Meaning
International treaties that fall within the scope of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting are identified by a specific designation. These covered tax agreements represent bilateral treaties that both signatory jurisdictions have agreed to modify through the multilateral instrument. In China, these agreements include treaties with many major trading partners.
Bilateral Treaty
Foreign parties must confirm whether their specific treaty with China has been modified by the multilateral instrument. When a treaty is listed as one of the covered tax agreements, its provisions are updated automatically to include anti-abuse rules. This ensures that the treaty cannot be used for artificial tax avoidance.
Modifying Effect
The multilateral instrument adds the principal purpose test and other anti-avoidance measures to these treaties. For the covered tax agreements, this modifying effect means that tax benefits like reduced withholding rates can be denied if the primary purpose of an arrangement is to obtain those benefits. This change affects holding company structures across many jurisdictions.
Enforcement Status
The State Taxation Administration applies the updated rules once both treaty partners have ratified the multilateral instrument and completed their notifications. If a transaction relies on one of the covered tax agreements, the taxpayers must verify the exact date of entry into effect for each specific modification. Failure to account for these changes can lead to unexpected tax liabilities and the denial of treaty relief during audits.
This creates a high standard of due diligence for cross-border investments into China.
