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China: Multilateral Instrument signed to update tax treaty network for BEPS


Khoonming Ho

Lewis Lu

On June 7 2017, the OECD hosted a signing ceremony in Paris at which representatives of 68 jurisdictions, including Wang Jun, commissioner of the Chinese State Administration of Taxation (SAT), signed the G20/OECD BEPS Project's Multilateral Instrument (MLI). This is set to update 1,100 double tax agreements (DTAs) and as a further eight countries have formally expressed their intent to sign the MLI, and an additional 25 plus countries are anticipated to join the MLI by the end of 2017, further swathes of the 3,000 plus DTAs in existence are set for update.

The first round of updates will amend 48 of China's DTAs and this may rise to 54 in the near future with the additional MLI adherents. This includes the DTAs with most of China's major trading and investment partners, but not the US, which has not signed the MLI. The most significant updates will be the insertion of the treaty anti-abuse principal purpose test (PPT) rules into each of the updated DTAs, alongside a new preamble reinforcing anti-treaty abuse rules. There will also be a general replacement of the corporate tax residence tie breaker test in the updated Chinese DTAs, and a modernisation of the mutual agreement procedure (MAP) and transfer pricing (TP) articles in older treaties. However, the more potentially impactful MLI updates, in respect of the new BEPS permanent establishment (PE) rules, have not been opted to be made to Chinese DTAs. A host of other rules adopted by other MLI signatories, in relation to arbitration, transparent entities, and PE triangular abuses, will also not be adopted by China.

The significance of the MLI updates for Chinese DTAs, which are likely to start to take effect from 2019 and 2020 (and later in some cases), remains to be seen. The precise form of the updates to each individual Chinese DTA, which is governed by complex MLI rules and which may in some cases require competent authority discussions to resolve, require further detailed study by tax officials and experts. The impact in practice of the PPT on access to treaty benefits will remain unclear until further SAT guidance, understood to be currently under preparation, is finalised and released.

The MLI updates to China's DTA network add to a steadily evolving framework in which China has been updating existing DTAs with terms that are by and large increasingly attractive. This is particularly true of DTAs with countries along the 'One Belt-One Road' (OBOR) corridors of investment and trade, which have been identified by the Chinese government as a key focus of the national external economic strategy. China will look to complete its DTA network with the 68 OBOR countries, currently covering 58 of them (26 of the OBOR DTAs will be updated through the MLI). The recent OBOR DTAs with Russia and Romania include unprecedented low withholding tax rates on interest and royalties, and updates to the interest article of the Malaysia DTA (also OBOR) similarly seeks to facilitate Chinese financing of local projects. DTAs with OBOR countries facilitate use of the MAP to support Chinese investors in these countries in their tax disputes, alongside parallel plans for China to establish tax cooperation mechanisms with OBOR countries and assist them in tax authority capacity building.

Khoonming Ho ( and Lewis Lu (

KPMG China

Tel: +86 (10) 8508 7082 and +86 (21) 2212 3421


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