India: Multi-Lateral Instrument: A BEPS Initiative – Aims In Bringing Synchronization & Harmonization


The interaction of domestic tax systems of different countries and the bilateral tax treaties amongst them, sometimes have led to unintended overlaps and gaps. Overlap happens when income is sought to be taxed by more than one jurisdiction resulting in double taxation, while gaps are manifested when income ends up not being taxed by any jurisdiction resulting in double non-taxation.

It is widely felt that bilateral tax treaties amongst different countries were applied to build complex structures, thereby artificially shifting profits to low tax or no tax jurisdictions, sans any economic/ commercial rationale or basis, to address such artificial shifting of profit to low or no tax jurisdiction. In 2013 the Organization for Economic Cooperation and Development (OECD) along with the G20 countries and the developing nations unveiled a package of 15 Actions items under the Base Erosion and Profit Shifting Project (BEPS). The BEPS project is premised upon the principle that the profits should be taxed where economic activities generating the profits are performed and where value is created.

The BEPS package does necessitate the need for amendments in the domestic tax laws of the countries as well as amendments to the tax treaties signed by the various countries. Amendments in the domestic tax laws of a nation are comparatively easier, while changes in the tax treaties entails a detailed, lengthy process and negotiations between the countries.

To ensure the sustainability of a consensual framework to eliminate double taxation and overcome harmful tax practices, there was a need for a mechanism to swiftly implement these changes. For these reasons, OECD and governments agreed to explore the feasibility of a multilateral instrument that would have the same effects as a simultaneous renegotiation of thousands of bilateral tax treaties. The BEPS Action Plan 15 resultantly, recommended the development of a Multilateral Instrument (MLI) to streamline the adoption of agreed measures and to ensure consistent adoption by participating jurisdictions. The MLI would also enable the countries to go through only one ratification procedure in their parliament in case the same was required under its constitutional/ legislative framework, so as to modify their whole treaty network rather than seeking separate approval of amendments for each bilateral tax treaty.

Since, jurisdictions adopt different methods in adapting such modifications made by the MLI to bilateral tax treaties at the domestic level. The ratification of an international treaty may automatically result in the integration of the rights and obligations set out in that treaty into the domestic law or the legislation may reproduce the relevant provisions of the MLI in order to give them effect under domestic law. 


The 2014 Interim Report on Action 151 recommended that an international conference be convened to negotiate a multilateral instrument to implement the tax treaty-related BEPS measures. The recommendation paved way on June 7, 2017, when the OECD hosted in Paris the signing of the Multilateral Convention to implement tax treaty related measures to prevent Base erosion and Profit shifting (BEPS).

The MLI was signed by 67 signatories covering 68 jurisdictions2. Also, 8 countries and jurisdictions have signed a letter expressing their intent to sign the MLI. Additional countries and jurisdictions are actively working to prepare for signature in the near future.

The signatories to the MLI are expected to undertake necessary steps in their domestic tax laws in order to ratify the MLI. The OECD allows the countries to leverage on the experiences and information in the ratification processes through the ad hoc group. It also provides tools and materials that would aid in the countries' ratification processes. 

The MLI is likely to have an impact on the Public International Law as well as the Domestic Law. The ratification of the MLI by the jurisdictions is a pre-requisite for it to achieve integration with the Public International Law.


The underlying objective is to implement and actualize such tax treaty-related measures which are developed through the BEPS Project, in existing bilateral tax treaties in a synchronized and efficient manner. Such coordinated measures will prevent treaty abuse, improve dispute resolution, prevent the artificial avoidance of permanent establishment status, neutralize the effects of hybrid mismatch arrangements etc.

In comparison to protocols, which directly amend the text of the treaties, the MLI would co-exist alongside the prevailing tax treaty framework, modifying their application to the extent necessary to implement the BEPS related measures. The MLI is based on the general legal principle that when two rules apply to the same subject matter, the later in time prevails.  MLI does not freeze the provisions in the underlying bilateral treaty and the same can always be negotiated and amended by the countries which are party to such treaty.

MLI covers the treaty-related minimum standards that were agreed as part of the BEPS Package in November 2015 and to which all countries and jurisdictions within the inclusive framework on BEPS have committed. These minimum standards relate to the prevention of treaty abuse and the improvement of dispute resolution. A jurisdiction must meet the minimum standard when signing the MLI, however, certain elements of these minimum standards can be met in different ways provided for in the MLI.

On November 24, 2016 OECD released the bare text of the MLI along with the Explanatory Statement. The MLI contains 39 Articles divided into Seven Parts.3

Part I

Article 1 to Article 2

Scope and Interpretation of Terms

Part II

Article 3 to Article 5

Hybrid Mismatches

Part III

Article 6 to Article 11

Treaty Abuse

Part IV

Article 12 to Article 15

Avoidance of Permanent Establishment Status

Part V

Article 16 to Article 17

Improving Dispute Resolution

Part VI

Article 18 to Article 26


Part VII

Article 27 to Article 39

Final Provisions

Some of the key parts relevant, are discussed in the following section


The MLI does not modify all the tax treaties a jurisdiction has with other countries. It only modifies tax treaties that fall within the ambit of Covered Tax Agreements (CTAs), that is an agreement for the avoidance of double taxation that is in force between Parties to the MLI and for which both parties have made a notification that they wish to modify the agreement using the MLI. Thus, if Country A has notified its treaty with Country B but if Country B has not notified its treaty with Country A, then the same would not be a "Covered Tax Agreement" and provisions of MLI would not be applicable.

MLI works on the principle of reciprocity, any provision under MLI would apply to a bilateral tax agreement between two countries/jurisdictions only if both the parties consent to the same.

The total number of unique treaties listed by the signatories in their MLI position are 2,362 out of which 1,103 treaties are already matched between the signatories (Covered Tax Agreements) and will be modified by the MLI.

Over 85% of all treaties concluded between the signatories will be modified through the MLI. It is expected that the remaining treaties will be modified either through bilateral negotiations or by extending the list of treaties to be covered by the MLI at a later stage.

Furthermore, the aforesaid tabulated Parts and Articles of MLI also provide flexibility to the countries in application of provisions of MLI, as different options are envisioned under the Articles and also the choice to the countries to opt out completely or partially of any Article.

MLI is a flexible instrument which would result in achieving necessary amendments in outcome on account of application of the tax treaties according to a jurisdiction's policy preferences with respect to implementation of the tax treaty related BEPS measures.

The MLI framework envisions:

  • Alternative ways to meet the minimum standards concerning treaty abuse and dispute resolution. (refer below)
  • Ability to opt amongst alternative provisions under the Articles.
  • Ability to reserve the right to not apply for certain MLI provisions (to opt out through a "reservation").

Each signatory must prepare and submit its "MLI position" before signing the MLI. The document shall entail the list of their CTAs as well as their preliminary positions and reservations with respect to each provision of the MLI. On June 7, 2017, the jurisdictions signing the MLI did submit their respective MLI position.

Each signatory is required to finalize its positions on the MLI after the corresponding ratification process in each jurisdiction is completed. Signatories can amend their MLI positions until ratification. Even after ratification, the countries shall enjoy flexibility with respect to optional provisions or withdraw reservations.


The MLI provides options for implementing the minimum standard to combat treaty abuse as provided in the final report for Action Plan 6 of BEPS.

As per Article 6 and Article 7 of MLI:

  • It is mandatory for the signatory jurisdictions to include in their tax treaties an express statement that their common intention is to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance including through treaty-shopping arrangements; and
  • Address treaty shopping by, at a minimum, implementing (i) a Principal purpose test (PPT) alone, (ii) a PPT and a simplified or detailed limitation on benefits provision (LOB), or (iii) a detailed LOB, supplemented by a mechanism (treaty-based or otherwise) dealing with conduit arrangements which are not already dealt with in the tax treaty.

Article 6 of the MLI provides treaty preamble language that would address the first leg of the minimum standard. There is no room available to the jurisdiction(s) to opt out of this minimum standard. However, if the CTAs already include any such express statement for elimination of double taxation, then only the signatory countries may opt out.

On the other hand, Article 7 of the MLI offers options for addressing the second leg of the minimum standard.

 The PPT alone is the default option, unless the signatory elects one of the other options. Signatories may elect to opt out of the PPT with respect to CTAs that already contain a PPT, or across the board if they elect to satisfy the minimum standard by adopting a detailed LOB (to be negotiated) and domestic anti-conduit rules.  

A high level review suggests that all countries opted for the PPT to address treaty abuse either by accepting the default rule, or opting out because of the presence of the PPT clause in CTA.  India and many other Latin America countries like Argentina, Chile, Colombia, Mexico, and Uruguay, opted for both the PPT and the simplified LOB outlined in Article 7 of the MLI.  

The implementation of the minimum standard on treaty abuse will be evaluated through a monitoring mechanism in order to ensure that the adherence to the minimum standard commitments embodied in the Action 6 of BEPS package are effectively met.


Article 12 to Article 14 of the MLI addresses the challenges related to permanent establishment (PE) based on the recommendations outlined in the final report for Action 7 (Artificial Avoidance of PEs) of the BEPS project. The same is done by modifying the permanent establishment definition in Covered Tax Agreements. This not being a minimum standard hence, countries can opt out or selectively adopt the provisions relating to PE.

Article 12 of the MLI has addressed the situation of artificial avoidance of PE status through Commissionaire Arrangements. In terms of the Article 12, the dependent agent would also create a PE of the principal in a situation in which the dependent agent "habitually concludes contracts or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise".

The said contracts would include contracts that are concluded in the name of the principal enterprise, or contracts for the transfer or right to use of property of the principal, or contracts for the provision of services by the principal.

Adoption of this change would create PEs for principals that distribute products and services through commissionaires and other dependent agent arrangements.

Furthermore, Article 12 also provides that an agent will be considered to be a dependent agent if that agent works exclusively or almost exclusively on behalf of one or more closely related enterprises.

Nations such as UK, Australia, Belgium, Canada, China, Germany, Hong Kong, Ireland, Italy, Korea, Luxembourg, Singapore, South Africa and Switzerland have opted out. While a number of nations such as India, Argentina, Chile, Colombia, Costa Rica, Mexico, Uruguay, France, Indonesia, Japan, the Netherlands, New Zealand and Spain have opted to include this provision.

Article 13 provides for the changes to the application of Specific Activity Exemptions which are generally used by the enterprises for artificially avoiding the PE status.

There are two options under the said Article and the Countries are free to choose any of the option or to opt out completely of the said Article. Option A of the Article, restricts the exceptions to preparatory or auxiliary activities. This modification would condition the availability of the specific activity exemptions on a subjective analysis based on all the facts and circumstances. In other words, this Option would provide the specific activity exemption, if the same is only for preparatory or auxiliary activity. However, the same would be subject to the facts and circumstances. Around one-third of the signatories elected option A including Argentina, Australia, Austria, Germany, India, Indonesia, Italy, Japan, Mexico, the Netherlands, New Zealand, South Africa and Spain.  

Option B on the other hand, provide greater certainty about the application of the specific activity exceptions. Option B provides that it would be made explicit that the specific activity exceptions are per se exceptions and are not subject to an overall condition of "preparatory or auxiliary" character. Although, some specific activities may be subject to the condition of "preparatory or auxiliary". A number of jurisdictions elected option B, including Belgium, France, Ireland, Luxembourg and Singapore.

Article 13 of the MLI also addresses the situation of fragmentation of business activities between closely related enterprises in order to inappropriately take advantage of these exceptions. It provides that the specific activity exemption would not apply when an enterprise or a closely related enterprise carries on business activities in one or more places in the same Country, and either the place constitutes a PE for the related enterprise, or the overall activity resulting from the combination of the activities carried on by the two enterprises at same place, is not of a preparatory or auxiliary character. 

Article 14 of the MLI provides to prevent artificial avoidance of PE status through splitting up contracts. It provides that if any activities are carried out by an enterprise in other jurisdiction at a building site, construction project, installation project or other places as provided for in the CTA, for more than 30 days and any other connected activities are carried by one or more of the closely related parties at the same place for more than 30 days, then in such a case for the purpose of computing the period for determination of PE, the different periods of time spent by the related enterprises shall be added to the period of the first mentioned enterprise. Nations such as Argentina, Australia, France, India, Indonesia, Ireland, the Netherlands and New Zealand have opted for this provision.


Recognizing the need to do better in this area, jurisdictions have agreed through the work on BEPS Action 14 on a minimum standard and a number of best practices in relation to dispute resolution. The minimum standard will ensure that treaty obligations related to the mutual agreement procedure are fully implemented in good faith and that administrative processes promote the prevention and timely resolution of treaty-related disputes.

Article 16 of the MLI provides for dispute resolution mechanism for resolution of tax disputes arising from the CTAs. If any person considers that action of one or both of the jurisdictions would result in taxation which would not be in accordance with the CTA, that person can approach Competent Authority of any of the Country, within a period of three years from the first notification of action resulting in taxation not in accordance with CTA.

The competent authority shall also endeavor to resolve by mutual agreement any difficulties or disputes arising as to the interpretation or application of the CTA.

The Article also provides Option to the Country to restrict the power of the taxpayer from seeking dispute resolution from either of the competent authority.

India has adopted the said Article with restriction that the resident tax payer of India cannot approach Competent Authority of other country for any dispute resolution pertaining to taxation not in accordance with the CTA.


Article 16 of MLI on Mutual Agreement Procedure (MAP) envisions a commitment by countries to implement a minimum standard to ensure that they resolve treaty-related disputes in a timely, effective and efficient manner. The endeavor is to protect taxpayers who are insecure about being taxed in a manner that is inconsistent with the provisions of the treaty. The shortcoming in the mechanism is that the MAP article does not enjoins the competent authorities to resolve the dispute but only to use their best efforts to do so, thereby leaving cases unresolved for a long period of time. Mandatory binding arbitration is a mechanism which, in defined circumstances, obliges the parties to the treaty to submit unresolved issues in a MAP case to an independent and impartial decision-maker – an arbitration panel. This would provide the taxpayer enough surety that if the taxpayer initiates a case under the mutual agreement procedure of the treaty, they shall be resolved and double taxation will be eliminated in accordance with the treaty.

The MLI introduces the MAP arbitration provisions into treaties concluded by Parties opting in for these provisions. It is expected that the provisions will apply to more than 150 existing treaties. 25 nations opted for signing up the arbitration provisions, namely, Andorra, Australia, Austria, Belgium, Canada, Fiji, Finland, France, Germany, Greece, Ireland, Italy, Liechtenstein, Luxembourg, Malta, the Netherlands, New Zealand, Portugal, Singapore, Slovenia, Spain, Sweden, Switzerland and the United Kingdom.


India is one of the non-member countries which is actively engaged in the BEPS project and has also signed the MLI on June 7, 2017. India has Double Taxation Avoidance Agreements with 93 jurisdictions and have proposed to cover all of them under the Covered Tax Agreements.

Out of such 93 jurisdictions 42 jurisdiction have not yet signed the MLI and 3 of them have not chosen agreement with India to be under the Covered Tax Agreements. As of now, India has Covered Tax Agreement with 48 jurisdictions on which the provisions of the MLI as proposed by both the jurisdictions would apply post ratification of the MLI by both the signatory countries.

China, Mauritius and Germany have not chosen agreement with India to be within the Covered Tax Agreement. Thus, MLI would not be applicable to the treaty between India and these Countries and the stand-alone provisions of the bilateral tax treaty existing, as such would be applicable, irrespective of the fact that India has notified treaties with them to be under CTA.

It is significant to note that at the time of signing MLI, which suggests India's approach and possibly its view points on regarding its stand on various aspects dealt with by the MLI. India has also furnished the list of reservations and options pertaining to various Parts and Articles of MLI.4


MLI can be regarded as a milestone in the International Tax framework. If implemented as perceived it will act as a catalyst for all the interested jurisdictions to amend and negotiate their tax treaties on the lines of the provisions reflecting internationally agreed standards. MLI can be an efficient instrument in achieving swift and consistent implementation of such standards within the extensive maze of existing bilateral tax treaties, which otherwise is a daunting task and a tall order.






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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Pranshu Goel
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