Expert Guides Tax - ITR 2020

THOUGHT LEADERSHIP ASIA PACIFIC
I N D I A
Multilateral Instrument: Whither an
efficient antidote to tax dodging
Aseem Chawla
ASC Legal, Solicitors & Advocates
New Delhi
Background
Multilateral Instrument (‘MLI’) is a result of the Organization of Economic
Co-operation and Development induced actions within the
Base Erosion Profit Shifting (‘BEPS’) project framework. The aim of
the measures undertaken in this project was to develop a mechanism
that would impede international profit shifts to countries applying
preferential tax rates & assist in undertaking effective measures aimed
at tightening the tax systems of the countries involved in the implementation
of the project. The report established fifteen areas of study
with the goal of providing the tools for counteracting tax avoidance
by organizations operating within foreign capital structures to different
countries participating in the implementation of the project.
The BEPS Plan comprised the following areas: tax challenges of the
digital economy; neutralising the effects of hybrid mismatch arrangements;
designing effective controlled foreign company rules; limiting
base erosion involving interest deductions and other financial payments;
countering harmful tax practices more effectively, taking into account
transparency and substance; preventing the granting of treaty benefits in
inappropriate circumstances; preventing the artificial avoidance of permanent
establishment status; upgrading transfer pricing mechanisms;
making mutual cooperation procedure more effective; as well as developing
a multilateral agreement under Action 15, highlighting the framework
to achieve modification of already existing bilateral tax treaties.
Functioning and Structure
As a Multilateral International Agreement, the MLI Convention allows
for amendments to double taxation agreements concluded by a given
country, without the necessity of negotiating a new international tax
agreement. In consequence, the MLI provisions
envision introduction of a mechanism of
a single multilateral legal instrument that allows
amendments to the bilateral tax agreements
while giving some degree of flexibility to
the countries to enforce its views on the subject
matter. The Convention has been divided in
seven parts – two general ones (introduction
and final provisions) as well as five detailed
ones (hybrid entities and instruments, including
anti-double-taxation methods, abuse of
double taxation agreements, preventing the
avoidance of permanent establishment status,
making dispute resolution mechanisms more
effective).
WITH GAAR ALSO IN
PLACE, IT WOULD BE
INCUMBENT FOR THE
ENTITIES TO ORGANISE
ITS AFFAIRS, WITH
IMPECCABLE
HOUSEKEEPING
Paving a way for the Minimum Standards
Some provisions of the MLI reflect a minimum standard, namely in
Article 6 (Preamble), Article 7 (Principle Purpose Test) and Article 16
(Mutual Agreement Procedures). As such, this can be complied with
in different ways. In some cases, Article 6 of the MLI itself provides
for different ways of meeting the minimum standard. If two contracting
states to a treaty implement a minimum standard in different
ways, it may give rise to inconsistencies in the tax treaty. For instance,
India has expressed reservation in Article 16, Mutual Agreement Procedure
(MAP), which is a minimum standard
but at the same time, it has affirmed to implement
MAP in a resident state, thus fulfilling
the minimum standard requirement through
implementation of bilateral notification and
consultation process.
Concept & Efficacy of the Covered Tax
Agreement
Article 6 of the MLI modifies existing tax
treaties to include a preamble text that clarifies
the purpose of the double tax treaty as not
being solely to eliminate double taxation, but to
do so without creating opportunities for nontaxation
or reduced taxation through tax eva-
TAX EXPERTGUIDES 11