THE MULTILATERAL CONVENTION TO IMPLEMENT TAX TREATY-RELATED MEASURES TO PREVENT BASE EROSION AND PROFIT SHIFTING (MLI) – MALAYSIA'S POSITION
The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) is one of the outcomes of the OECD/G20 Project to tackle Base Erosion and Profit Shifting (the "BEPS Project"). It is an agreement negotiated under Action 15 of the BEPS Project. Implementation of the Final BEPS Package will require changes to the bilateral tax treaties. Bilateral updates to the treaty network would be a very burdensome and time-consuming exercise, thus the MLI Convention is seen as the solution as it allows jurisdictions to swiftly amend their double taxation avoidance agreements (DTAs) to implement the tax treaty related BEPS recommendations.
Malaysia was involved in the development of the MLI with more than 100 jurisdictions in the Ad Hoc Group. The negotiation of the MLI text was concluded on 24 November 2016 in Paris. The first signing ceremony was held on the 7th of June 2017 whereby 67 countries and jurisdictions signed the MLI, covering 68 jurisdictions (including Hong Kong).
a. Signing of MLI Convention by Malaysia
In line with Malaysia's commitment in meeting the internationally agreed tax standards and the implementation of BEPS Action Plans, Malaysia, represented by the Honourable Deputy Finance Minister I, YB Dato' Wira Othman Aziz signed the MLI at the OECD headquarters in Paris on 24th January 2018 along with Barbados, Cote d'Ivoire, Jamaica, Panama and Tunisia. At the time of signature, a list of expected reservations and notifications pursuant to Articles 28(7) and 29(4) of the Convention was deposited.
The latest list of Signatories and Parties to the MLI Convention may be found here.
b. Entry into force of the MLI Convention
The MLI Convention entered into force on 1st July 2018 after the deposit of instruments of ratification by five jurisdictions.
c. List of Covered Tax Agreements
In the provisional reservations and notifications, Malaysia listed its DTAs with 73 countries as the Covered Tax Agreements of the MLI:
These DTAs will be amended subject to the ratification of the MLI and both Malaysia and the approval/agreement of both Malaysia and the treaty partner to amend the DTA using the MLI.
d. Provisions adopted
The MLI contains both minimum standard and optional provisions. Malaysia provided its positions as follows:
a) Minimum standard provisions:
(i) Article 6 (Purpose of a covered tax agreement) – To include a statement of intent in the preamble of the covered tax agreement that the DTA is to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance;
(ii) Article 7 (Preventing treaty abuse) – To include a general anti-abuse rule in the covered tax agreement, commonly known as the Principal Purpose Test (PPT);
(iii) Article 16 (Mutual agreement procedure) – To update the Mutual Agreement Procedure in the DTA to new rules of resolution of disputes procedure which among others, allows the aggrieved party to present his case to the competent authority of either Contracting State, sets the duration of 3 years for MAP application, no time limit to implement agreements reached and the resolution of disputes regarding interpretation or application of double tax agreement and cases of elimination of double taxation.
b) Optional provisions:
(i) Article 3(1) (Transparent entity) – Treaty benefits will be granted for income derived through fiscally transparent entities, such as partnerships or trusts, where one of the two countries treats the income as income of one of its residents under its domestic law. These rules will not prevent either country from taxing its own residents.
(ii) Article 12 (Artificial avoidance of permanent establishment status through commissionaire arrangements and similar strategies) – If an agent or intermediary plays the principal role in concluding substantively finalised business contracts in a country on behalf of a foreign enterprise, that arrangement will constitute a 'permanent establishment' of the foreign enterprise in that country.
(iii) Article 13 (Artificial avoidance of permanent establishment status through the specific activity exemptions) – Only genuine preparatory or auxiliary activities will be excluded from the definition of permanent establishment. In addition, related entities will be prevented from fragmenting their activities in order to qualify for this exclusion.
(iv) Article 15 (Definition of a person closely related to an enterprise) – Definition of a 'person closely related to an enterprise' for the purpose of permanent establishment Articles.
(v) Article 17 (Corresponding adjustments) – It provides that a country to make a corresponding adjustment to the profits of a resident entity, as a result of an adjustment by the other country to the profits of an associated entity which is a resident of that other country if the adjustment is justified, in order to alleviate double taxation.
The MLI will modify Malaysia's DTAs if both treaty partners share the same position on the provisions of the MLI. The reservations and notifications provided at the time of signing are provisional and the extent to which MLI provisions are incorporated into Malaysia's DTAs will depend on the final positions at the time of ratification of MLI of both countries. Guidance will be issued to assist in the interpretation and implementation of the MLI Convention.
e. Future actions
Once Malaysia completes its domestic ratification process, it will need to deposit the instrument of ratification, acceptance or approval and the final reservation & notification with the OECD Depositary. Generally, the provisions will take effect after the expiration of a period of six calendar months from the latest dates on which the MLI enters into force for each of the Contracting States of the DTAs.
The MLI has been gazetted on 4th August 2020 through P.U. (A) 224. Malaysia is expected to deposit the instrument of ratification, acceptance or approval in 2021.
Malaysia's provisional positions on the MLI Convention can be found here. Please visit the OECD website for further information on MLI.