Multilateral Instrument (MLI) Ratification Impact On .
Multilateral Instrument (MLI) RatificationImpact on Indian tax treatiesAugust 2019 For private circulation only
Multilateral Instrument (MLI) Ratification Impact on Indian tax treatiesOverview Under the OECD*/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS), more than 125 countries arecollaborating to put an end to tax avoidance strategies that exploit gaps and mismatches in tax rules to avoid paying tax MLI is an outcome of BEPS Action Plan (AP) 15 of the OECD/G20 Inclusive Framework, which offers solutions for governmentsto plugs loopholes in international tax treaties by transposing results from the BEPS project into bilateral tax treatiesworldwide MLI allows governments to modify application of its network of bilateral tax treaties in a synchronised manner withoutrenegotiating each of these treaties bilaterally In November 2016, MLI was agreed upon by more than 100 participating jurisdictions** MLI came into force on 1 July 2018*** More than 1,500 tax treaties are expected to be modified Till now 89 jurisdictions**** have signed the MLI (30 of these have deposited their instruments of ratification, acceptance orapproval [‘ratification instrument’] along with the OECD Secretariat along with its list of reservations and notifications [‘MLIpositions’])INDIA’s positiona) 25 June 2019: Ratification instrument deposited with the OECD (with definitive MLI positions)b) India’s MLI positions – Refer section ‘India’ MLI position (Article-wise)’Broad Architecture of MLIMLI consists of 39 Articles (MLI Articles):Articles 1 and 2 set out the scope of MLI and theinterpretation of terms used thereinArticles 3-17 deal with BEPS tax treaty measuresExplanatory statementto the MLI amplifies theunderstanding of MLIArticlesOECD website includes alist of signatories of theMLI, information on theArticles of the MLI thatthese signatories havechosen to opt, and an MLIMatching DatabaseArticles 18-26 cover provisions related to mandatorybinding arbitrationArticles 27-39 contain procedural provisions such asprovisions relevant to adoption and implementation of theMLI including ratification, entry into force and entry intoeffect dates, withdrawal, etc* Organisation for Economic Co-operation and Development**Including OECD member countries, G20 countries and other developed/developing countries***Following the deposit of ratification instrument by a fifth jurisdiction (viz. Slovenia) with the OECD Secretariat****Status as of 17 July 2019. Additionally, certain jurisdictions have expressed their intent to sign MLI viz: Algeria, Eswatini, Kenya, Lebanon, Oman and Thailand;Source: ies-and-parties.pdf2
Multilateral Instrument (MLI) Ratification Impact on Indian tax treatiesStructure of the MLIJurisdictions that sign the MLI arerequired to adopt MLI provisionsforming part of the agreed minimumstandards:1 Articles 6 and 7 reflect the minimumstandard for prevention of treatyabuse under BEPS AP 6 Article 16 reflects the minimumstandard for improvement of disputeresolution under BEPS AP 14Optional changes to tax treaties in the MLIinclude:2Opting out of these provisions (forming partof agreed minimum standards) is possibleonly in limited circumstances Tax treaty benefits eligibility in case offiscally transparent entities (Article 3) Tiebreaker rules for dual resident entities(Article 4) Different options for eliminating double taxrelief (Article 5)3 Minimum shareholding periods to benefitfrom the provision related to dividends(Article 8) Changes to the definition of a permanentestablishment (Article 12), etc4For such MLI provisions, there is generallyflexibility to opt out of either all or part ofthe provision Each party to the MLI must notify tax treaties to which the MLIprovisions would apply. MLI provisions would apply to a taxtreaty only if both parties to the tax treaty notify it as CoveredTax Agreement [CTA] For a specific bilateral tax treaty, MLI would have effectafter both parties to a CTA have deposited their ratificationinstruments with the OECD SecretariatHow the MLIOperates? MLI would modify application of all CTAs at least to the extentof implementation of following minimum standards viz:1) Counter treaty abuse (through Article 6 - purpose of CTA andArticle 7 - prevention of treaty abuse)2) Improve dispute resolution (through Article 16 – mutualagreement procedure) Flexibility to implement BEPS tax treaty measures in variousways:–– Choices to apply optional and alternative provisions–– Reservations to opt out of provisions or parts of provisionsthat are not minimum standards (either for all CTAs, or aselect CTAs)3
Multilateral Instrument (MLI) Ratification Impact on Indian tax treatiesia24 Nov 2016Publication of MLISigning ceremony:7 Jun68 jurisdictions including2017India signed MLI13 Jun 2019Indian Government approvedratification of MLI1 Jul 2018MLI entered into forceDeposit of ratificationinstrument (alongwith final MLIpositions) by India25 Jun2019MLI enters intoforce for India1 Oct2019*1 Apr2020*That is, on the first day of the month following theexpiration of three months beginning on the date ofdeposit of ratification instrument by India with theOECD Secretariat**That is, Indian tax treaties with jurisdictions thathave already deposited their ratification instrumentwith the OECD Secretariat latest by 30 June 2019 andhave notified tax treaty with India as CTA4MLI provisions to enter intoeffect for 23 Indian bilateraltax treaties**
Multilateral Instrument (MLI) Ratification Impact on Indian tax treatiesIndian CTAsMLI to enter into effect from 1 April 2020List of jurisdictions that have notified tax treaty with India as CTA and havedeposited their ratification instruments with OECD Secretariat by 30 June New ZealandPolandRussiaSerbiaSingaporeSlovak RepublicSloveniaSwedenUnited KingdomUAE“Entry into effect” with respect to CTA [Article 35]A. For Withholding Taxes (WHT): On or after the firstday of the next calendar year following the latest ofthe dates on which MLI enters into force for each ofthe party to the CTA. India has chosen to substitute“calendar year” with “taxable period”B. For other taxes: Taxable period beginning on or afterthe expiry of six calendar months following the latest ofthe dates on which MLI enters into force for each of theparty to the CTAIn relation to Indian tax treaties with jurisdictions tabulated (23), MLI to enter into effect for India from 1 April 2020 (for WHT andother taxes)CTAs that get modified next Where CTA party deposits ratification instrument latestby 31 December 2019, MLI to come into effect from 1 April2020 for WHT and 1 April 2021 for other taxes for exampleNorway, which deposited its instrument of ratification onJuly 17, 2019 MLI will not impact a) India-USA tax treaty (since USAhas not signed MLI) and b) India tax treaties with China*,Germany, and Mauritius (since Indian tax treaties are notnotified by said parties/ India)*India and China have recently amended its tax treaty through protocol signed on 26 November 2018. Amongst others, protocol incorporates changes requiredto implement treaty related minimum standards agreed under BEPS project5
Multilateral Instrument (MLI) Ratification Impact on Indian tax treatiesKey impact areas vis-a-vis Indian Tax TreatiesKey prominent modifications inIndian tax treatiesPreventingtax treatyabuseWideningPermanentestablishment(PE) scope Minimum standard underBEPS AP 6 to tackle treatyabuse, i.e., insertion ofnew preamble andprincipal purpose test(PPT) in all Indian CTAs tobe achieved Broader agency PE ruleto apply to addressartificial avoidance of PEstatus throughcommissionairearrangements and similarstrategies PPT to replace/supersedeexisting general antiabuse provisions in CTA,or to be added in theabsence of suchprovisions Address avoidance of PEformation throughspecific activityexemptions and splittingup of contracts93 jurisdictions (out of 95 jurisdictions)notified by India as CTAsImprovingdisputeresolution MAP request to beimplemented throughbilateral negotiation orconsultation process Provisions on mandatorybinding arbitration (inthe event competentauthorities are unable toreach a decision underMAP) to not apply to allCTAsOtherkeymodifications Tie breaker test in caseof dual residency ofperson (other than anindividual) to be nowdecided by competentauthority (CA) of the CTAparties Taxation of capital gainsfrom alienation of shares/interests deriving valueprincipally fromimmovable property mayalso be amended Additionally, India haschosen to applysimplified limitation onbenefits (SLOB), whichwill generally apply toCTAs if other party hasalso opted for itsapplicationFor evaluating extent of modification of the Indian tax treaty, India's MLI positions need to be compared with the MLI positions taken byits counterpart. Refer snapshot of these impact areas vis-à-vis select Indian tax treaties*India and China have recently amended its tax treaty through protocol signed on 26 November 2018. Amongst others, protocol incorporates changes requiredto implement treaty related minimum standards agreed under BEPS project6
Multilateral Instrument (MLI) Ratification Impact on Indian tax treatiesOverview of MLI positions of Select CTA partiesPrevention of treaty abuseBroader agency PE rule Preamble and PPT to apply to all Indian CTAs Opted to apply: India, France, New Zealand Opted to apply SLOB: India, Russia, Norway Opted to not apply: Netherlands, Singapore, UK,Luxembourg, Australia, Sweden Opted to not apply SLOB: France, Netherlands, Singapore,UK, Luxembourg, Australia, New Zealand, SwedenPE specific activity exemption Opted to apply*: Option A - India, Netherlands, NewZealand, Australia Option B – France, Singapore, LuxembourgSplitting-up of contracts Opted to apply: India, Netherlands, New Zealand, Australia Opted to not apply: France, Singapore, UK, Luxembourg,Sweden Opted to not apply: SwedenMLI Impact on Select Indian Tax Treaties - SnapshotMLI provisions to enter into effect for following Indian tax treaties from 1 April 2020 for both WHT and other taxes Only PPT to be added since France has not opted for SLOBIndia-Francetax treaty Broader agency PE rule applicable since France has notified India tax treaty Avoidance of PE status through specific activity exemptions related provision not applicablesince France has not chosen same option Splitting up of contracts related provision not applicable since France has made a reservation Only PPT to apply since UK has not opted for SLOBIndia-UKtax treaty Broader agency PE rule not applicable since UK has made a reservation Avoidance of PE status through specific activity exemptions related provision not applicablesince UK has not chosen any option Splitting up of contracts related provision not applicable since UK has made a reservation Only PPT to be added since Netherlands has not opted for SLOBIndiaNetherlandstax treaty Broader agency PE rule not applicable since Netherlands has made a reservation Avoidance of PE status through specific activity exemptions related provision applicable sinceNetherlands has chosen same option Splitting up of contracts related provision applicable Only PPT to apply since Singapore has not opted for SLOBIndiaSingaporetax treaty Broader agency PE rule not applicable since Singapore has made a reservation Avoidance of PE status through specific activity exemptions related provision not applicablesince Singapore has not chosen same option Splitting up of contracts related provision not applicable since Singapore has made a reservation*To apply to particular CTA, if both CTA parties chose to apply same option. Also, whilst option A provides that exemption from PE is available only if all the activitiescarried on are preparatory and auxiliary in nature, option B broadly provides specific activity exemption as per OECD Model Convention 2014.7
Multilateral Instrument (MLI) Ratification Impact on Indian tax treatiesMLI’s Challenges and Review AreasInterplay of PPT with general antiavoidance rules (GAAR) under theIndian domestic lawImpact of PPT rule, in selecttreaties, on grandfathered income/investmentsConsequences that may arise if theMLI provisions come into effectseparately for WHT and other taxesMLIAvailability of tax treaty benefitsto fiscally transparent entities (onaccount of India’s reservation to Article3 of MLI)*Existing MNEs operating structuresin India require review in light of theexpanded PE rulesPractical challenges in reading MLI provisions thateffect CTA given the number of documents, viz. MLItext, MLI positions of CTA partners, etc., to be readtogether*Indian judiciary had evaluated subject issue in the past. In Linklaters LLP vs ITO [2010] 40 SOT 51 (Mumbai) and Clifford Chance vs DCIT [2002] 82 ITD 106 (Mumbai),it has been held that UK partnership was eligible to claim tax treaty benefits under the India-UK tax treaty where partners were also subject to tax in the UK. However,there is contrary ruling as well [ref: Schellenberg Wittmer [2012] 24 taxmann.com 299 (AAR - New Delhi)], wherein tax treaty benefits were denied to Swiss-basedpartnership8
Multilateral Instrument (MLI) Ratification Impact on Indian tax treatiesIndia’s MLI positions (Article wise)MLI ArticleBrief description of the ArticleIndia’s final positionArticle 2: Interpretationof termsNotification of tax treaties covered by MLIconventionIndia has notified 93 tax treatiesArticle 3:Transparent entitiesTax treaty benefits to be allowed to fiscallytransparent entities for the income earnedto the extent that such income is taxed in thejurisdiction in which the entity is a residentIndia has made a reservation and thus, not toapply to its CTAsArticle 4:Dual resident entitiesCAs of both jurisdictions to mutually agree onthe manner to determine the residential statusof dual resident non-individuals regarding placeof effective management, place of incorporationor constitution, and any other relevant factors.In the absence of such agreement, treatybenefits to be denied to such a person (unlessotherwise agreed by them)India has opted for application of suchprovision; said provision to apply to all itsCTAs (unless reservation is made by other CTApartner)Article 5:Recommends three options for elimination ofApplication of methods to double taxation inter-alia including “Option C”,eliminate double taxation which prescribes application of credit methodTax treaties not notified by India: China andMarshall IslandsIndia has chosen to apply Option C (i.e., creditmethod); the said option to apply to all its CTAsfor its own residentsIndian tax treaties generally contains creditmethod except in select cases (For e.g., tax treatywith Bulgaria, Greece, Egypt, Slovak Republic thatcontains exemption method). Therefore, exemptionmethod in such select cases to be replaced by“credit method”Article 6:Purpose of CTA(minimum standard)Introduces preamble text in CTA stating thatthe jurisdictions intend to avoid creation ofopportunities for non-taxation or reducedtaxation through tax evasion or avoidance, andthrough treaty shoppingIndia is silent on its position. Being minimumstandard, such MLI provision to apply to all itsCTAsArticle 7:Prevention of treatyabuse(minimum standard)Envisages following three anti-abuse measuresto meet the minimum requirement:A. PPTB. PPT supplemented with either SLOB ordetailed LOB clauseC. Detailed LOB provision, supplemented by amutually negotiated mechanism to deal withconduit arrangements not already dealt within CTAIndia has opted for PPT SLOB. PPT beingminimum standard, it will apply to all its CTAsIndia has accepted to apply PPT as an interimmeasure and intends where possible to adoptLOB provision, in addition or replacement ofPPT, through bilateral negotiationsNot opted for competent authority route underArticle 7(4) of MLI and thus, not applicableSLOB to be applicable only where other CTApartner has adopted it or allowed India to applySLOB asymmetrically9
Multilateral Instrument (MLI) Ratification Impact on Indian tax treatiesMLI ArticleBrief description of the ArticleIndia’s final positionArticle 8:Dividend transfertransactionsIntroduces additional criteria of “365 daysminimum holding period” for the shareholder toavail concessional tax rates under CTAIndia has opted to apply such provision (exceptin case of India-Portugal tax treaty, whichalready contains similar provision)Thus, said MLI provision to apply to all its CTAexcept India-Portugal treaty (unless reservationis made by other CTA partner)Article 9:Capital gains fromalienation of sharesor interest of entitiesderiving their valueprincipally fromimmovable propertyIntroduces additional criteria of “365 daysminimum holding period” in case of gains arisingfrom alienation of shares or other participationrights if such shares or rights derive morethan a specified percentage of their value fromimmovable property situated in the sourcejurisdictionIndia has opted to apply minimum holdingperiod threshold along with minimum valuederivation criterion of 50 percent. The saidprovision to apply to CTA only if other CTApartner has chosen to apply the said provisionOptional provision of inserting a minimum valuederivation criterion of 50 percent of their valuedirectly or indirectly from immovable propertyArticle 10:Anti-abuse rule for PE inthird jurisdictionAddresses abuse of CTAs in a triangularsituationIndia is silent on its position; the said provisionto apply to all its CTA (unless reservation ismade by any other CTA partner)Article 11:Application of taxagreement to restrict aparty’s right to tax itsown residentsPreserves the right of jurisdiction to tax its ownresidentsIndia is silent on its position; the said provisionto apply to all its CTA (unless reservation ismade by any other CTA partner)Article 12:Artificial avoidanceof PE status throughcommissionaire andsimilar strategiesWidens the definition of PE given in tax treatiesto include cases where a person habituallyconcludes contracts or plays a principal role inconclusion of contracts of another enterpriseIndia has opted to apply the said provision;the said provision to apply to a CTA only if anyother CTA partner has chosen to apply the saidprovisionArticle 13:Artificial avoidance of PEthrough specific activityexemptionsProvides two options to counter artificialavoidance of PE status through specific activityexemptions.India has chosen to apply Option A; the saidoption to apply to CTA only if other CTA partnerhas chosen same option“Option A” states that exemption from PE isavailable only if the activities carried on are ofpreparatory and auxiliary natureIndia has chosen to apply anti-Additionally, it provides for anti-fragmentationrulefragmentation rule; the said rule toapply to a CTA only if other CTA partnerhas chosen to apply the said provisionArticle 14:Splitting up of contractsAddresses avoidance of PE by splitting thecontractsbetween related enterprises to circumvent thethreshold of PE creationIndia is silent on its position; the said provisionto apply to all its CTA (unless reservation ismade by any other CTA partner)Article 15:Definition of a person“closely relatedto an enterprise”Defines the term “person closely related”, in thecontext of Articles 12, 13, and 14 of the MLIIndia is silent on its position; the said provisionto apply to all its CTA (unless reservation ismade by any other CTA partner)10
Multilateral Instrument (MLI) Ratification Impact on Indian tax treatiesMLI ArticleBrief description of the ArticleIndia’s final positionArticle 16:Mutual agreementprocedure[Minimum standard]Requires MAP request to be made to eitherstate, or implement a bilateral notification orconsultation processIndia has reserved its right for not adopting themodified MLI provisions on the basis that it willmeet the minimum standard by allowing MAPaccess in the resident state and implementingbilateral notification or consultation processArticle 17:CorrespondingadjustmentsRequires jurisdictions to make appropriatecorresponding adjustments in transfer pricingcasesIndia has chosen to apply the said provisionexcept for CTAs where the provisions alreadyexistBilateral APA and MAP allowed even in absence ofArticle 9(2) – clarified by CBDT vide press releasedated 27 November 2017Article 18-26:Mandatory bindingarbitrationProvides mandatory binding arbitration in caseswhere competent authorities are unable toreach an agreement to resolve a case underMAPIndia has not opted for mandatory arbitrationArticle 35:Entry into effectEffect of provisions of the MLIIndia has chosen to substitute “calendar year”with “taxable period”If other CTA partner opts for calendar year, dateof applicability of MLI provision for such other CTApartner will differ via-a-vis as for India11
Multilateral Instrument (MLI) Ratification Impact on Indian tax treatiesIndia’s Final MLI Positions viz-a-viz ProvisionalMLI PositionsProvisional List*Final List** India notified China as a CTA India excluded tax treaty with China as CTA;added Hong Kong to the list of CTAs India had made reservation againstapplication of Article 5 of MLI suggestingoptions for double taxation elimination India opted for Option C; Option C isbroadly in line with the tax credit method India accepted PPT, being the minimumstandard; in addition, chose to apply SLOBsubject to CTA party’s position India has additionally noted its intentstating that whilst it accepts PPT as aninterim measure, it intends to adopt LOBprovision in addition to or in place of PPTvide bilateral negotiations For “entry into effect”, India had made areservation to consider reference date as 30days after the date when the depositaryreceives latest notification to the effect thatsuch country has chosen this reservation andcompleted its internal procedures for entryinto effect of MLI provision Deleted*Submitted by India at the time of signing the MLI**Submitted by India at the time of depositing the ratification instrument12
Multilateral Instrument (MLI) Ratification Impact on Indian tax treatiesContactsGokul ChaudhriPartnergchaudhri@deloitte.com13Sumit SinghaniaPartnersinghanias@deloitte.com
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