Impact of MLI on Indian Tax Treaties

Key Impact areas vis-à-vis Indian Tax Treaties

Introduction

Multilateral Instruments (MLI) is for sure all the rage in the realm of International Taxation. Under the OECD*/G20 comprehensive structure onBase Erosion and Profit Shifting (BEPS), in excess of 125 nations are teaming up to stop charge shirking methodologies that misuse the hole and confounds in charge rules to abstain from settling charges. The MLI offers solid answers for government to connect provisos global assessment bargains by transposing the outcomes from the OECD*/G20 BEPS Project into reciprocal expense arrangements around the world.

Overview

On 24th November 2016, more than 100 nations and wards, including many creating nations, finished up dealings on Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) that will permit governments to alter the application on its system of respective duty arrangements in a synchronized way. The MLI as of now covers 94 purviews. India marked the MLI on seventh June 2017, presented a temporary rundown of expense understandings that would be changed by the MLI, which later went into power on first July, 2018. What's more, On twelfth June, 2019, Indian Cabinet declared the MLI endorsement. As a subsequent stage, India kept its sanctioned MLI with the OECD with its last situation on 25th June, 2019. MLI goes into power in India on first October, 2019 and its arrangements went into impact from first April, 2020 for 23 Indian respective duty settlements.

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 15th 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 neutralize 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.

Preventing Tax Treaty Abuse

1. 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.
2. PPT to replace/supersede existing general anti abuse provisions in CTA or to be added in the abuse of such positions.
3. 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

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

Improving Dispute Resolution

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

Other Key Modifications

1. 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.
2. 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.