BEPS project Current Affairs - 2019

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India ratifies OECD’s convention to check Tax Evasion

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.

Key Highlights

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.

Cabinet approves revision of DTAA between India and Qatar

The Union Cabinet has given its approval for revision existing Double Taxation Avoidance Agreement (DTAA) between India and Qatar. The purpose of revision is for avoidance of double taxation and for prevention of fiscal evasion with respect to taxes on income. The existing DTAA between India and Qatar was signed in April 1999 and came into force in January, 2000. The

Features of Revised DTAA

  • It updates provisions for exchange of information to latest standard. It includes Limitation of Benefits (LOB) provision to prevent treaty shopping and aligns other provisions with India’s recent treaties.
  • It meets minimum standards on treaty abuse under Action 6 and Mutual Agreement Procedure under Action 14 of G-20 OECD Base Erosion & Profit Shifting (BEPS) Project to which India is participating.

Treaty Shopping

Under it, a resident of third country invests by taking advantage of fiscal treaty between India and another contracting state. This has greatly contributed in encouraging FDI in country but has been medium of tax evasion. The roots of Treaty shopping are in inconsistencies among international tax regimes. If there is dissimilarity of tax systems, it can lead to distortion of investment flows. It can be controlled by introduction of limitation of benefit clause (LOB) and other clauses which limit benefits to residents of two countries only.