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Unless I'm missing something there is a flaw it this. Current tools would not see these documents as being well formed, as the entity reference is not defined in any DTD. If it used a different syntax, without significance in XML 1.1, it could be backward compatible. This would be similar to the way XML namespaces do not break well-formedness when parsed by non-namespace aware applications.
Also, the elements (typically the root) could become cluttered with these attributes. Also there is no way to import a set of them as for example the entities used in HTML.
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