OECD 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.

Month: Categories: Business, Economy & Banking

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India finds OECD’s STR Index faulty

India has found problems with the current methodology adopted by the Organisation for Economic Cooperation and Development (OECD) under its Services Trade Restrictiveness Index (STRI) to rank countries.

Key Highlights

  • About: A study commissioned by Indian Ministry of Commerce found that OECD index, the STRI has a several problems associated with it, which also includes some significant design issues that render the index impractical for use.
  • Issues: As per India the outcomes of STRI are biased and counter-intuitive.
  • The initial work suggests that there are both empirical and theoretical inconsistencies in STRI’s methodology.
  • The data generated by OECD’s methodology seems to have been through arbitrary procedures and reflects being bias towards developed country.
  • It shows Indian services sector as highly restrictive in areas such as FDI.
  • Impractical: For instance, STRI seems to show the services sector in India as one of the most restrictive in world, particularly in policy areas like foreign entry, FDI etc. This is astonishing as since 1991, following the LPG reforms the one area that has seen maximum liberalisation in India is Foreign Direct Investment (FDI).
  • India’s Approach: India is trying to build a consensus around adopting a new method of measuring trade restrictiveness in services sector. For this India approached several developing countries during recently-concluded WTO Ministerial talks held in New Delhi. It has also approached South Africa, Indonesia, China, Turkey and Brazil.
  • India’s Argument: Unlike manufacturing trade which has a well-documented system of classification of commodities, the problem in services, is that for a long time there was not any way to find that whether a country’s service trade policies were restrictive.
  • Also, even if it was ascertain as restrictive it was not known that what to do about it since services trade is usually regulated by domestic regulations and not border tariffs.

About STRI

  • It was launched in 2014, by The Organisation for Economic Cooperation and Development (OECD).
  • It purpose is to rank countries based on their services trade policies.
  • STRI (computed by OECD) is now available for year 2018. It includes a total of 45 economies (with 36 OECD and the rest non-OECD) and 22 sectors. These countries and sectors undertaken represent more than 80% of global trade in services.

Month: Categories: Reports & Indices

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