G20 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 • DTAA • G20 • India-OECD • Multilateral Convention to Implement Tax Treaty Related Measures • OECD • Tax avoidance
India will preside and host the G20, or Group of 20 nations meeting in 2022. G20 provides a unique opportunity for India to transform from rule-taker to rule-maker. Being a host India would set an annual agenda, wielding vast direct and indirect influence on the G20 nations’ economies.
To exploit this opportunity to the full extent, India must address organisational challenges, where the country has an infrastructure, management and intellectual gap.
The organisational challenges before India are:
- G20 summit brings together several global leaders with their attending delegations and independent experts. Since it is a small powerful group it demands good airports, accommodation, conference facilities, and communications infrastructure all year round.
- G20 is tasked with leading and managing the global economic agenda for the year. It cannot be a task of a single ministry or agency. Various ministries and regulators must come together in contributing to the formulation of global financial regulations.
- The logistical requirement for G20 is monumental and unprecedented for India. G20 demands an energetic secretariat to organise over 150 high-level ministerial, sub-ministerial and sub-forum meetings through the year; at least 50 task forces lead scores of meetings including those by sub-forums for think tanks and business, content management, negotiation and feedback processes and developing and executing the year-long agenda.
- India needs to augment its intellectual capacity to be able to deliver inter-disciplinary research on the international monetary system, global financial architecture, global trading system, global climate, energy and sustainability issues.
The global economic framework is largely driven by the West, and increasingly by China neither of which are suitable for an India. G20 presidency has given an opportunity for India to take the lead and give direction to global economic policy framework. If India doesn’t augment its capacity to set the agenda, India would again be reduced to passive rule-taker, not rule-maker or designer of global economic rules.