INTRODUCTION
MLI Convention aims to implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting. On 7th June, 2017, 70 Ministers and other high level representatives participated in the signing ceremony of MLI. This Convention is a product of Organisation for Economic Co-operation and Development (OECD)/G20 Project to fight BEPS[1] which envisages 15 Action plans.
It has been established to provide solutions to the governments to remove the loopholes present in the existing international tax rules by transposing results from the OECD/G20 to deal with BEPS into bilateral tax treaties existing in the world.
Flexibility is to be delivered by the MLI as it offers a harmonious combination of variety of tax policies while still ensuring that the tax treaty related BEPS measures are effectively implemented. It will modify the tax treaties that are Covered Tax Agreements according to the jurisdiction’s policy preferences.
The jurisdictions are given the freedom to anatomize their tax treaty networks and determine how they would want the MLI to affect and modify their tax treaties.
BEPS Project consists of 15 Action Plans to address BEPS in a comprehensive manner. It is an onerous job to change more than 3000 bilateral tax treaties for its effective implementation. To resolve this issue, MLI was conceived to modify all Covered Tax Treaties[2] (Covered Tax Agreements/CTA) to bring the BEPS measures into action.
FUNDAMENTALS OF THE CONVENTION
The Convention strives to implement two minimum standards that all countries to need to adopt.
Article 6 and 7 of the MLI: Prevention of Treaty Abuse
- By stating in the Preamble of the tax treaties that it intends to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty shopping) (Article 6 of the MLI) and
- By adopting certain specific anti-abuse provisions (Article 7 of the MLI).
Article 16 of MLI
Improvement of the dispute resolution mechanism in tax treaties to mitigate cases of double taxation
ITS APPLICATION
It will not act as an Amending Protocol to a single existing treaty, which would result in the refashioning of the text of the Covered Tax Agreements.
Instead, it will be applied alongside existing Tax Treaties altering their application in order to implement the BEPS measures. The Convention ensures consistency and certainty in the implementation of the BEPS Project in a multilateral context. The Convention is very accommodating as it offers the option to exclude a specific tax treaty and to opt out of provisions or parts of provisions through making reservations.
This very instrument consists of VII Parts and 39 articles which aim to modify bilateral treaties of the countries signatory to the MLI. The respective articles will provide options to each country to select for adopting in its tax treaties. OECD acts as the Secretariat for the MLI Convention.
Ratification from minimum five signing countries is required for the MLI to operate and come into force. Every country has different domestic procedures for ratification. MLI will come into force 3 months after such ratification by the fifth country. It is required to enter into effect between the respective countries post its entry into force from the next taxable year which begins 6 months after the MLI has entered into force for both countries.
INDIAN PERSPECTIVE
The Union Cabinet chaired by the Prime Minister Shri Narendra Modi gave its approval for the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting on 17th May, 2017.
India recently signed the Convention on 7th June, 2017 held in Paris which is the first step in the process of expressing consent to be bound by the Convention, which will become binding only upon ratification.
A list of Covered Tax Agreements as well as a list of reservations and options chosen by a country are required to be made at the time of signature or when depositing the instrument of ratification.
The Final List of Covered Tax Agreements and the final list of reservations will be submitted at the time of submission of instrument of ratification.
[1] Base Erosion and Profit Shifting (BEPS) basically means the artificial shifting of profits by Multi-national enterprises to low or no tax locations. Such shifting of profits is attained via loopholes in the tax rules of different countries along with the governing tax treaties. Such actions result in erosion of the tax base of the country where the value was created and is hence termed as an abuse of the tax framework.
[2] Covered Tax Agreement (CTA) It 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.
IMPLIMENTATION
This will bring monumental changes to all 93 comprehensive tax treaties entered into by India and will result in effective implementation of recommendations under the BEPS project.
Since countries such as USA, UAE, Malaysia and Thailand did not participate in the signing ceremony and Germany has not notified its tax treaty with India as a Covered tax Agreement under the MLI, ergo, India’s existing bilateral treaties with these countries would not be affected.
The effect of the MLI on the India-Mauritius treaty will be known shortly as Mauritius will sign the MLI by 30th June, 2017.
India has the option to amend its MLI position until ratification. Even post ratification, it can choose to opt in with respect to optional provisions or to withdraw reservations.
KEY FEATURES
India has accepted the inclusion of Article 6 and 7 of the MLI in the Preamble of all its treaties.
The Principle Purpose Test (PPT) has been introduced as a minimum standard which has been expressly stated in the Preamble of tax treaties which elucidates that that the purpose of the treaty is not to create opportunities for tax evasion, tax avoidance or double non-taxation. The benefit of the tax treaty shall not be granted if obtaining such benefit was one of the principal purposes of any transaction.
India has also accepted the Simplified Limitation of Benefits Clause (SLOB).The SLOB aims to create supplementary conditions to be satisfied to avail the benefit of a tax treaty.
India has not agreed to the MLI provisions 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.
OUR COMMENTS
The inception of MLI is a milestone in the field of international Taxation and Treaty Law. The most essential feature of the convention is the flexibility it offers as it provides every signatory the opportunity to adopt the BEPS measures according to their preferences.
It would be interesting to observe as to how these amendments would influence the grandfathering provisions in the existing bilateral treaties entered into by India with other countries.
With the introduction of the PPT rule, the treaty shopping routes can be targeted effectively.
