)] on or after 30th May 2020 [per article 35(4), and article 35(7)(a)(i)], except for cases that were not eligible to be presented as of that date under this Convention prior to its modification by the MLI, without regard to the taxable period to which the case relates.” [Emphasis added]

 

Notes for the above-synthesized texts [per article 35(7)(a)(i)]:

 

• Russia notified the OECD Depositary and the U.K. that it had completed its international procedure on 30^th April 2020 for purpose of article 35(7)(a) in accordance with article 35(7)(b).
• “The latest of the dates on which this Convention enters into force for each of the Contracting Jurisdictions to the Covered Tax Agreement” was replaced by texts described under article 35(7)(a)(i).
• “30 days after the date of receipt (30^th April 2020, per article 35(7)(b)) by the Depositary of the latest notification by Russia each Contracting Jurisdiction making the reservation described in paragraph 7 of Article 35” is 30^th May 2020.

 

8. Application of article 35(4) and article 16(1) to the India-Russia CTA, subject to reservations under article 16(5)(a) and article 35(7)(a)(i)

 

The synthesized text of article 16(1) and article 25 of the India-Russia CTA follows the same text pattern as that for the India-United CTA.

 

Russia has adopted the modified version of article 35(4) in accordance with article 35(7)(a)(i). The synthesized text of Article 35(4) and the India-Russia CTA reads as follows: [6]

 

“In accordance with paragraph 4 of Article 35 of the MLI, Article 16 of the MLI has effect with respect to this Convention for a case presented to the competent authority of either the contracting jurisdiction of which he is a resident or a national. [per article 16(5)(a)] on or after 30th May 2020 [per article 35(4), and article 35(7)(a)(i)], except for cases that were not eligible to be presented as of that date under this Convention prior to its modification by the MLI, without regard to the taxable period to which the case relates.” [Emphasis added]

 

9. Conclusion

 

In the case that a person who considers that he is not taxed in accordance with the terms of the CTA is not given the access to present a MAP case to the CA of either contracting jurisdiction, paragraph 5(a)(ii) of the Article 16 introduces an administrative remedy to ensure that in making the decision whether to proceed with the mutual agreement procedure, the taxpayer’s request is open to consideration by the CA’s of both contracting jurisdictions, in the situation that the person is only allowed to present the MAP case to the CA of the contracting jurisdiction of which that person is the resident or, if the case comes under the scope of non-discrimination article based on nationality, of which he is a national.

 

The alternative rule under article 16(5)(a) ensures that the taxpayer’s right to MAP is not compromised. In contrast, article 35, which is procedural in nature, does not deal with the taxpayer’s rights and obligations. Specifically, article 35(7)(a) provides an alternative way for a contracting jurisdiction to bring the MAP article into operation, taking into account that it takes time for that contracting jurisdiction to amend its domestic laws to implement the MLI including the MAP article.

 

China Tax & Investment Consultants Ltd

www.china-tax.net

 

 

 

 

 

 

 

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[1] What is a mutual agreement procedure (MAP)?

 

A Mutual Agreement Procedure (MAP) is the dispute resolution mechanism contained in the article of double tax treaties concluded between the tax authorities (the competent authorities). Action 14 contains a commitment by the jurisdictions to implement a minimum standard for improving dispute resolution.

 

Scope of MAP

 

The scope of the MAP tells us about what an MAP does in dispute resolution, which covers the following Articles in the OECD Model Tax Convention:

• Determination of residence of a person (Article 4);
• The existence of a permanent establishment (Article 5);
• The attribution of profits to a permanent establishment (Article 7(2));
• Inclusion of profits of associated enterprises and the corresponding adjustments to be made (Article 9)
• Treatment of interest in case of thin capitalization (Article 11(6));
• The taxation in the State of the payer – in case of a special relationship between the payer and the beneficial owner – of the excess part of interest and royalties (Article 9, Article 11(6), Article 12(4));
• Temporary nature of the services performed by an employee (Article 15(2));
• Non-discrimination (Article 24).

 

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[2] Analysis of Provision and Reservations under Article 16 - Taxpayer's Access to MAP

 

2.1.1. First sentence of Article 16(1)

 

a) Paragraph 1 of Article 16 (Improving Dispute Resolution) of the MLI provides that

“1. Where a person considers that the actions of one or both of the Contracting States result or will result for him in taxation not in accordance with the provisions of this Agreement, he may, irrespective of the remedies provided by the domestic law of those States, present his case to the competent authority of either [emphasis added] contracting jurisdiction. 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 Agreement.”

 

b) [Article 16(5)(a)] Reservation for the first sentence of paragraph 1 of Article 16 

Most tax treaties are concluded on the basis of the 2014 version of the OECD Model Tax Convention that does not provide for presenting the MAP case to either contracting jurisdiction. For the reason of practical administration, Article 16(5)(a) permits a Party to the MLI to make reservations not to apply the first sentence of Article 16(1) to its CTAs by adopting the alternative rule, which reads:

A Party can only opt out of the first sentence in Article 16(1) on the basis that

1. 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 [emphasis added]; and
2. 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.

 

c) Comments on the first sentence and the reservations:

• Article 16(1) of the multilateral instrument (the MLI) replicates Article 25(1) of the OECD Model Tax Convention (2017 update), and it has made an improvement on the 2014 OECD Model Tax Convention by requiring the contracting states to provide taxpayers with wider access to the MAP.
• Article 16(5)(a) provides that a Party to the MLI may reserve its right for the first sentence of Article 16(1) not to apply to all of its CTAs by adopting the alternative rule under Article 16(5)(a).

 

2.1.2. Second sentence of Article 16(1) of the MLI

 

[Article 16(5)(b)] Reservation for the second sentence of paragraph 1

 

A Party may reserve that right 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.

 

 

2.2.1. Paragraph 2 (the first and second sentences) of Article 16 provides that

 

"The competent authority shall endeavor, if the objection appears to it to be justified and if it is not itself able to arrive at a satisfactory solution, to resolve the case by mutual agreement with the competent authority of the other Contracting Jurisdiction, with a view to the avoidance of taxation which is not in accordance with the Covered Tax Agreement. Any agreement reached shall be implemented notwithstanding any time limits in the domestic law of the Contracting Jurisdictions.”

 

(a) Comments on paragraph 2 of Article 16:

 

(i) The second sentence "any agreement reached shall be implemented notwithstanding any time limit in the domestic law of the contracting jurisdictions" is an open-ended commitment. In other words, however many years the contracting jurisdiction making the initial adjustment has gone back, the enterprise should be assured of an appropriate adjustment in the other contracting jurisdiction. Some contracting jurisdictions might consider that such an open-ended commitment is unreasonable a matter of practical administration.

 

(ii)) To give flexibility to the application of the second sentence of Article 16(2) to the CTA, element 3.3 of the Action 14 minimum standard in the 2015 Final Report provides that "[c]ountries should include in their tax treaties the second sentence of paragraph 2 of Article 25 of the Model Tax Convention ("[a]ny agreement reached shall be implemented notwithstanding any time limit in the domestic law of the Contracting State"). Countries that cannot include the second sentence of paragraph 2 of Article 25 in their tax treaties should be willing to accept alternative treaty provisions that limit the time during which a Contracting State may make an adjustment pursuant to Article 9(1) – Associated Entity or Article 7(2) – Business Profits attributable to a permanent establishment, in order to avoid the late adjustments with respect to which MAP relief will not be available.”

 

(b) [Article 16(5)(c)] Reservation for the second sentence of paragraph 2 of Article 16

 

"A Party may reserve its right for the second sentence of paragraph 2 not to apply to its Covered Tax Agreements on the basis that for the purposes of all of its Covered Tax Agreements:

i) any agreement reached via the mutual agreement procedure shall be implemented notwithstanding any time limits in the domestic laws of the Contracting Jurisdictions; or

ii) it intends to meet the minimum standard for improving dispute resolution under the OECD/G20 BEPS package by accepting, in its bilateral treaty negotiations, a treaty provision providing that:

A) the Contracting Jurisdictions shall make no adjustment to the profits that are attributable to a permanent establishment of an enterprise of one of the Contracting Jurisdictions after a period that is mutually agreed between both Contracting Jurisdictions from the end of the taxable year in which the profits would have been attributable to the permanent establishment (this provision shall not apply in the case of fraud, gross negligence or wilful default); and

B) the Contracting Jurisdictions shall not include in the profits of an enterprise, and tax accordingly, profits that would have accrued to the enterprise but that by reason of the conditions referred to in a provision in the Covered Tax Agreement relating to associated enterprises have not so accrued, after a period that is mutually agreed between both Contracting Jurisdictions from the end of the taxable year in which the profits would have accrued to the enterprise (this provision shall not apply in the case of fraud, gross negligence or wilful default)."

 

(c) Comment on reservation for second sentence of Article 16(2):

 

A Party that makes reservation for the second sentence of Article 16(2) may not permit a taxpayer to request a MAP on other articles - such as the non-discrimination based on nationality - other than that falling under busines profits of a permanent establishment and associated entity, which are modelled after Aritcle 7 and Article 9 of the Model Tax Convention.

 

2.3.1. 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.”

 

 

 

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[3] 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 aritcle 16 made under article 16(5) by some selected Signatories and Parties as of 29th January 2019, as per information from the MLI database's matrix of options and reservations, which is provided by the OECD Depositary. 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

 

a) 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.

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

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

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

 

Table 2 - Bilateral tax treaty relations with reference to the reservation made under Article 16(5)(a)

Reservation 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.

 

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

 

Reservation positions

 

It is noted that Canada, China, and Singapore 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 a 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. 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. 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:

1. 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; and
2. 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 Australia and Canada reserves its right not to apply the first sentence of Article 16(1) to all of its CTAs, including 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 any 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 synthesised 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:

 

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 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 reserves its right for the first sentence of Article 16(1) not to apply to its CTAs under Article 16(5)(a)

 

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

 

It is observed that no contracting jurisdictions in table 1 above have made a 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. 

 

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. 

 

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

 

In contrast, Australia-Canada CTA, Australia-Singapore CTA, and Australia-UK CTA 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”