Government Of India Ratifies MLI – Bringing India On The Cusp Of A New International Tax Regime

Author:Mr Sanjay Sanghvi, Jimmy Bhatt and Kruthika Prakash
Profession:Khaitan & Co
 
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Update

The Government of India (Union Cabinet) has approved the ratification of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) and India's final position to the same.

Background and Key Highlights

Our Ergo Newsflash dated 3 July 2017 provided a detailed background to the MLI, summary of its important provisions including the impact of the provisional reservations and positions expressed by India on its existing network of tax treaties.

With an object to address aggressive tax strategies by Multinational Enterprises (MNE), the Organisation for Economic Cooperation and Development (OECD) had undertaken the landmark Base Erosion and Profit Shifting (BEPS) Project. Under the BEPS Project, the OECD had identified 15 Action Points (BEPS Action Plan) to address aggressive tax planning strategies which exploit gaps and mismatches in tax rules and result in the shifting of profits by MNEs to no/low tax jurisdictions. The MLI was envisaged as a faster mechanism to give effect to various recommendations in the BEPS Action Plan and as an alternative to the time-consuming process of amending more than 3000 bilateral tax treaties.

The MLI seeks to implement a series of measures to address treaty abuse, dispute resolution, artificial avoidance of Permanent Establishment (PE) and hybrid mismatch arrangements among other key issues which resulted in unintended consequences of tax treaties. It intends to counter the existing lacunae in the international tax regime and aims to curb revenue loss by preventing tax treaty abuse and by ensuring alignment of taxation with value creation.

As a part of the Ad Hoc Group working on the BEPS project, India had actively participated in drafting the MLI. On 7 June 2017, India had signed the MLI along with 67 other jurisdictions and submitted its provisional notification (covering all its tax treaties). As on 29 May 2019, around 88 jurisdictions have signed the MLI, including Canada, China, France, Germany, Guernsey, Hong Kong, Ireland, Isle of Man, Italy, Japan, Jersey, Liechtenstein, Luxembourg, Mauritius, Netherlands, Russia, Singapore, South Africa, Spain, Switzerland, United Kingdom. By 1 September 2019, it shall have entered into force in 26 jurisdictions, including France, Japan, Netherlands, Singapore, UAE and UK. Notably, USA is not a signatory to the MLI and accordingly India-USA tax treaty would remain entirely unaffected by the MLI...

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