The Indian Union Cabinet has recently approved India’s signing of the multilateral instrument (MLI) for implementing the tax treaty procedures in the OECD/G20 base erosion profit shifting (BEPS) action plan. A ceremony for signing this deal is going to be held in Paris in June this year.
The Cabinet’s decision and further action was anticipated because of India’s active contribution in the BEPs project and in the MLI drafting.
Though India has recently done some amendments in the tax treaties that were a concern to the government, like those with Singapore, Mauritius and Cyprus, and applied domestic general anti-avoidance rules (GAAR), the MLI is still important to India as an instrument to avoid any tax treaty abuse, including any instances of artificial avoidance of the permanent establishment status. The Indian government’s confirmation of their plan to sign again goes to prove India’s viewpoint towards restraining the base erosion globally.
The OECD has developed the BEPS Action Plan to deal with the use of aggressive strategies of tax planning used by multinational firms that falsely transfer the profits to low tax jurisdictions which have limited or no economic activities. BEPS Action Plan 15 envisions MLI’s development for implementing the measures related to tax treaty under the BEPS Action Plan.
The MLI is definitely a milestone development as it strives to modify more than 3000 bilateral tax treaties. When comparing with the protocols, which directly modifies the text of the treaties, the MLI is envisioned to be applicable along with the current tax treaties, amending their application to the required extent for implementing the measures related to BEPS.
An important aspect of the MLI is that it functions on the reciprocity principle. This means that any provision under the MLI is applicable to a bilateral tax agreement that happens between any two nations or jurisdictions, only in case both the parties agree to it. To bring this reciprocity into effect, the MLI allows for reservations against specific MLI provisions (except the ones related to application of BEPS minimum standards). Typically, if any one of the parties make a reservation against any MLI provision, then it is applicable symmetrically between the reserving party and all other concerned parties.
For the MLI to be brought into force, global law related to multilateral treaties should be complied with. Generally, the first step is signature, then ratification or acceptance and approval from each involved party, as per their respective law requirements applicable in that country.
Therefore, signature is only the initial step towards stating consent to be bound by the MLI.
IMC Group