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The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI Convention) 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 Convention with more than 100 jurisdictions in the Ad Hoc Group. The negotiation of the MLI Convention 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 Convention, 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 Convention 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 signature brings to the total of 78 Signatories of the MLI Convention to date. 

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 requires ratification by 5 countries before it enters into force. Until 18th April 2018, there are 5 Signatories that have ratified the MLI Convention consisting of Austria, Isle of Man, Jersey, Poland and Slovenia. Slovenia is the fifth Signatory to deposit its instrument of ratification, acceptance or approval.  Accordingly, pursuant to its Article 34(1), the Convention will enter into force on 1 July 2018, the first day of the first month following the expiration of a period of three calendar months beginning on the date of deposit of the fifth instrument of ratification, acceptance or approval.

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 Convention:

1 Albania 38 Morocco
2 Australia 39 Myanmar
3 Austria 40 Namibia
4 Bahrain 41 Netherlands
5 Bangladesh 42 New Zealand
6 Belgium 43 Norway
7 Bosnia Herzegovina 44 Pakistan
8 Brunei 45 Papua New Guinea
9 Canada 46 Philippines
10 Chile 47 Poland (New Agreement - gazetted - not yet entered into force)
11 China 48 Qatar
12 Croatia 49 Romania
13 Czech Republic 50 Russia
14 Denmark 51 San Marino
15 Egypt 52 Saudi Arabia
16 Fiji 53 Seychelles
17 Finland 54 Singapore
18 France 55 Slovak Republic
19 Germany 56 South Africa
20 Hong Kong 57 South Korea
21 Hungary 58 Spain
22 India 59 Sri Lanka
23 Indonesia 60 Sudan
24 Iran 61 Sweden
25 Ireland 62 Syria
26 Italy 63 Switzerland
27 Japan 64 Thailand
28 Jordan 65 Turkey
29 Kazakhstan 66 Turkmenistan
30 Kyrgyz Republic 67 United Arab Emirates
31 Kuwait 68 United Kingdom
32 Laos 69 Uzbekistan
33 Lebanon 70 Venezuela
34 Luxembourg 71 Vietnam
35 Malta 72 Zimbabwe
36 Mauritius 73 Senegal (New Agreement - gazetted - not yet entered into force)
37 Mongolia    

These DTAs will be amended subject to the ratification of the MLI Convention and both Malaysia and the approval/agreement of both Malaysia and the treaty partner to amend the DTA using the MLI Convention.

d. Provisions adopted
The MLI Convention 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) – This provision is a best practice and subject to peer review under Action 14. It requires 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 Convention will modify Malaysia’s DTAs if both treaty partners share the same position on the provisions of the MLI Convention.  The reservations and notifications provided at the time of signing are provisional and the extent to which MLI Convention provisions are incorporated into Malaysia’s DTAs will depend on the final positions at the time of ratification of MLI Convention of both countries. Guidance will be issued to assist in the interpretation and implementation of the MLI Convention.  

e. Future actions
The next step for Malaysia is to proceed with its domestic ratification process. Some provisions of the Income Tax Act 1967 may requires amendments to enable the ratification of MLI Convention. Once the amendment of the law is done and ratification process is completed, Malaysia will deposit the instrument of ratification, acceptance or approval and its 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 Convention enters into force for each of the Contracting States of the DTAs.

It is expected that it would be in the latter part of 2019 that MLI Convention for Malaysia will enter into force and thus modifying the provisions of the DTAs. 

Malaysia’s provisional positions on the MLI Convention can be found here. Please visit the OECD website for further information on MLI.

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