BEPS project Current Affairs - 2020

Cabinet approves Double Taxation Avoidance Agreement between India-Chile

Union Cabinet has approved the signing of Double Taxation Avoidance Agreement (DTAA) and Protocol between Republic of India and Republic of Chile. This will help in elimination of double taxation as well as prevention of fiscal evasion and avoidance with respect to taxes on income.

Major impact of DTAA Agreement and Protocol

It will facilitate elimination of double taxation between two nations. Moreover, a clear allocation of taxing rights between Contracting States by Agreement will provide tax certainty to investors and businesses of both countries. This will also augment the flow of investment through fixing of fees for technical services, royalties and the tax rates in source State on interest.

The Agreement and Protocol implements minimum standards and other recommendations of G-20 OECD Base Erosion Profit Shifting (BEPS) Project (or BEPS Project). The Agreement includes provisions such as a Principal Purpose Test, Preamble Text, a General Anti-Abuse provision along with a Simplified Limitation of Benefits Clause (SLBC) as per BEPS Project. This will result in curbing of tax planning strategies which exploit gaps and mismatches in tax rules.

Way Forward

The Implementation Strategy and Targets includes completing necessary formalities for bringing the Agreement and Protocol into force after the Cabinet approval. Implementation would be watched and reported by Union Ministry of Finance.

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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.

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