Way back in 90s, globalisation and opening-up of the economy changed the manner in which the businesses were conducted. With passage of time, businesses environment became more uncertain and thus dynamic. Multinational Corporations (‘MNCs’) devised strategies to efficiencies in their tax bill as well. However, loss of revenue led to the convergence of the governments worldwide to bring turnaround changes in the taxation laws. One such measure is the Multilateral Instrument (‘MLI’). MLI is Organization for economic cooperation and development’s(‘OECD’s’) crucial apparatus for implementation of the objectives of its most ambitious project titled “Base Erosion and Profit Shifting” (‘BEPS’).


BEPS Project was conceptualised in 2013 by the G2O/OECD Countries with the nucleus object of avoiding ‘double non-taxation or lower taxation’ opportunities being capitalised by MNCs based on the current bilateral tax treaties.

This was intended through achieving: –

(a) Coherence in the tax policies of the sovereign states to counter the existing
gaps/mismatches/frictions /in the interaction of the countries’ domestic laws and international tax

(b) Realignment of the taxation concepts with the value creation concepts especially to curb the practices of the establishment of shell companies/letterboxes which do not have any substance on their own and rationalisation of the transfer pricing principles with respect to attribution of profits based on value created by the intangibles, capital, risks etc.

© Transparency for seamless flow of information amongst governments so that potential risks of revenue leakages could be identified timely and new mechanisms may be implemented to counter the same.

OECD had formulated 15 Action plans to accomplish the above objectives. Some of the action plans required changes in the domestic laws of the countries, some required changes in the bilateral treaties and some require changes in both the domestic laws as well as the treaties. As far as India is concerned, India has brought into effect at least two of the action plans by amending its domestic laws viz: introduction of equalisation levy by Finance Act, 2016 (Action Plan 1 on digital economy) and introduction of section 286 also by Finance Act, 2016 (Action Plan 13 on country by country reporting). Amending more than 3,000 bilateral treaties would have taken numerous years by when the objectives of the BEPS project would be obsolete and the entire exercise of development of BEPS action plans would have become futile. Therefore, an ad-hoc group was formulated to devise an instrument which could in one shot implement the tax-treaty related BEPS measures. This is how the MLI was born.

What is MLI?
Therefore, MLI can be defined as a single instrument targeting to modify the bilateral tax treaties to incorporate the BEPS action plans (at least the minimum standards.) MLI is flexible in the sense that it provides countries the choice to apply optional provisions, reserve the right to opt out of the provisions entirely, apply certain provisions only, apply provisions only to certain tax treaties etc.

Application of MLI
MLI does not amend the tax treaties just like a protocol to a tax treaty. It acts as an instrument parallel to the existing tax treaties which the countries have till date entered into for avoidance of double taxation. Each country has to give list of the tax treaties to which intends to modify through MLI. The tax treaty shall get modified only it the other country has also listed its tax treaty with the first country as a “covered agreement”. In order to apply the MLI, one would have to check the following documents: –

(a) The MLI;
(b) Specific tax treaty so “covered” by the countries;
© Position of one country under the MLI provisions; and
(d) Position of other country under such MLI provisions

With respect to the optional provisions, for application of MLI, both the countries should adopt the same optional provision. However, a unilateral reservation made by a country would block the application of MLI provisions.

Provisions of MLI
Provisions of MLI are discussed in brief in the ensuing paragraphs:

Part-II Hybrid Mismatches (Articles 3 to 5)
BEPS Action Plan 2 was devised to neutralize the effect (e.g.- double non taxation, double deduction, long term deferral) of hybrid instruments and entities. Article 3 of the MLI deals with transparent entities, Article 4 of the MLI deals with the dual resident entities and Article 5 deals with application of Methods for avoidance of double taxation.

With respect to transparent entities India has reserved its right not to apply it in its entirety, probably
because India does not recognise the concept of transparent entities. For dual resident entities, India has reserved its right to not to opt for Article 4 as its all the existing treaties contain a provision of deciding the residency of entities based on Mutual Agreement Procedure (‘MAP’). With respect to Article 5, India has reserved its right not to apply it in its entirety.

Part-III Treaty Abuse (Articles 6 to 11)

BEPS Action Plan 6 was conceived to counter the “treaty shopping” techniques adopted by the entities. Treaty shopping generally refers to the utilisation of a tax treaty to cash-in the benefits offered by it, by way of exploiting the loopholes therein, which are otherwise not intended by the treaty partners. Article 6 mandates the inclusion of a preamble to the existing tax treaties defining the purpose of the treaty that the intention of the double tax treaty is to eliminate double taxation without creating any opportunities for non-taxation or reduced taxation. It is a mandatory article which gives the right of reservation only in cases where tax treaties already contain similar preambles. India has not given any reservation and therefore, it is more likely that the tax treaties of India with 93 countries would be modified. When and how the modification process will be undertaken by India, it is to be seen.

Article 7 contains the core of the BEPS project of thwarting the abuse of the tax treaties. As a minimum standard, the PPT test has been provided as a default option to be incorporated by all the countries in their tax treaties with a right of reservation where tax treaties contain a similar article. PPT test denies the benefit available to a person under the tax treaty if one of the principal purposes of the arrangement or the transaction is to obtain a benefit not covered by the object or purpose of the tax treaty.India has reserved the right for the application of PPT Test to its treaties with 36 countries (e.g.- UK, UAE, Indonesia, Malaysia, Luxembourg, Sri Lanka etc.) as these treaties already contain the provisions similar to PPT Test. Article 7 further gives an option to supplement the PPT Test with SLOB. India has opted for the application of SLOB to all its treaties except for the treaties with 9 countries (e.g- USA, Mexico, Sri Lanka, Iceland etc.) for these treaties already have the provisions similar to SLOB. Though BEPS Action 6 also gave an option to adopt detailed LOB provisions alongwith anti-conduit rules
also, detailed LOB provisions have not been made part of the MLI as these would require substantial bilateral customisation. In such a situation, the countries are permitted to opt out of the PPT test, though they may
apply it as an interim measure till the time of finalisation of detailed LOB provisions alongwith anti conduit rules bilaterally with the other country.

Article 8 of the MLI provides for the benefit of exemption or lower taxation of the dividend income, only if certain percentage of shares are held by the shareholder for a period of 365 days. India has not reserved its right to not to apply the article in its entirety, except in case of its tax treaty with Portugal
which contain a holding period of 2 years. However, India has reserved its right in respect of the application of this article with 21 countries, as the treaties with these 21 countries though do not contain the condition of holding period but have some other conditions (such as minimum percentage of shareholding) to claim the benefit of exemption of dividend income or taxation thereof at a lower rate. By adopting this approach, India has brought the provisions of Article 8 of MLI on the lines of the provisions of section 79 of Income-tax Act, 1961 (“Act”) which also provide for the allowability of carry forward and set off of losses incurred in preceding years subject to the condition that 51% of the shareholding of the company is held by same persons who held such shareholding in the year in which losses occur.

Article 9(1) deals with the taxability of the capital gains arising to a person from shares or other rights of participation in entities if such shares or interests in entities derive their value substantially from the immovable property situated in a country. Such capital gains may be taxed in the country where such immovable property is situated. India has opted for a more specific article 9(4) of MLI similar on the lines of the Article prescribed in BEPS Action 6 to tax the capital gains arising from sale of shares or comparable interests which derive more than 50% of their value directly or indirectly from the immovable property situated in India at any time during the period of 365 days preceding the date of sale of such shares or comparable interests. India has also reserved its rights not to apply the provisions of the article 9(1) to its treaties with 71 countries (e.g.- Malaysia, UAE, Switzerland, Australia, Canada, Cyprus, Thailand, Sri Lanka etc.) as such treaties already contain the provisions relating to taxability of capital gains arising from sale of shares deriving their value from immovable property situated in India.

Article 10 deals with the triangular cases of Permanent Establishment (‘PE’). Triangular cases are the cases where the income (say dividend or interest) is accruing or arising in a country (source country) and such income is attributable to the PE of an enterprise resident in another country (resident country), situated in a third country (PE country). In such cases, where the resident country treats such income as exempt, it being attributable to PE and that the tax paid in the PE country is less than 60% of the tax that would have been payable in the resident country had the PE be situated in the resident country then the source country shall tax it in accordance with its domestic laws. India has not made any reservations in respect of this Article. However, its applicability to India’s treaties will depend on whether its treaty partners have also chosen to adopt this provision. Article 11clarifies that the countries shall have the right to tax its residents except in respect of certain benefits provided under Article 11(1). This is just to ensure that notwithstanding the provisions of the treaty, a person would be taxed in its resident country. India has not made any reservations in respect of this Article. However, its applicability to India’s treaties will depend on whether its treaty partners have also chosen to adopt this provision.

Part-IV Artificial Avoidance of PE (Articles 12 to 15)

Article 12 aims to counter the commissionaire arrangements or similar strategies adopted by the MNCs to avoid their taxable presence in the source countries via PEs. Commissionaire arrangements are the arrangements through which a person (‘agent’) is able to sell the products in its own name but on behalf of the enterprise. Since the agents do not own the products, they are taxable only on the remuneration which they receive from the enterprise. Further, Article 5(5) of the OECD Model convention focuses on the formal conclusion of contracts in the name of the enterprise. Since the contracts concluded by the agents are not binding on the enterprise, the enterprises are able to avoid the existence of its PE in the source country. Such arrangements are generally found in European countries. Article 12 expands the definition of an agent to include even those agents who play the principal role of leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise. Definition of independent agent has also been amended to counter the situations where an agent performs activities wholly or almost exclusively on behalf of the enterprise(s) and such agent is “closely related” (defined in Article 15)to the enterprise. India has not made any reservations, however, has notified that the provisions relating to dependent agency PE shall apply only to extent “such person has and habitually exercises the authority to conclude contracts”. With respect to independent agent, India has not made any reservation, even with respect to
the curtailment of the applicability of the article. Again the applicability will depend only upon the choice of India’ treaty partners.

Article 13 counters with the menace of avoidance of PE relating to specific activity exemption by providing two options to the countries. Option A provides that the exemption from existence of PE in respect of activities presently listed/not listed in the tax treaties shall be provided only if such activities are of a preparatory or auxiliary in character. Option B does provide that the activities though are not made subject to the condition that they are preparatory or auxiliary in character but the inappropriate use of such activities can be addressed through anti-fragmentation rules. India has opted for Option A.

Article 14 deals with splitting-up of contracts. It provides that in case of construction or installation PE, where the activities are divided among the group companies, such activities should be aggregated together to determine whether these activities fall within the threshold limit prescribed under the respective tax treaties for determination of PE are exceeded or not. India has not made any reservations in respect of this Article. However, its applicability to India’s treaties will depend on whether its treaty partners have also chosen to adopt this provision.

Part-V Dispute Resolution (Articles 16 to 17)

As under each of the above articles a right has been given to a taxpayer to present its case before the competent authorities to grant the benefits otherwise available under the tax treaties, that’s why probably resolution of disputes has been made as a mandatory standard (under Article 16) for all the countries to strengthen the dispute resolution mechanism. However, certain flexibility has also been provided with respect to the country of the competent authority where a taxpayer can present its case. India has reserved its right to the effect that a person may present its case to the competent authority: — u of which it is a resident; u of which it is a national if the case relates to non-discrimination based on ‘nationality’; and thereafter the competent authorities shall imitate he process through bilateral notification or consultation.

Article 17 provides for corresponding adjustments of profits by a country where another country taxes it on account of ‘arms length price’ under the transfer pricing principles. India has reserved the right not to apply this article in respect of its tax treaties with 67 countries for such tax treaties already contain the provisions relating to the corresponding adjustments.

Part-VI Arbitration (Articles 18 to 26)

Under Article 18 an option has been given to the countries to apply Part-VI relating to mandatory binding arbitration to their tax treaties. India has not exercised such option and therefore, arbitration provisions shall not apply to India’s tax treaties.

Part-VII Final Provisions (Articles 27 to

Article 39) Article 27
provides that the MLI is subject to ‘ratification, acceptance and approval’. For this the countries may have to comply with the domestic legislative requirements. Upon submission of an instrument for ratification, acceptance and approval (“instrument”) the ‘entry into force’ of the MLI gets triggered. No timelines have been prescribed for such submission of the instrument.
Article 34 provides for the entry into force of the MLI. Entry into force of the MLI can be divided into two parts- for the first five countries submitting the instrument and for other countries submitting the instrument.
Article 35 provides for entry into effect of the provisions of the MLI with respect to taxes covered by it. The Article gives the right to each country to prefer “taxable year” over “calendar year”, which India has opted. Further as per the right of reservation, India has opted for the delay in application of the provisions of entry into effect of the MLI such that for India, the date of entry into effect of the MLI shall be calculated after the expiry of 30 days from the date of receipt of notification by the depository of OECD that India has
completed its internal procedures with respect to a tax treaty for all the taxes (withholding and other taxes). These provisions will apply only if other treaty partner also opts for it.

What Next

In the signing ceremony held in Paris on June 07, 2017, most of the countries had signed the MLI. Some countries have expressed their intent to sign the MLI and some more are expected to express similar intentions or sign the MLI. Moreover, even the countries who had signed the MLI have signed, have done so with provisional list of the covered treaties as well as provisional reservation and/or options available under the MLI. This would then be followed by the submission of instrument of instrument for ratification, acceptance and approval by each country. It is expected that this process may get over by March’ 2019.

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