By Prabhakar KS, Shree Tax Chambers, Bengaluru, India
On 12 June, India ratified the Multilateral Convention to implement the Tax Treaty related measures to prevent Base Erosion and Profit Shifting (MLI) almost 2 years after signing it along with 67 participating countries at an OECD event in Paris.
Ratification is a part of the procedural steps where a country formally agrees to adopt the tax treaty with its counterparts. Currently, India has covered 93 countries pursuant to Article 2(1)(a)(ii) of the convention. India’s due ratification of the MLI enables it to modify its treaties entered with other tax jurisdictions.
It is a well-known fact that multinationals aggressively engage in tax planning to prevent their profits from becoming subject to tax in source countries tax regime.
Base erosion profit shifting (BEPS) is another name for a tax avoidance strategy adopted by MNEs to exploit the existing loopholes in the taxing statues for its own stake. As said, the strategy helps in minimizing the MNEs tax burden by moving the group’s effective place of management or management control to a friendly tax or low tax regime. In turn, governments of the source country denied due right to tax them.
To prevent such practices, on 5 October 2015, the OECD and G20 released the BEPS package which includes 15 action plan items. To date, more than 125 tax jurisdictions, including India have agreed to implement those measures in a true spirit.
Basically, the BEPS framework stands on three pillars. The first one is ‘coherence’, in domestic tax rules that affect multinational transactions including certain limitations on interest deductions, countering tax-avoidance using hybrid mismatches, and challenging harmful tax practices.
The second pillar is ‘substance’, namely, adopting international tax standards to ensure alignment of domestic tax rules, prevent tax treaty abuse or treaty shopping, strengthen the permanent establishment (PE) rules, ensure transfer pricing outcomes with respect to intangibles.
The final pillar is ‘transparency,’ which includes methodology, data analysis and disclosure rules, transfer pricing documentation, and tax dispute mechanisms.
Action plan 15 exclusively deals with developing an MLI to expedite the implementation of the BEPS measures particularly through modifying the existing bilateral tax treaties. The MLI aims to modify bilateral tax treaties quickly to implement the tax treaty measures developed in the course of the BEPS Project.
The MLI enables all signatories to comply with tax treaty related minimum standards including the minimum standards under Action Plan 6, which concerns tax treaty shopping.
Treaty shopping refers to particular arrangements where a person who is not a resident of one of the two states attempts to obtain certain tax benefits which are normally extended to resident taxpayers.
The tax treaty shopping minimum standard provides that a treaty should include an unambiguous statement providing that the treaty is not designed to create opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty shopping, to be precise, adoption of a ‘limitation-on-benefits” rule or ‘principal purpose test’ rule.
— Prabhakar K S is Proprietor of Shree Tax Chambers, Bengaluru, Karnataka, India.
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