Today we talk about multilateral convention (MLI) in China. In May 2022 China ratified a multilateral convention to implement a tax treaty perhaps and the conversion entered into force in September 2022. Implementation of the convention is the important step of BEPS action plans in China. The instrument of the ratification sets out the position adopted by China. There is a little difference between the ratified version and the version signed by China in June 2017. China has basically obtained the provision of the convention which represents the minimum standards. For example, determination of tax residency for dual resident entities by mutual agreement the principal purpose test for preventing treaty abuse and the requirements. For the four implementations of mutual agreement procedures and the object out of some of the provisions that are not mandatory the convention includes four tax related perhaps actions.  Let's talk about China's conversion position from the perspective of the different action plans. 

The first plan is hybrid mismatched for dual resident entities. The convention requires that the competent authorities of the Contracting jurisdictions should consider the place of effective management: the place where it is incorporated or otherwise constituted and any other relevant factors and the endeavor to determine by mutual agreement the entity's tax residence. China has adopted this provision and it should be noted if both contracting jurisdictions fail to reach an agreement on the issue. Such institutions are not entitled to any treaty benefits. 

The second plan is preventing treaty abuse. China's position in this instrument of ratification on preventing treaty abuse generally follows its current position on newly negotiated or renegotiated tax treaties. As a minimum standard, China has opted for the principal purpose test whereby a treaty benefits may be denied if obtaining those benefits was one of the principal purposes of any arrangement or transaction. Unless granting of such benefit in the circumstance, circumstance would be in accordance with the object and the purpose of a tax treaty. Similar provisions can also be found in China's recently negotiated or renegotiated tax treaties. The adoption of the principal Purpose test in convention will apply to all covered tax agreements mentioned in China's instrument of ratification. China has not opted for the simplified Arab rule, which is basically in line with the position reflected in recent tax treaties. It has said from the perspective of dividend, China has opted for the minimum standard. For example, the 365 day shareholding period for enjoying a reduced withholding tax rate on dividends. This is in line with China's current practice based on either the text of recent tax treaties or domestic interpretation rules. The third plan is artificial avoidance ofP, as China opted out of the provisions in the avoidance of P section in convention. There is no immediate impact on foreign companies P position in China in the near future. The final plan is improving dispute resolution. China has adopted the full implementation of mutual agreement procedure in good faith required by the convention and has allowed appropriate cross bonding adjustments in case such adjustment is justified.

However, China has opted out of the mandatory arbitration provisions of the convention. The ratification of the convention reflects China's determination to participate in the fight against BEPS and will open a new chapter for China's tax treaty. China has opted out of most of the provisions that are not required under the minimum standard, especially P. However, even tax treaty texts are not be revised by the convention. It is likely that China's tax authority would be more cautious in granting treaty benefits under this new landscape. In addition, with regard to the principal purpose test adopted by China, it may be subjective to a certain extent because it requires tax authorities to judge the principal purpose of the arrangement, considering various facts and circumstances. Applicantsfor treaty benefits need to pay more attention to the commercial purpose and the substance of the business arrangement and the transaction structures and the written supporting documents so as to reduce the uncertainty or tax treatment for Chinese enterprises having or planning to have cross-border transactions. The convention can be used not only as an instrument for mitigating cross-border tax risks and enhancing tax compliance, but also as a support channel for resolving international tax disputes to protect taxpayers rights.