The OECD devised the BEPS Action Plan to tackle use of aggressive tax planning strategies used by multinationals that artificially shift profits to low tax jurisdictions with limited or no economic activity.  In October 2015,  the OECD released the final report on the 15 Action items of the BEPS Action Plan. The final report contained recommendations that fall into different categories ranging from minimum standards, reinforced international standards and common approaches.

Some of the recommendations target domestic rules, while others target tax treaty provisions – namely, some of the recommendations in Action 2 on hybrid mismatches, Action 6 on treaty abuse, Action 7 on permanent establishment, and Action 14 on dispute resolution. To enable jurisdictions to swiftly and consistently implement the treaty-based recommendations, the final action of the BEPS Action Plan i.e. Article 15, is the development of a multilateral instrument (MLI) that countries can use to implement various treaty-related measures developed in the course of the work.

The MLI was developed and agreed in November 2016 by approximately 100 jurisdictions including OECD member countries, G20 countries and other developed and developing countries.  However, it is open for signature to any interested jurisdictions.

Furthermore, the MLI also includes a section that enables jurisdictions to include mandatory binding treaty arbitration in their tax treaties in accordance with the special procedures provided by the MLI. Unlike the other articles of the MLI, this section applies only between jurisdictions that expressly choose to apply mandatory binding arbitration with respect to their tax treaties. MLI has been open for signature since 1 January 2017. However, OECD hosted first signing ceremony on 7 June 2017, wherein 68 jurisdictions (including India) signed the MLI and 8 other jurisdictions signed a letter expressing their intent to sign MLI.  The said 68 countries submitted the provisional list of Covered Tax Agreements (i.e. treaties to whom they intend the Multilateral Convention to apply) as well as the scope of reservations and notifications made by them.  The definitive MLI positions for each jurisdiction will be provided upon the deposit of its instrument of ratification, acceptance or approval of the MLI.

The practical application of MLI and its various articles to existing tax treaties will depend upon the following:-

• Whether both the treaty countries are signatories to the MLI;
• Whether the tax treaty has been notified by both treaty countries as “Covered Tax Agreement”. It is possible that a country has signed the MLI but has not notified a specific bilateral tax treaty as Covered Tax Agreement. In such a situation, the articles of the MLI will have no application and the existing bilateral tax treaty between the two countries will continue to operate in its current form. For instance, Germany has not notified its bilateral tax treaty with India as Covered Tax Agreement in the provisional list of covered tax agreements. Thus, till such time as Germany notifies its tax treaty with India as Covered Tax Agreement, MLI will not affect the bilateral tax treaty between India and Germany.
• Reservations and options exercised by each of the countries signing the MLI, to opt-out of certain parts of the MLI.

Post signing of the MLI in June 2017, countries would need to ratify the MLI in accordance with their respective domestic laws and deposit the ratified MLI with OECD. The MLI will enter into force 3 months from the date of deposit of the ratified instrument. Six months after the MLI is entered into force, it will take effect for taxes levied with the exception of taxes withheld at source.

Key MLI provisions and their impact on India's bilateral tax treaties

A. Article 3- Transparent Entities

• MLI Provision

The MLI provides that income derived by or through a transparent entity shall be considered income of a resident only to the extent that income of such entity is treated for the purposes of taxation, as income of a resident of that contracting state. The MLI provides liberty to contracting states not to apply this provision entirely, to Covered Tax Treaties.

• India Position

India has expressed its reservation on this Article and has not adopted this Article in its entirety. Consequently, the eligibility of fiscally transparent entities to claim benefit under India's tax treaties would continue to be as per the provisions of the particular tax treaty in this regard.

B. Article 4- Dual Resident Entities

• MLI Provision

Article 4 intends to modify the tie-breaker test under treaties for persons other than individuals.  The said article provides that the residency of a dual resident entity shall be determined by a Mutual Agreement Procedure (MAP) between the contracting states having regard to its POEM, place of incorporation or constitution and any other relevant factors.

• India Position

(i) Provisions notified by both contracting states- Currently India's bilateral tax treaties contain a tie breaker test to determine residency of a dual resident entity. India has notified the provisions of all of its 93 Covered Tax Treaties. Consequently, when the respective contracting states of these 93 Covered Tax Treaties also notify the provisions on the test to determine residency for a dual resident entity, the provisions of the said Covered Tax Treaties would be replaced by the MLI provision. This is unless the particular treaty partner of a Covered Tax Treaty expresses its reservations on Article 4 of the MLI.

(ii) Provisions not notified by other contracting states- Where India's treaty partners to the Covered Tax Treaties do not notify the provisions on tests to determine residency for dual resident entities, the MLI provisions would apply to such Covered Tax Treaties only to the extent that provisions of such tax treaty are incompatible with the MLI provision.

C. Article 5 – Methods for elimination of double taxation

• MLI Provision

Article 5 of the MLI refers to 3 (three) options for preventing double non-taxation situations arising due to the residence state providing relief under the exemption method for income not taxed in the source state.

• India position

India has expressed its reservation on Article 5 and has decided not to apply the said Article 5 to any of its Covered Tax Treaties. Given that India's tax treaties apply the credit method for providing relief from double taxation, the situation contemplated under Article 5 may not be relevant in the Indian context.

D. Article 6 and Article 7- Prevention of Treaty Abuse

• MLI Provision

Article 6 of the MLI provides a mandatory requirement amendment to the preamble of the Covered Tax Treaties, by including language reflecting the intent of the contracting states to avoid double non-taxation and treaty shopping.

Article 7 of the MLI provides for a principal purpose test (PPT) as a mandatory requirement. The benefit under a Covered Tax Treaty (in respect of income or capital) would not be available if obtaining that benefit was one of the principal purposes of any arrangement, or transaction. This is unless it is established that granting that benefit in the circumstances would be in accordance with the object and purpose of the relevant provision of the Covered Tax Treaty.   The MLI also provides liberty to apply the simplified Limitation of Benefits (LOB) clause.

• India Position

India has adopted a simplified LOB clause under Article 7 of the MLI.

E. Article 8- Dividend Transfer Transactions

• MLI Provision

Article 8 of the MLI stipulates the conditions under which a person of one contracting state (holding shares beneficially) can avail an exemption or limited rate of tax on dividends paid by a company resident of another contracting state. Article 8 requires the shares to be held by the beneficial owner for a period of 365 days in order to claim an exemption or lower withholding tax rate on dividend income. Contracting states can reserve the application of this Article in its entirety or reserve the holding period contained in any Covered Tax Treaties, which is more or less than a period of 365 days.

• India Position
  • Provisions notified by both contracting states- India has notified 21 of its Covered Tax Treaties which contain provisions dealing with taxation of dividend income. If the other contracting states also notify these provisions, the provisions of the Covered Tax Treaties would be replaced by Article 8 of the MLI.
  • Provisions not notified by both contracting states- Where the other contracting state does not notify the provisions of the respective Covered Tax Treaties, the minimum holding period contained under Article 8 would not apply. India has reserved the holding period contained in India-Portugal tax treaty, where the holding period is 24 months to avail the benefit in respect of dividend income contained in that tax treaty.

F. Article 11- Application of Tax Agreements to restrict a Party's right to tax its own residents

• MLI Provision

Article 11 provides a saving clause to clarify that Covered Tax Treaties shall not affect the right of taxation of a contracting state to tax its own residents, save for certain benefits granted, under the provisions of the Covered Tax Treaties.

• India Position

India has neither expressed any reservation nor has it notified any of its Covered Tax Treaties, which contain such a provision. Consequently, the MLI provisions in this respect would supersede the Covered Tax Treaties and would apply to the extent that the provisions of the Covered Tax Treaties are incompatible with Article 10 of the MLI

G. Article 16- MAP

• MLI Provision

Article 16 of the MLI introduces the minimum standards for improving dispute resolution. Article 16 requires contracting states to allow taxpayers to present a MAP case to the competent authorities (CA) of either of the states and not only to the CA of the state of residence. Furthermore, the Article 16 requires that MAP access should be allowed in a case where the MAP application is presented within 3 (three) years of the first notification of the action resulting in taxation not in accordance with a tax treaty.

Under the MLI, CAs of both the states need to endeavour to resolve a case under MAP if they are not able to arrive at a satisfactory solution unilaterally. Also, the MAP agreements are to be implemented notwithstanding any time limits under domestic laws.

• India Position

i. Bilateral recourse to MAP

India has reserved its right for not adopting the modified provisions on the basis that it would meet the minimum standard by allowing MAP access in the resident state and by implementing a bilateral notification process. Thus, each of the Covered Tax Treaties would have a bilateral notification process to allow MAP recourse not only to Indian residents but also residents of other contracting states who are partners of Covered Tax Treaties.

ii. Time period of three years to invoke MAP

India has notified tax treaties which provide a lower limitation period of (a) 2 (two) years and; (b) those that have minimum period of 3 (three) years for presenting a MAP case. Thus, the notified tax treaties with Belgium, Canada, Italy and UAE would now provide a minimum time limit of 3 (three) years for MAP access.

iii. Bilateral MAP when unilateral MAP fails

India has notified its tax treaties which require a provision enabling bilateral MAP with the CAs of both the contracting states when unilateral MAP does not resolve the dispute.

Conclusion

The MLI marks an important milestone in the implementation of the BEPS Project. Success of  MLI would primarily depends on the number of countries that will sign it. However, the OECD needs to be applauded for avoiding the need to undertake the humongous task of modification of more than 3000 tax treaties.

The signatories include UK, Canada, Australia, Belgium, Finland, France, Cyprus, and Singapore, the Netherlands, Luxembourg, Japan, South Africa and Ireland. Thus, India's recently revised / amended treaties with Cyprus and Singapore would also be impacted by the MLI.  Also, Mauritius is expected to sign the MLI soon and hence, the India Mauritius Tax Treaty would also be impacted by the MLI. With the PPT being implemented as a minimum standard and strategies for avoidance of PE being tackled by Article 12 to 14 of the MLI, the network of the bilateral tax treaties will undergo a vital change and go a long way towards reducing BEPS.