Taxpert Professionals

BE IN THE KNOW!!!
TOPIC - MULTILATERAL INSTRUMENT (MLI) CONVENTION
MULTILATERAL INSTRUMENT (MLI) CONVENTION
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 BEPS1 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 jurisdictions 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 Treaties2 (Covered Tax Agreements/CTA) to bring the BEPS
measures into action.

1Base 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.

2Covered 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.
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
a) 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
b) 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.
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,
Indias 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.
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 Indias 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.
CONCLUSION
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
About Taxpert Professionals:
Taxpert Professionals is a conglomeration of multi-diverged professionals known for providing concentrated services in relation to taxation and corporate
laws in a seamless manner. Taxpert professionals believe in the creation of value through advising and assisting the business. At Taxpert the pool of
professionals from different spectrum like tax, accountancy, legal, costing, management facilitate the conversion of knowledge into beneficial transaction.

About CA. Sudha G. Bhushan :

Sudha is qualified Chartered Accountant and a Company Secretary with more than a decade of experience in the Foreign Exchange
Management Act, RBI, Transfer pricing and International taxation matters. She is a noted speaker and author.
Her articles are regularly published in the Journals of several institutes and at various other forums and has authored the following books:
Practical aspects of FDI in India published by Institute of Company secretaries of India
Due Diligence under Foreign Exchange Management Act, 1999 published by CCH.
Comprehensive Guide to Foreign Exchange Management in two volumes published by CCH.
Practical Guide to Foreign Exchange Management published by CCH, a Walter Kluwers company.
Handbook on FEMA, Publication of Institute of Chartered Accountants of India

A scholar throughout her life she has been awarded many awards and recognitions including Women Empowerment through CA Profession by Northern
India Regional Council (NIRC) of Institute of Chartered Accountants of India (ICAI). Backed by experience in International firms she has extensive experience
of handling international transactions. She advises corporate as well as government authorities in lot of intricate transactions. Rendering tax and regulatory
advisory services, she has overseen and played a crucial role in the execution of complex international transactions involving issues revolving around tax,
repatriation, minimization of tax exposure, Foreign Investment (Inbound and outbound) etc.
She is on the Board of many esteemed listed companies as Independent director. She is member of Committee of International Taxation of WIRC, ICAI,
Member of Editorial Committee of WIRC of ICAI and Committee of women empowerment of ICAI.
She can be contacted at sudha@taxpertpro.com || 09769033172