‘Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting’ (MLI for short) is the official title of the multilateral treaty framework that aims to prevent BEPS.
Base erosion and profit shifting (BEPS) refers to artificially shifting profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid. This is achieved by employing tax planning strategies that exploit gaps and mismatches in tax rules. Per OECD, Conservative estimates indicate annual losses of anywhere from 4 to 10% of global corporate income tax revenues, i.e. USD 100 – 240 billion annually.
Working together in the OECD/G20 BEPS Project, over 60 countries jointly developed 15 actions to tackle tax avoidance, improve the coherence of international tax rules and ensure a more transparent tax environment. The Multilateral Instrument (MLI) responds to this call for swift action by implementing the BEPS measures which require changes to tax treaties. In the words of OECD Secretary-General, Angel Gurria, “The entry into force of this multilateral convention marks a turning point in the implementation of OECD/G20 efforts to adapt international tax rules to the 21st Century.”
There are about 2,600 double tax treaties in the world, some 500 among industrialized economies, approximately 800 among developing economies and about 1,300 between industrialized and developing economies. It will be a never-ending exercise if countries want to re-negotiate each tax treaty with the other county partner, to bring in intended changes within the existing bi-lateral treaty framework. Such measure will be inefficient and lacks uniformity, besides being a slow and everlasting process. MLI acts as a master template (sort of a layer above the existing tax treaties) to bring in changes alongside existing bilateral treaties, at one go. MLI will also result in more certainty and predictability for businesses, and a better functioning international tax system for the benefit of society at large.
What is MLI?
The multilateral instrument is a treaty/ standard template, which is one element of the OECD BEPS project, designed to help implement the recommended measures to avoid tax treaty abuse. Countries will be able to use MLI framework to implement some of the BEPS action plans relating to double tax treaties.
Why MLI?
Abuse of tax treaties is an important source of BEPS. The MLI helps the fight against BEPS by implementing the tax treaty-related measures developed through the BEPS Project alongside existing bilateral tax treaties in a synchronised and efficient manner.
These measures help combat (a) treaty abuse, (b) improve dispute resolution, (c) prevent the artificial avoidance of permanent establishment status and (d) neutralise the effects of hybrid mismatch arrangements.
When a country signs MLI, whether all existing bilateral treaties would automatically stand to be modified/ superseded?
No. Upon coming into effect, the MLI will not replace the existing treaties completely. Instead it will apply alongside existing treaties and either modify, supersede, supplement, or complement their application so as to bring them in line with the measures to address base erosion. The MLI changes apply to “Covered Tax Agreements” (CTA) only. A Covered Tax Agreement is Tax treaty in force between the Parties (countries) to the MLI and for which both Parties have made a notification that they wish to modify the agreement using the MLI framework. In other words, if one party notifies a tax treaty and the other party to the treaty does not, it will cease to be a CTA and will be kept outside the purview. Parties remain free to make subsequent amendments through bilateral negotiations and the entire process is flexible and dynamic. Under Art 2 of MLI, at the time of signature, India notified its existing DTAA with 93 countries as Covered Tax Agreements (CTAs).
How many Jurisdictions are involved?
MLI is developed by an Ad hoc Group of 100+ jurisdictions. This instrument is signed by developed and developing economies around the world and it is open for signature by any country. On 7 June 2017, a high-level signing ceremony took place in Paris. India also participated in this ceremony and became a signatory to MLI. This convention was signed by Arun Jaitley, Union Finance Minister for India, along with representatives of 65 countries.
Highlights of positions/ reservations adopted by India at the time of signature of MLI
Together with the list of CTAs, India also submitted a provisional list of reservations and notifications (MLI positions) in respect of the various provisions of the MLI. Reservations submitted by India at the time of signature is accessible on OECD official website. The definitive MLI positions will be provided upon the deposit of its instrument of ratification of the MLI, later.
- India has opted for a wider scope of dependent agency Permanent Establishment (DAPE) to include activities of an agent playing a principal role in concluding contracts even though such contracts are formalized abroad or such activities of an agent who claims to be independent even though he is working exclusively or almost exclusively for closely-related enterprises (CREs).
- India adopts that the specific activity exemption from creating a PE is available, subject to fulfilment of preparatory or auxiliary conditions.
- India has also adopted the minimum standards prescribed under dispute resolution through mutual agreement procedure (MAP) to permit correlative adjustment arising on account of primary adjustment, to adopt a minimum time limit of three years for providing MAP access and to confer an obligation on competent authorities to resolve treaty interpretation and double taxation issues.
- Consistent with its earlier stand, India has not elected mandatory binding arbitration.
- India has chosen to additionally apply the simplified limitation of benefits (LOB) rule which provides an objective determination to deny treaty benefits, along with the mandatory minimum standard of the principal purpose test (PPT) to counter treaty shopping.
- While opting for substitution of the place of effective management (POEM) rule by the competent authority for resolving the issue of dual residency of non-individuals, India has not opted to implement changes related to the granting of treaty benefits to fiscally transparent entities.
The MLI and its implications are not theoretical or academic anymore. The MLI convention has already entered into force 1 July 2018 for five jurisdictions who deposited their instruments with the OECD (note: India has not yet deposited the signed MLI instrument). Accordingly, MLI has become the cutting-edge of the international tax practice in reality.
Interested readers may visit the OECD website, MLI section for a Q&A webinar session with OECD experts that has a discussion on the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS that took place on Friday 9 June 2017.
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