BEPS Current Affairs - 2019
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India has ratified Multilateral Convention to Implement Tax Treaty Related Measures (MLI) to prevent Base Erosion and Profit Shifting (BEPS). It will pave way for amendments to double taxation avoidance agreements (DTAA) with countries signatories to convention to plug revenue leakages. The provisions enshrined in framework will come into effect from fiscal year 2020-21 for bilateral tax treaties.
Earlier on 25 June 2019 India deposited to OECD an Instrument of ratification, along with India’s final position in terms of reservations, Covered Tax Agreements (CTAs), options and notifications under MLI.
Impact: MLI will modify India’s tax treaties that will help reduce revenue loss due to treaty abuse and Base Erosion and Profit Shifting (BEPS) strategies by ensuring that profits are taxed where ever substantive economic activities generating profits are carried out.
India’s DTAA with MLI shall get modified in following prominent ways-
- MLI will modify their application in order to implement BEPS measures. It will be applied alongside existing tax treaties.
- Avenues leading to avoidance of capital gains from alienation of shares or interests which derive value principally from immovable property would be plugged.
- Some dividend transfer transactions that are intended to lower withholding taxes payable on dividends artificially would also be prevented.
- As on date out of 93 CTAs notified by India, 22 countries have already ratified MLI and so DTAA with these countries will be modified by MLI.
- Once MLI comes into effect, India’s DTAA will have a new Preamble and Principal Purposes Test (PPTs).
- These changes would also lead to curbing of artificial avoidance of Permanent Establishment (PE) status through various arrangements.
Way Ahead: MLI will enter into force for India on 1 October 2019 and provisions enshrined in framework will come into effect on India’s DTAAs from fiscal year 2020-21 for bilateral tax treaties.
What is MLI?
The Multilateral Convention (MLI) is an outcome of OECD or G20 Project to tackle Base Erosion and Profit Shifting (called as BEPS Project). BEPS means tax planning strategies which exploit mismatches and gaps in tax rules so as to artificially shift profits to a low or no-tax location where there is little/no economic activity, which further results in little or no overall corporate tax being paid.
Tags: Base erosion and profit shifting • BEPS • BEPS project • Covered Tax Agreements • Double Taxation Avoidance Agreements
India and China have signed protocol to amend Double Taxation Avoidance Agreement (DTAA) for the avoidance of double taxation and for prevention of fiscal evasion with respect to taxes on income by allowing exchange of information. Under Section 90 of Income-tax Act, 1961, India can enter into agreement with foreign country or specified territory for the avoidance of double taxation of income, for exchange of information for the prevention of evasion.
The Protocol to amend DTAA with China updates existing provisions for exchange of information to latest international standards. It incorporates changes required to implement treaty related minimum standards under the Action reports of Base Erosion & Profit Shifting (BEPS) Project. Besides minimum standards, it also brings in changes as per BEPS Action reports as agreed upon by the two sides. It will help prevent tax evasion by allowing the exchange of information.