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The Multilateral Convention / Multilateral Instrument to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, sometime abbreviated BEPS multilateral instrument, is a multilateral convention of the Organisation for Economic Co-operation and Development to combat tax avoidance by multinational enterprises through prevention of Base Erosion and Profit Shifting [“BEPS”]. The BEPS multilateral instrument was negotiated within the framework of the OECD G20 BEPS project and enables countries and jurisdictions to swiftly modify their bilateral tax treaties to implement some of the measures agreed

The inception of MLI is a milestone in the field of International Taxation and Treaty Law. MLI will not replace existing bilateral tax treaties entirely rather it will apply alongside the existing tax treaties and either supplement, complement, supersede or modify their application to bring them in line with the measures set out in the BEPS Action Reports. As far as India’s position is concerned, MLI would be impacting India’s tax treaty with various countries. Following are the countries with which MLI has been entered:

1. Austria 9. Iceland 17. Netherlands 25. Slovak Republic
2. Australia 10. Ireland 18. New Zealand 26. Slovenia
3. Belgium 11. Israel 19. Norway 27. Sweden
4. Canada 12. Japan 20. Poland 28. UAE
5. Denmark 13. Latvia 21. Qatar 29. Ukraine
6. Finland 14. Lithuania 22. Russia 30. United Kingdom
7. France 15. Luxembourg 23. Serbia
8. Georgia 16. Malta 24. Singapore

The way that the MLI impacts a particular Covered Tax Agreement [“CTA”] will depend upon the respective MLI positions of the two countries – so the impact of the MLI will differ from treaty to treaty. Generally, it is only where both countries have adopted a MLI provision that the MLI will relevantly modify the particular tax treaty. The dates (viz., Entry into Force, Relevant date and Entry into Effect) are of crucial at the time of reading MLI out of which ‘Entry into Effect’ is of utmost important. The ‘Entry into Effect’ is determined as:

For withholding taxes: ‘Entry into Effect’ for the purpose of withholding taxes shall be 1st day of next taxable year from the ‘Relevant Date’.

For all other taxes: ‘Entry into Effect’ for the purpose of all other taxes shall be taxable period beginning on or after 6 months from the ‘Relevant Date’.

The provisions of the MLI require the mandatory amendment of bilateral tax treaties to allow for certain minimum standards to be applied in respect of bilateral treaties. The BEPS multilateral instrument looks to:

Expanding scope of treaty: The wording of the preamble of the relevant treaty must be updated to expand its scope by addressing the elimination of opportunities for non-taxation or reduced taxation through tax evasion or avoidance.

(Article 6 of the MLI)

Prevent treaty abuse : To avoid situations of treaty abuse, either of the three should be incorporated in the bilateral treaties through MLI. As far as India’s situation is concerned, India has adopted ‘Principal Purpose Test’

Principal Purpose Test [“PPT”]: PPT provides that benefits of Covered Tax Agreement shall not be granted in respect of income or capital, if it is satisfied that obtaining the benefit was one of the principal purposes of any arrangement or transaction subject to certain exception. It is relevant that burden of proof lies of proving the PPT is on the tax department.

Simplified Limitation on Benefits [“LOB”] test: It is specific anti avoidance agreement which aimed at treaty shopping. Treaty benefits would be denied to a resident of a contracting state who is not a ‘Qualified Person’. If a person is not a ‘Qualified Person’, the benefit of treaty would be available on satisfaction of certain conditions.

Extensive LOB with anti-conduit rules: If the countries reserve the right for PPT under MLI to not apply to their CTA, they may agree on a detailed LOB provision as the subjective threshold governing grant of treaty benefits to residents of two Treaty Partners engaged in cross border operations. Parties have the option to provision in combination with either rules to address conduit financing structures or a PPT thereby ensuring that the BEPS minimum standards are met.

(Article 7 of the MLI)

Improvement of dispute resolution: A mandatory binding mutual agreement procedure arbitration provision would be developed as part of the negotiation of the Convention.

(Article 16 of the MLI)

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June 2024