FOREIGN TRADE UNIVERSITY HO CHI MINH CITY CAMPUS o0o INTERNATIONAL TAXATION MID-TERM REPORT Module code: ML90 COMPARATIVE ANALYSIS OF MULTILATERAL INSTRUMENT MLI ADOPTION: LESS
FUNDAMENTALS ABOUT MULTILATERAL INSTRUMENT OF
Key Features of Multilateral Instrument of International Tax
Considering the MLI'’s key features are important to give a more nuanced understanding of how the MLI affects different situations and fosters a fairer and more efficient international tax system There are five main features that a re clearly efficient in the MLI
As of November 2023, the Multilateral Instrument (MLI) boasts over 100 member countries, highlighting its extensive global reach This widespread adoption significantly influences the international network of tax treaties, with more nations anticipated to join soon The MLI applies to approximately 1,900 bilateral tax treaties, including many established prior to the BEPS initiative, ensuring consistent and comprehensive implementation of BEPS rules worldwide.
The Multilateral Instrument (MLI) introduces targeted rules to tackle Base Erosion and Profit Shifting (BEPS) issues across various tax treaty provisions Key areas include addressing hybrid mismatch arrangements (Action 2), preventing treaty abuse (Action 6), strengthening the definition of permanent establishment (Action 7), and improving dispute resolution effectiveness through binding arbitration (Action 14) These measures enhance international tax cooperation and ensure more equitable and efficient resolution of cross-border tax conflicts.
The third key feature is the flexibility granted to signatory nations, allowing contracting parties to choose which tax treaties to modify while retaining the right to make future bilateral amendments This flexibility also applies to the implementation of BEPS minimum standards, enabling jurisdictions to select suitable approaches or opt out of specific provisions that may apply later Furthermore, optional provisions and alternative approaches are available to accommodate various national interests in addressing BEPS concerns, ensuring tailored and adaptable solutions.
Transparency is a key characteristic of the MLI, with the OECD website (oe.cd/mli) offering valuable resources such as the Explanatory Statement, notifications of covered tax agreements, and the BEPS MLI Matching Database These tools enable users to identify treaty modifications, understand how the MLI amends specific tax treaties, and access summarized texts and interpretative notes from participating countries, promoting clarity and informed decision-making in international tax matters.
Finally, the MLI strengthens existing mechanisms for resolving tax treaty disputes by introducing a binding arbitration option This approach provides a more decisive and effective way to resolve disagreements between countries
ANALYSIS OF THE CURRENT SITUATION OF
APPLICATION OF THE MULTILATERAL CONVENTION TO
The status of the application of MLI provisions in Malaysia
3.1.1.1 Introduction to Malaysia's adoption of MLI and its implementation process The completion of Malaysia's accession to the Multilateral Convention to Implement Tax Treaty Related Measures (MLI) is a great stride towards enhancing international tax regulation that will see tax treaties comply with international standards From there, the MLI seeks to prevent base erosion and profit shifting (BEPS) by amending existing bilateral tax treaties without the need for new negotiations It was created under the guidance of the OECD (Organisation for Economic Co-operation and Development) and G20 (OECD,
Malaysia ratified the Multilateral Instrument (MLI) on February 18, 2021, demonstrating its commitment to implementing international tax compliance standards The country previously signed the MLI in 2018 and outlined its non-compliance agreements at that time This step aligns Malaysia with global efforts to prevent tax avoidance and promote transparency.
10, 2022, extending the list of agreements that fall under the MLI's purview On June 1,
2021, the MLI came into effect for Malaysia Once the term of MLI comes into force, the agreements that the MLI amend will comply with the minimum standard
3.1.1.2 Key provisions adopted under the MLI by Malaysia and their impact on existing tax treaties
Malaysia has introduced many significant measures in accordance with the MLI with the aim of preventing BEPS and boosting the effects of tax treaties
The Principal Purpose Test (PPT) is a crucial measure implemented by Malaysia under the Multilateral Instrument (MLI) to prevent treaty abuse (Deloitte, 2020) It aims to withhold treaty benefits when obtaining them is one of the main objectives of a specific deal or transaction This anti-abuse provision is designed to ensure that treaty benefits are not unjustly exploited, thereby promoting the integrity of tax treaties and enhancing compliance.
14 those tax strategies that exploit the existing gaps in tax treaties or abusive mismatches that allow some special tax benefits
In addition to PPT, Malaysia has issued regulations under the MLI about the Mutual Agreement Procedure (MAP) By offering a framework for competent authorities of treaty partners to resolve disagreements on the interpretation or application of tax treaties, the MAP provisions have improved the dispute resolution procedures in tax treaties
3.1.1.3 Implications for international businesses operating in Malaysia
International enterprises operating in Malaysia will be significantly impacted by the adoption of MLI regulations, affecting their compliance obligations, transparency requirements, and tax planning strategies.
Firstly, MLI strengthened compliance and openness regulations International firms now ensure that their transactions and agreements comply with legitimate commercial reasons rather than simply taking advantage of tax benefits that result from implementing anti-abuse procedures such as the Principal Purpose Test (PPT) To comply with the new treaty rules, it requires increased transparency in the documentation of the business rationale for cross-border transactions and may require amendments to existing arrangements
International bodies need to update their conflict resolution methods to enhance global cooperation Tax treaties should be interpreted and implemented more effectively through collaboration using the Mutual Agreement Procedure (MAP) provisions This approach helps bridge the information gap, reduces jurisdictional overlaps, and creates a clearer legal framework for potential investments, fostering a more stable international business environment.
Thirdly, companies need to provide themselves with ways to tax planning with respect to MLI The consequences on multinationals’ planning if MLI amends the current existing tax treaties, may differ and depend on the kind of the tax planning techniques employed Hence, enterprises are recommended to analyze the continuing arrangements
15 and to consider whether they are up-to-date within the new treaty framework and to find programs which would bring advantages of tax optimization
Multinational businesses should actively participate in consultations with local authorities and experts to ensure the development of consistent rules and policies aligned with global tax reforms Additionally, by taking a proactive role in adapting to new system controls, companies can mitigate risks and implement necessary changes to their tax strategies, enhancing compliance and long-term stability.
The status of the application of MLI provisions in China
3.1.2.1 Introduction to China's adoption of MLI and its implementation process
As part of a global campaign headed by the OECD, China is moving toward implementing the Multilateral Instrument (MLI) to fight against Base Erosion and Profit Shifting (BEPS) Following a directive from G20 Finance Ministers and Central Bank Governors in February 2015, collective negotiations involving over 100 countries and jurisdictions resulted in the establishment and implementation of the MLI The MLI was formally adopted on 24 November 2016
On June 7, 2017, China signed the Multilateral Instrument (MLI) to address BEPS (Base Erosion and Profit Shifting) concerns and align its tax policies with international standards Extensive negotiations ensured that the MLI provisions meet OECD's minimum standards and integrate smoothly with existing tax treaties Key emphasis was placed on enhancing dispute resolution mechanisms and preventing treaty abuse to promote fair and effective international tax cooperation.
China was careful to make sure the MLI provisions matched the goals of its domestic tax policy throughout the negotiating stage Remarkably, China chose to keep bilateral negotiations going instead of opting out of parts of the MLI that it felt would clash with its current tax laws For instance, China chose to handle c onflicts through mutual agreement procedures as outlined in its existing treaties (OECD) (Law.asia, 2022) rather than updating the permanent establishment (PE) articles and taking a cautious approach to the arbitration proceedings.
On August 1, 2022, China's State Taxation Administration (STA) issued STA Public Notice [2022] No 16 (PN 16), providing important clarifications on the implementation of the Multilateral Instrument (MLI) and the initiation of application procedures for specific tax treaties This notice aims to enhance understanding of China's approach to MLI adoption and streamline the application process for relevant tax treaties It underscores China's commitment to aligning with international tax standards and improving the efficiency of treaty-related procedures, which is essential for multinational corporations and international tax planning.
2022) May 2022 marked the completion of China's ratification process For China, the MLI went into force on September 1, 2022
As of June 30, 2022, the MLI applies to 47 tax treaties that China has signed, provided that both parties to the tax treaty have completed the MLI's entry-into-force procedures More nations and areas are expected to sign the MLI and finish the entry into force processes, which would further broaden the MLI's applicability to China's current tax treaties (Ernst & Young LLP, 2022)
3.1.2.2 Key provisions adopted under the MLI by China and their impact on existing tax treaties
China has incorporated key provisions into the Multilateral Instrument (MLI) to strengthen dispute resolution mechanisms and prevent treaty abuse These amendments significantly influence existing tax treaties and impact the operations of international companies operating within China.
The Principal Purpose Test (PPT) is a key element of China's implementation of the Multilateral Instrument (MLI) aimed at preventing treaty abuse Its primary purpose is to deny treaty benefits when a transaction's main objective is to fraudulently obtain tax advantages As part of the global effort to combat base erosion and profit shifting (BEPS), China's adoption of the PPT helps prevent tax treaties from being exploited for tax evasion or avoidance.
Furthermore, China is signing onto the mutual agreement mechanism (MAP) as part of the MLI, but it has to be modified to resolve disputes with foreign tax authorities (Law.asia, 2022) The MAP modification is expected to improve and accelerate the tax dispute resolution method, resulting in a more effective and transparent approach to dealing with foreign tax disputes.
The preamble of the treaty has been revised through the MLI modifications to establish clearer standards for interpreting and applying tax treaty provisions, thereby strengthening restrictions against treaty misuse (KPMG, 2017) Additionally, China aims to amend the preamble of its tax treaties to enhance their effectiveness and clarity, aligning them with international standards and best practices (China Tax, 2022).
3.1.2.3 Implications for international businesses operating in China
Following the adoption of the MLI, capital gains and dividends on immovable properties in China are now subject to different taxation rules (KPMG, 2017) These changes aim to create a fair and transparent tax system for international companies operating in China by ensuring accurate taxation of capital gains and dividend income Additionally, these adjustments help prevent potential tax fraud and promote compliance with international tax standards.
The adoption of the Principal Purpose Test (PPT) introduces increased scrutiny for international businesses engaged in cross-border transactions According to Tiberghien (2022), the PPT stipulates that any arrangement aiming primarily to obtain tax treaty benefits should be rejected if such benefits are not the genuine economic reason behind the transaction Therefore, businesses must ensure that their agreements are grounded in solid business rationale rather than solely pursuing tax advantages to comply with new regulations.
The MLI amendments will likely require multinational corporations to modify their global tax planning strategies, including restructuring cross-border activities to ensure compliance Companies may need to reassess their tax residency statuses and intra-group transactions to prevent disputes and align with the updated tax treaties This regulatory shift underscores the importance for enterprises to understand how the MLI impacts their operations and to adapt accordingly.
Additionally, international enterprises conducting business in China may be subject to extra compliance requirements from the MLI This includes abiding by the PPT clause and other provisions pertaining to the prevention of treaty abuse Moreover, businesses need to review their processes to ensure they meet the new MLI compliance requirements If they
18 don't, foreign corporations may find doing business in China to be riskier and less straightforward (KPMG, 2016)
Simultaneously, the MLI provides a more efficient and transparent approach, which enhances the processes for resolving tax-related disputes These improved processes will benefit international enterprises operating in China and provide a more streamlined resolution of any potential tax-related issues (Deloitte, 2017).
Implications of the comparison for Vietnam - - -ccs 222cc sea 18
3.1.3.1 Implications of the comparison of Vietnam with Malaysia
Upon contrasting Vietnam's implementation of the Multilateral Instrument (MLI) with Malaysia's strategy, multiple implications become apparent for global enterprises functioning within both regions
First of all, the two nations ought to take advantage of their alignment with international standards By ratifying the MLI, Vietnam and Malaysia have both shown that they are committed to complying with international tax standards This denotes a cooperative endeavor to counteract profit shifting and base erosion (BEPS) while improving tax transparency Besides, MLI also has an impact on tax planning Specifically, the adoption of MLI provisions, such as the PPT and MAP, will require multinational corporations (MNCs) to reassess their tax planning strategies in both Vietnam and Malaysia MNCs operating in these countries must ensure that their cross-border transactions are supported by legitimate commercial reasons rather than solely for tax optimization purposes
MLI would also improve dispute resolution The MLI's MAP provisions will enhance Malaysia's and Vietnam's dispute resolution processes International businesses will gain from this since it will provide simpler and more effective procedures for settling tax-related disputes and lowering the possibility of double taxation However, given that respective treaty revisions and strategic goals for the implementation of MLI may differ, Vietnam and Malaysia should take these differences into account when planning their strategic activities Malaysia may prioritize broader compliance and transparency purposes
19 in its implementation of MLI rules, while Vietnam, like China, may embrace MLI requirements selectively to line with domestic tax policy and economic aims
3.1.3.2 Implications of the Comparison of Vietnam with China
Vietnam ratified the Multilateral Instrument (MLI) on September 1, 2023, reaffirming its commitment to international tax reform and modernizing its tax treaty framework By adopting key provisions like the Principal Purpose Test (PPT) and updating the Mutual Agreement Procedure (MAP), Vietnam aims to enhance dispute resolution and prevent treaty abuse These measures are designed to ensure tax treaties are effectively used to avoid double taxation and combat tax evasion, aligning Vietnam with global efforts to strengthen international tax cooperation.
China has adopted the Multilateral Instrument (MLI), focusing on strengthening fundamental conditions to prevent treaty abuse and improve dispute resolution mechanisms Like Vietnam, China opposes treaty benefits in arrangements primarily designed to exploit clauses such as the Principal Purpose Test (PPT) Additionally, China has revised its tax treaties, including changes to the preamble and rules on taxing capital gains and real estate income, to clarify treaty interpretations and ensure better alignment with contemporary corporate practices and tax policy goals.
China and Vietnam both actively implement Multilateral Instruments (MLI) to enhance international tax cooperation While Vietnam has fully adopted multiple tax treaties through MLI, China has selectively applied specific treaty provisions to align with its domestic tax laws and strategic economic objectives The differences in their MLI adoption strategies reflect their unique tax policy goals and the current structure of their treaty networks, demonstrating a nuanced approach to international tax reform.
Recommendations for improving MLI application in Vietnam
With 6 years of application of MLI in Malaysia, it is understandable that Vietnam can get some valuable lessons from that country
First of all, Vietnam should focus on being proactive in its interactions with those who are relevant (companies, tax authorities, and consultants) Vietnam can guarantee that their stakeholders are informed about the effects of MLI rules by promotion via communication channels, and cooperative conversations From that, Vietnam will be able to determine matters for firms operating under its authority and effectively approach the issues
Vietnam should prioritize enhancing transparency and streamlining paperwork processes, similar to Malaysia’s approach To comply with MLI regulations such as the PPT, businesses must demonstrate that their transactions have valid commercial purposes rather than solely tax optimization Vietnam can provide guidance to companies on documenting their financial rationale, ensuring adherence to international tax standards and minimizing the risk of treaty abuse By improving compliance and transparency, Vietnam can strengthen its position within the global tax framework.
Finally, Vietnam ought to take a customized strategy for MLI implementation that is in line with its national economic objectives and tax laws This involves using MLI provisions in a targeted manner to address particular issues with treaty abuse and tax avoidance, as well as to supplement the networks of tax treaties that are already in place Vietnam can guarantee consistency between international standards and its own regulatory environment by deliberately incorporating MLI regulations into it s regulator y structure 3.2.2 Recommendations Learned from China
Consulting China's implementation tactics can significantly enhance Vietnam's utilization of the Multilateral Instrument (MLI) A key strategy involves increasing stakeholder involvement, inspired by China's successful approach of engaging a broad range of stakeholders through consultations and educational sessions This collaborative engagement ensures effective MLI adoption and fosters stronger international tax cooperation.
21 experts, companies, and the general public can help allay worries and increase knowledge of the legislation's contents
Vietnam should strengthen Ifts own dispute s etflement procedures by taking a cue from China's emphasis on enhancing MLI systems This entails not just approving MLI dispute resolution measures but also making sure that these provisions are put into practice by providing sufficient administrative assistance and clear procedural guidelines
Furthermore, evaluating the effect of the MLI on Vietnam's tax treaties and international tax compliance can be aided by putting in place a strong monitoring and evaluation structure A model could be found in China's continuous evaluation of the results and necessary strategy adjustments This framework should have procedures in place for getting input from impacted parties and modifying regulations in response to real-world difficulties.
To sum up, the Multilateral Convention to Implement Tax Treaty Related Measures (MLI) is an important step in the right direction toward harmonizing global tax laws and preventing profit shifting and base erosion With prospects for improved transparency and dispute resolution as well as issues with compliance and tax planning adjustments for multinational firms, Vietnam's acceptance of the MLI shows a proactive commitment to international tax norms In contrast, China and Malaysia have customized their MLI implementation plans to fit in with their national tax laws, placing special emphasis on features like improved dispute resolution and anti-abuse measures Recommendations for Vietnam that center on stakeholder engagement, compliance monitoring, and capacity- building within tax administration can be informed by lessons learned from China and Malaysia In the end, successful MLI implementation throughout these nations supports international trade and investment in the contemporary era of taxation by fostering a more equitable and predictable global tax environment.
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The Government of Malaysia provides comprehensive information on the Multilateral Instrument (MLI), which is designed to prevent BEPS (Base Erosion and Profit Shifting) and enhance tax treaty effectiveness, as detailed by the Inland Revenue Board of Malaysia Meanwhile, KPMG’s 2016 tax alert highlights China's adoption of the MLI, emphasizing its role in updating worldwide tax treaties to align with OECD standards and combat international tax avoidance These resources underscore the global effort to strengthen international tax cooperation through the implementation of the MLI.
KPMG (2017) China signs multilateral instrument to implement BEPS reforms https://kpmg.com/ky/en/home/insights_new/2017/06/china-tax-alert-19.html
KPMG (2023) Vietnam signs Multilateral Convention KPMG Vietnam https://kpmg.com/vn/en/home/insights/2023/03/vietnam-signs-multilateral- convention.html
Lahbib (2022) highlights that tax treaties with China and Hong Kong will now be covered by the Multilateral Instrument (MLI), enhancing international tax cooperation The MLI aims to modernize and prevent treaty abuse, ensuring more consistent enforcement of tax treaties globally This development reflects efforts to adapt existing agreements to address evolving global tax challenges and promote transparency Countries involved are expected to incorporate the MLI into their bilateral treaties with China and Hong Kong, aligning their tax policies with international standards.
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