India: India Signs The Multilateral Instrument Under The BEPS Project; A New Era Dawns In International Taxation

Last Updated: 20 June 2017
Article by SKP  

India joined hands with 68 countries in signing the Multilateral Instrument (MLI) at a recently concluded ceremony in Paris on 7 June. This sets the tone for changes in virtually all the 93 comprehensive tax treaties entered into by India and paves the way for implementation of recommendations under the BEPS project. The international tax regime is set to witness a massive and unprecedented change.

BEPS, which stands for Base Erosion and Profit Shifting, refers to the artificial shifting of profits by Multi-national enterprises to low or no tax locations. Such shifting of profits is achieved through gaps in the tax rules of different countries along with the governing tax treaties. Such actions erode the tax base of the country where the value was created and is therefore considered to be an abuse of the tax framework.

To address the BEPS concerns, the BEPS project was developed by the OECD1 Committee on Fiscal Affairs (CFA) and endorsed by the G20 leaders in September 2013. It identified 15 Action Plans to deal with BEPS.

Implementation of certain BEPS Action Plans required amendments to the tax treaties across the world, which was a herculean task as there exist more than 3,000 tax treaties. To address this, the OECD constituted an ad hoc group of member countries to prepare the text of the MLI, which, once signed will simultaneously amend a large number of tax treaties.

Indicative India-related developments and their potential impact

  • The MLI will result in modifications to the tax treaties with countries who are a party to the MLI. Countries such as the USA, UAE, Malaysia and Thailand did not participate in the signing ceremony. Germany has not notified its tax treaty with India as a Covered Tax Agreement under the MLI. Therefore, India's existing bilateral treaties with these countries would remain unaffected.
  • Mauritius has announced that it will sign the MLI by 30 June 2017. Hence, the effect of the MLI on the India-Mauritius tax treaty will be known shortly.
  • The MLI provides for insertion of Principle Purpose Test (PPT) as a minimum standard. The PPT seeks to expressly state in the Preamble of tax treaties that the purpose of the treaty is not to create opportunities for tax evasion, tax avoidance or double non-taxation. As per PPT, the benefit of the tax treaty shall not be granted if obtaining such benefit was one of the principal purposes of any arrangement or transaction. Since this is a minimum standard, the PPT shall be imported in all the tax treaties entered into by India with the countries participating in the MLI.
  • In addition to the PPT rule, India has agreed to a Simplified Limitation of Benefits clause (SLOB). The SLOB seeks to create supplementary conditions to be satisfied to avail the benefit of a tax treaty. However, India's prominent treaty partners have not agreed to the SLOB clause and as such, the practical applicability of the SLOB clause could be limited.
  • India has not accepted the MLI provisions relating to arbitration proceedings for dispute resolution and methods for elimination of double taxation. The double taxation relief will continue to apply as per the existing bilateral tax treaties
  • India has accepted the provisions for prevention of artificial avoidance of Permanent Establishment (PE) under commissionaire structures, specific activity exemptions and artificial splitting of contracts. Some of India's treaty partners have accepted these provisions but some have not. Hence, the expanded PE exposure for Indian marketing operations of a multinational enterprise could vary from country to country.


1. Organisation for Economic Co-operation and Development

SKP's Comments

The MLI sets the tone for a paradigm shift in the applicability of India's tax treaties. The signing of the MLI does not automatically result in amendments to the tax treaties. Tax treaties will get amended after the participating countries follow the due process laid under the MLI as well as under their domestic laws. Taxpayers need to evaluate their existing tax structures and tax positions in light of the expected changes in the tax treaties.

We invite you to a webinar that discusses the likely effects of the MLI on taxpayers operating in India. Our panellists will address key questions around the MLI such as:
  • What will be the fate of the recently negotiated tax treaties with Mauritius, Singapore and Cyprus?
  • How will the Indian transfer pricing regime be affected?
  • What will be the fate of tax planning and existing tax structures of MNCs?
Click on the link below to register for the webinar.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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