Impact of MLI on Indian Tax Treaties under International Taxation

Introduction

Multilateral Instruments (MLI) is indeed the talk of the town in the world of International Taxation. Under the OECD*/G20 inclusive framework on Base Erosion and Profit Shifting (BEPS), more than 125 countries are collaborating to put an end to tax avoidance strategies that exploit the gap and mismatches in tax rules to avoid paying taxes. The MLI offers concrete solutions for government to plug loopholes in international tax treaties by transposing the results from the OECD*/G20 BEPS Project into bilateral tax treaties worldwide.

Overview

On 24^th November 2016, over 100 countries and jurisdictions, including many developing countries, concluded negotiations on Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) that will allow governments to modify application on its network of bilateral tax treaties in a synchronised manner. The MLI already covers 94 jurisdictions. India signed the MLI on 7^th June 2017, submitted a provisional list of tax agreement that would be modified by the MLI, which later entered into force on 1^st July, 2018. And On 12^th June, 2019, Indian Cabinet announced the MLI ratification. As a next step, India deposited its ratified MLI with the OECD with its final position on 25^th June, 2019. MLI enters into force in India on 1^st October, 2019 and its provisions entered into effect from 1^st April, 2020 for 23 Indian bilateral tax treaties.

Base Erosion and Profit Shifting (BEPS)

Base Erosion and Profit Shifting (BEPS) refers to corporate tax planning strategies used by multinational enterprises to shift profit from higher-tax jurisdiction to lower-tax jurisdiction thus eroding the tax base of higher-tax jurisdictions, mismatches in tax rules to avoid paying taxes. BEPS practices cost countries 100-240 billion in lost revenue annually.

Multilateral Instrument (MLI)

Multilateral Instrument (MLI) is an outcome of 15^th BEPS Action Plan of OECD*/G20 inclusive framework.  The MLI helps to fight against BEPS by implementing the tax treaty related measures developed through BEPS Project in existing bilateral tax treaties, in an efficient manner. These measures will prevent treaty abuse, improve dispute resolution, prevent the artificial avoidance of permanent establishment status and neutralise the effects of hybrid mismatch arrangements.

How will you know if an existing tax treaty is modified by the MLI?

The MLI modifies tax treaties that are Covered Tax Agreements (CTA). A CTA is an agreement for the avoidance of double taxation that is in force between Parties to MLI and for which both parties have made notifications that they wish to modify the agreement using the MLI. List of notified tax treaties can be found in the MLI positions available at oe.cd/mli.

Key Impact areas vis-à-vis Indian Tax Treaties

Introduction

Multilateral Instruments (MLI) is indeed the talk of the town in the world of International Taxation. Under the OECD*/G20 inclusive framework on Base Erosion and Profit Shifting (BEPS), more than 125 countries are collaborating to put an end to tax avoidance strategies that exploit the gap and mismatches in tax rules to avoid paying taxes. The MLI offers concrete solutions for government to plug loopholes in international tax treaties by transposing the results from the OECD*/G20 BEPS Project into bilateral tax treaties worldwide.

Overview

On 24^th November 2016, over 100 countries and jurisdictions, including many developing countries, concluded negotiations on Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) that will allow governments to modify application on its network of bilateral tax treaties in a synchronised manner. The MLI already covers 94 jurisdictions. India signed the MLI on 7^th June 2017, submitted a provisional list of tax agreement that would be modified by the MLI, which later entered into force on 1^st July, 2018. And On 12^th June, 2019, Indian Cabinet announced the MLI ratification. As a next step, India deposited its ratified MLI with the OECD with its final position on 25^th June, 2019. MLI enters into force in India on 1^st October, 2019 and its provisions entered into effect from 1^st April, 2020 for 23 Indian bilateral tax treaties.

Base Erosion and Profit Shifting (BEPS)

Base Erosion and Profit Shifting (BEPS) refers to corporate tax planning strategies used by multinational enterprises to shift profit from higher-tax jurisdiction to lower-tax jurisdiction thus eroding the tax base of higher-tax jurisdictions, mismatches in tax rules to avoid paying taxes. BEPS practices cost countries 100-240 billion in lost revenue annually.

Multilateral Instrument (MLI)

Multilateral Instrument (MLI) is an outcome of 15^th BEPS Action Plan of OECD*/G20 inclusive framework.  The MLI helps to fight against BEPS by implementing the tax treaty related measures developed through BEPS Project in existing bilateral tax treaties, in an efficient manner. These measures will prevent treaty abuse, improve dispute resolution, prevent the artificial avoidance of permanent establishment status and neutralise the effects of hybrid mismatch arrangements.

How will you know if an existing tax treaty is modified by the MLI?

The MLI modifies tax treaties that are Covered Tax Agreements (CTA). A CTA is an agreement for the avoidance of double taxation that is in force between Parties to MLI and for which both parties have made notifications that they wish to modify the agreement using the MLI. List of notified tax treaties can be found in the MLI positions available at http://www.oecd/mli.org.

Key Impact areas vis-à-vis Indian Tax Treaties

Preventing Tax Treaty Abuse

• Minimum Standard under BEPS AP 6 to tackle treaty abuse i.e; insertion of new preamble and principal purposes test (PPT) in all Indian CTAs to be achieved.
• PPT to replace/supersede existing general anti abuse provisions in CTA or to be added in the abuse of such positions.
• India has chosen to apply Simplified Limitations on Benefit (SLOB) which will apply to CTAs only if otherer party has opted for its applications

Widening Permanent Establishment Scope

• Broader agency PE rule to apply to address artificial avoidance of PE status through commissionaire arrangements and similar strategies.
• Address avoidance of PE formation through specific activity exemptions and splitting up of contracts.

Improving Dispute Resolution

• Mutual Agreement Procedure (MAP) request to be implemented through bilateral negotiation or consultation process.
• Provision on mandatory binding arbitration (if competent authorities are unable to reach a decision under MAP) to not apply to CTAs.

Other Key Modifications

• Tie breaker test in case of dual residency of person (other than an individual) to be now decided by Competent Authority (CA) of the CTA Parties.
• Taxation of Capital Gains on alienation of Shares/interests deriving value principally from immovable property is to be amended.

Conclusion

Any Corporate planning to opt the amended sections must read the sections, rules and notifications carefully to avoid unwanted difficulties and litigations before going forward. 

Disclaimer- The contents of this document are solely for informational purpose. It does not constitute professional advice or formal recommendation. While due care has been taken in preparing this document. The author does not accept any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information nor any other action taken in reliance thereon. 

Reference

• http://www,oecd/mli.org