CHINA: OECD says SAR’s tax agreements not complying with key minimum standard, Gov’t addressing issue

None of the four agreements in effect between Macau and other countries to avoid double taxation and prevent tax evasion meets a key minimum standard required by the OECD. The SAR Government is taking steps to address the issue.

Macau’s population often only hears about the Organisation for Economic Cooperation and Development (OECD) every three years, when results of the Programme for International Student Assessment (PISA) are released. PISA, a global study, assesses educational systems by evaluating the academic performance of 15-year-olds in mathematics, science, and reading. However, Macau’s association with the OECD goes beyond PISA (first held in 2000), as Macau has been the 101st member of the OECD since January 1991.

The OECD this year released its “Sixth Peer Review Report on Treaty Shopping,” part of its “Prevention of Tax Treaty Abuse” programme, reviewing tax treaties across 127 countries and jurisdictions. The report examined compliance with one of four minimum standards aimed at addressing base erosion and profit shifting (BEPS), which involves tax planning strategies used by multinational enterprises to exploit gaps in tax rules, shifting profits to low- or no-tax locations to avoid taxation. The minimum standard in question requires jurisdictions to include a statement against double non-taxation (typically in the preamble) and to adopt one of three specified measures to prevent “treaty shopping,” an expression defined by the OECD as “the attempt to indirectly access the benefits of a tax treaty between two jurisdictions by a person who is not a resident of one of those jurisdictions, often through complex structures and arrangements.”

Steps being taken
With regard to Macau, the report states: “Macau (China) has four tax agreements in force, as reported in its response to the Peer Review questionnaire. None of those agreements comply with the minimum standard.” The report also notes that “Macau (China) indicated in its response to the Peer Review questionnaire that steps have been taken (other than under the MLI) to implement the minimum standard in its agreements with Cape Verde, Mozambique, Portugal, and Vietnam.”

The MLI refers to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“Multilateral Instrument” or “BEPS MLI”)

The Official Gazette lists three additional tax agreements focused on eliminating double taxation, with the latest agreement signed with Cambodia in 2023. Another agreement with Belgium, published in 2011, aims to “Avoid Double Taxation and Prevent Tax Evasion in Income Taxes.” The OECD report further highlights that “no jurisdiction has raised any concerns about their agreements with Macau” and confirmed that, as of the document’s release, “Macau has not joined the MLI.”

The OECD describes the Multilateral Instrument (MLI or BEPS MLI) as a measure that “offers concrete solutions for governments to close loopholes in international tax treaties by transposing results from the BEPS Project into bilateral tax treaties worldwide. The BEPS MLI allows governments to implement agreed minimum standards to counter treaty abuse and improve dispute resolution policies by providing flexibility to accommodate specific tax treatment policies.”

Government explanations
MNA sought clarification from the Government, specifically through the Financial Services Bureau (DSF) A spokesperson explained that “Macau has no objection to the OECD statement,” adding: “The minimum standard was introduced in 2015, and the OECD only published the revised Model Tax Convention on Income and on Capital in November 2017. However, the four DTAs [double tax agreements] under the BEPS Action 6 peer review, with Portugal, Mozambique, Cape Verde, and Vietnam, were signed in 1999, 2007, 2010, and April 2018 respectively.”

As a result, “the OECD’s recommended provisions were not available during the negotiation stages of these treaties, and therefore were not included,” the spokesperson noted. Due to Macau’s limited number of DTAs, the spokesperson added, “Macau prefers to update existing treaties through bilateral protocols rather than the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI).” Negotiations are currently underway with the four countries to amend the protocols.

Given the bureaucratic and often lengthy process of treaty negotiations (or renegotiations), Macau’s explanations for the “Fourth Peer Review Report on Treaty Shopping” from 2022 remain incomplete. For Cape Verde, “Macau has already submitted a proposal for amending the protocol.” For Mozambique, “Macau has held the first round of negotiations to amend the protocol.” Lastly, with Portugal and Vietnam, “Macau has extended an invitation to begin discussions to amend the existing DTA through a protocol.”

What is BEPS?

Macau first underwent an OECD peer review in 2017-2018. Since then, the OECD has issued recommendations which the Government has gradually accepted and is incorporating into local legislation. “Overall, Macau, China has met most of the elements of Minimum Action Standard 14. Where deficiencies exist, Macau, China has worked to address them, which was monitored in stage 2 of the process. In this regard, Macau, China has almost resolved all the identified deficiencies,” the Organisation states.

The primary exception has been the issue of base erosion and profit shifting (BEPS). According to the OECD, “The Multilateral Instrument (BEPS MLI) offers concrete solutions for governments to close loopholes in international tax treaties by transposing results of the BEPS Project into bilateral tax treaties worldwide.” The BEPS MLI “allows governments to implement enhanced minimum standards to counter treaty abuse and improve dispute resolution mechanisms while providing flexibility to accommodate specific tax treatment policies,” according to official information.