Article 6 of the MLI – Purpose of a Covered Tax Agreement consists of two parts:

  1. Analysis on the Contents of Article 6
  • Article 6(1) - Operative clause
  • Article 6(2) - Compatibiltiy clause
  • Article 6(3) - Opt-in clause
  • Article 6(4) - Reservation (opt-out) clause
  • Article 6(5) - Notification clause giving legal relevance to Article 6(2)
  • Article 6(6) - Notification clause giving legal relevance to Article 6(3)
  1. Examples of the Application of Article 6 to CTAs

Part 1 – Analysis on the Structure of Article 6

1. A Covered Tax Agreement shall be modified to include the following preamble text: "Intending to eliminate double taxation with respect to the taxes covered by this agreement without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in this agreement for the indirect benefit of residents of third jurisdictions),".

Article 6(1) sets the minimum standard for all Parties that have committed themselves to the OECD/G20 BEPS package.

Paragraph 75 of the "Explanatory Statement to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting" (the Explanatory Statement) provides that:

The minimum standard for protection against the abuse of tax treaties under Action 6 (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances) requires countries to include in their tax treaties an express statement that their common intention is to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty-shopping arrangements. This could be done by including such a statement in the preambles of tax treaties in Article 6(1) below.

2. The text described in paragraph 1 shall be included in a Covered Tax Agreement in place of or in the absence of preamble language of the Covered Tax Agreement referring to an intent to eliminate double taxation, whether or not that language also refers to the intent not to create opportunities for non-taxation or reduced taxation.

Paragraph 2 is a compatibility clause which describes the interaction between paragraph 1 and the preamble language of Covered Tax Agreements.

3. A Party may also choose to include the following preamble text with respect to its Covered Tax Agreements that do not contain preamble language referring to a desire to develop an economic relationship or to enhance co-operation in tax matters: "Desiring to further develop their economic relationship and to enhance their co-operation in tax matters,".

Paragraph 3 is an opt-in provision, meaning that Parties to the MLI are free to decide whether they include the other part of the preamble of the OECD Model Tax Convention in the Covered Tax Agreements.

4. A Party may reserve the right for paragraph 1 not to apply to its Covered Tax Agreements that already contain preamble language describing the intent of the Contracting Jurisdictions to eliminate double taxation without creating opportunities for non-taxation or reduced taxation, whether that language is limited to cases of tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in the Covered Tax Agreement for the indirect benefit of residents of third jurisdictions) or applies more broadly.

Article 6(4) is a reservation clause.

Paragraph 85 of the Explanatory Statement provides that "[b]ecause paragraph 1 reflects the minimum standard for protection against the abuse of tax treaties under Action 6, paragraph 4 permits a Party to opt out of applying paragraph 1 only with respect to Covered Tax Agreements that already satisfy the minimum standard. Paragraph 4 is intended to permit Parties to preserve preamble language in their Covered Tax Agreements that already refers to the intent to eliminate double taxation without creating opportunities for non-taxation or reduced taxation, whether or 22 not such language is limited to cases of tax evasion or avoidance (including cases of treaty shopping) or applies more broadly."

5. Each Party shall notify the Depositary of whether each of its Covered Tax Agreements, other than those that are within the scope of a reservation under paragraph 4, contains preamble language described in paragraph 2, and if so, the text of the relevant preambular paragraph. Where all Contracting Jurisdictions have made such a notification with respect to that preamble language, such preamble language shall be replaced by the text described in paragraph 1. In other cases, the text described in paragraph 1 shall be included in addition to the existing preamble language.

Article 6(5) is a notification clause.

Each Party that does not reserve its right under Article 6(4) shall notify the Depositary in the manner given with the information described.

If both contracting jurisdictions have made a matched notification, the text described in paragraph 1 shall apply in place of, or in its absence be included in addition to, the existing preamble language.

6. Each Party that chooses to apply paragraph 3 shall notify the Depositary of its choice. Such notification shall also include the list of its Covered Tax Agreements that do not already contain preamble language referring to a desire to develop an economic relationship or to enhance co-operation in tax matters. The text described in paragraph 3 shall be included in a Covered Tax Agreement only where all Contracting Jurisdictions have chosen to apply that paragraph and have made such a notification with respect to the Covered Tax Agreement.

Article 6(6) is a notification clause.

It requires each Party that chooses to apply Article 6(3) to notify the Depositary of tis choice. Only where all Parties have chosen to apply that paragraph shall the text described in Article 6(3) be included in a Covered Tax Agreement.

Part 2 – Examples of the Application of Article 6

Example 1 - Application of Article 6 to Japan's CTA's

Sample CTAs

Article 6(3)

Article 6(4)

Opting in for article 6(3) to apply to CTAs

Reservation for article 6(1) not to apply to CTAs on ground that an equivalent provision already exists

Japan-German CTA

Y

Japan-Australia CTA

Y

Japan-New Zealand CTA

Y

Japan-Singapore CTA

Y

Japan-United Kingdom CTA

Y

Example 2 - Application of Article 6 to the U.K.'s CTA's

Sample CTAs

Article 6(3)

Article 6(4)

Opting in for article 6(3) to apply to CTAs

Reservation for article 6(1) not to apply to CTAs on grounds that an equivalent provision already exists

Belarus-United Kingdom CTA

Y

Japan-United Kingdom CTA

Y

New Zealand-United Kingdom CTA

Y

Singapore-United Kingdom CTA

Y

Notification

Pursuant to Article 6(6), the text described in paragraph 3 (the opt-in provision) shall be included in a Covered Tax Agreement where both Japan and the United Kingdom have chosen to apply that paragraph and have made a matched notification with respect to the bilateral Covered Tax Agreement. [Emphasis added] A matched notification is the prerequisite for the CTA to have the legal effect.

Note that in cases of a CTA that is concluded by more than two parties (i.e. a multilateral tax treaty), the opt-in provision shall not be included in that CTA until all the parties have made a matched notification, pursuant to Article 6(6). [Emphasis added] An example of a multilateral tax treaty is the Convention between the Nordic Countries for the Avoidance of Double Taxation with respect to Taxes on Income and Capital (23 Sept 1996), which is concluded by six signatory states: Denmark, the Faroe Islands, Finland, Iceland, Norway, and Sweden.

As a separate but related note, more sophisticated examples of opt-in provisions are found in paragraphs (4), (6) and (7) of Article 7 - Prevention of Treaty Abuse. See more information at: www.china-tax.net

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.