India Signs Tax Super-Treaty With Some Reservations

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By Siri Bulusu

India June 7 entered into a super-treaty that will overhaul the global tax ecosystem, but indicated reservations over recently negotiated tax treaties with Mauritius, Singapore and Cyprus.

The multilateral instrument will swiftly modify more than 2,000 active tax treaties to incorporate the action items from the Organization for Economic Cooperation and Development’s Base Erosion and Profit Shifting initiative, which is aimed at expanding the global tax net, easing the flow of information between countries, and curbing tax avoidance by multinational corporations.

At the signing ceremony in Paris, 68 countries entered into the OECD’s multilateral instrument and—due to the flexibility allowed for signatory countries—presented reservations and changes they will negotiate into treaties with different jurisdictions.

India’s Union Cabinet gave permission to the Central Board of Direct Taxes on May 17, 2017, to sign the multilateral convention. In the last year, however, India already amended its tax treaties with Mauritius, Singapore and Cyprus to include anti-abuse provisions in accordance with the BEPS guidelines.

The three countries are important tax jurisdictions for India—with Mauritius and Singapore being the top two countries that invest directly into India, Uday Ved, a Mumbai-based chartered accountant, told Bloomberg BNA on June 6.

As expected by tax practitioners, India entered into the MLI and notified Cyprus, Mauritius and Singapore as “covered tax agreements,” meaning India likely will prefer to keep the terms of its recently negotiated tax treaties with the respective countries.

Cyprus and Singapore both signed the MLI on June 7, while Mauritius expressed its intent to sign the super-treaty by June 30.

“‘One size fits all’ provisions if mandated under the MLI would have been self-defeating to the very purpose of BEPS as most countries would not be expected to adopt all the recommended BEPS measures considering their economic global equation vis-à-vis their trading partners,’” Girish Vanvari, national head of tax for KPMG India, told Bloomberg BNA in an emailed statement June 8.

Minimum Standards

Signing the multilateral Instrument requires each jurisdiction to comply with the minimum standards of the super-treaty, which include such provisions as: country-by-country reporting, peer review of harmful tax practices, effective mutual agreement procedure, and prevention of treaty abuse.

Vanvari said that in the context of treaty abuse “which is one of the most important BEPS Actions,” many countries in the past including India have incorporated the anti-abuse provisions (Limitation of benefits Article) in the bilateral tax treaties.

Limitation of benefits clauses, a means to limit what types of companies are eligible for tax benefits, were already included in India’s BEPS-compliant tax treaties with Cyprus, Singapore, and Mauritius.

India adopted all of the place of effective management related measures, though some of its existing treaties already have adopted measures according to the BEPS action plan.

Permanent Establishment

The provision regarding permanent establishment is one of the longer and more detailed sections of the multilateral instrument, say practitioners, since it will scrutinize the substance behind most international transactions that call permanent establishment into question.

“Artificial avoidance of Permanent Establishment status is the key concern of each signatory country, since this is the main source of base erosion,” Rakesh Nangia, managing partner at Nangia & Co LLP, told Bloomberg BNA in an emailed statement.

Nangia added that the MLI will expand the scope of the definition of permanent establishment, meaning that corporations conducting business in India may not be able to claim specific exemptions under its new application.

“Significant discussion” in the run-up to the signing ceremony focused on the provisions to check artificial avoidance of permanent establishment status under BEPS Action Plan 7,” Maulik Doshi tax partner at SKP Business Consulting LLP, told Bloomberg BNA in a June 5 email.

Companies that deal with “contract breaking”—or negotiation of most of a contract in a foreign jurisdiction and signing it in the home jurisdiction—is an example of a measure that will be curbed under the multilateral instrument since it takes a “substance first” approach, Doshi said.

“All-in-all, the outcome of the [multilateral instrument] will pave the way for a new regime in international taxation in general and tax treaty interpretation in particular,” Doshi said.

To contact the reporter on this story: Siri Bulusu in New Delhi at correspondents@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

For More Information

The OECD's list of signatories can be found here: http://www.oecd.org/tax/treaties/beps-mli-signatories-and-parties.pdf

India's MLI position can be found here: http://www.oecd.org/tax/treaties/beps-mli-position-india.pdf

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