MultilateralBEPS

Convention

76 countries and jurisdictions sign Multilateral Instrument of BEPSConvention on 07.06.2017 at OECD to close loopholes in thousands of taxtreaties worldwide

Signing of Multilateral Instrument marks an historic event and milestonein joint efforts of various OECD and G-20 countries to update existingnetwork of bilateral tax treaties and reduce opportunities for taxavoidance by multinational enterprises

India, as a firm believer and keen participant in global efforts forminimizing treaty abuse and tax avoidance by multilateral enterprises,actively participated in finalization of Multilateral Convention andconvincing other countries to be a part of this convention.

India signed the Multilateral Instrument on 07th June 2017 alongwithother countries, and also released a list of its bilateral tax treaties with93 countries/ jurisdictions, which India will recognize as “AgreementsCovered by the Convention”

India also released a list of its “reservations” against applicability ofcertain articles of model Multilateral Convention in respect of itsbilateral agreements with various countries/ jurisdictions

Interestingly, Mauritius, widely perceived as a ‘favorable tax jurisdiction’did not sign the Multilateral Instrument on 07th June, but issued anofficial press release committing to sign the same by 30th June 2017

Noida I New Delhi | Gurgaon I Mumbai | Dehradun | SingaporeJune, 2017 – Volume 51

www.nangia.com

MultilateralBEPS

Convention

76 countries and jurisdictions sign Multilateral Instrument of BEPSConvention on 07.06.2017 at OECD to close loopholes in thousands of taxtreaties worldwide

Signing of Multilateral Instrument marks an historic event and milestonein joint efforts of various OECD and G-20 countries to update existingnetwork of bilateral tax treaties and reduce opportunities for taxavoidance by multinational enterprises

India, as a firm believer and keen participant in global efforts forminimizing treaty abuse and tax avoidance by multilateral enterprises,actively participated in finalization of Multilateral Convention andconvincing other countries to be a part of this convention.

India signed the Multilateral Instrument on 07th June 2017 alongwithother countries, and also released a list of its bilateral tax treaties with93 countries/ jurisdictions, which India will recognize as “AgreementsCovered by the Convention”

India also released a list of its “reservations” against applicability ofcertain articles of model Multilateral Convention in respect of itsbilateral agreements with various countries/ jurisdictions

Interestingly, Mauritius, widely perceived as a ‘favorable tax jurisdiction’did not sign the Multilateral Instrument on 07th June, but issued anofficial press release committing to sign the same by 30th June 2017

What Multilateral Convention is all about?

The Multilateral Convention, is the first multilateral treaty of its kind,which allows jurisdictions to transpose results from the OECD/G20BEPS Project into their existing networks of bilateral tax treaties.

The Multilateral Convention has been developed through inclusivenegotiations involving more than 100 countries and jurisdictions,under a mandate delivered by G20 Finance Ministers and Central BankGovernors at their meeting in February 2015

The Multilateral Convention will save its signatory countries from theburden of re-negotiating covered tax treaties bilaterally. It will alsoresult in more certainty and predictability for businesses, and a betterfunctioning international tax system across the world.

The Multilateral Convention intends to provide solution forgovernments to close the gaps in existing international rules that allowcorporate profits to disappear or be artificially shifted to low or no taxenvironments, where companies have little or no economic activity.

Treaty measures that are included in the new multilateral conventioninclude those on hybrid mismatch arrangements, treaty abuse,permanent establishment, and mutual agreement procedures,including an optional provision on mandatory binding arbitration,which has been taken up by 25 signatories.

India’s position & key reservations to model Multilateral Convention

Article 3 of the Model Multilateral Convention contains provisionsregarding income derived by or through an entity or arrangement thatis treated as wholly or partly “fiscally transparent”. As per this Article,income of such “fiscally transparent entity/ arrangement” isconsidered as income of “a resident of a Contracting Jurisdiction”.

India has expressed its reservation against applicability of this entirearticle to its covered tax jurisdictions. Accordingly, India will continueto tax income of such “fiscally transparent entity/ arrangement” as perits domestic GAAR rules or as per provisions already available under itsbilateral tax treaties.

In relation to Article 4 of Model Convention, which provides fortaxation in case of “Dual Resident Entities”, India has expressed thatprovisions of Article 4 would have only limited applicability in respectof India’s covered tax agreements, since India’s bilateral treaties withall its 93 covered tax jurisdictions/ countries already provide fornecessary mechanism for resolution of issue relating to “Dual ResidentEntities”. This reservation also gains importance in light of POEMguidelines recently notified by Indian government under domesticincome tax provisions.

Article 5 of the Model Multilateral Convention contains provisionsregarding “Application of Methods for Elimination of Double Taxation”.India has expressed its reservation against applicability of this entirearticle to its covered tax jurisdictions. Accordingly, in respect of India’stax treaties, “Methods for Elimination of Double Taxation” willcontinue to apply as provided under corresponding Article inrespective bilateral tax treaties and Section 90-91 of Income Tax Act,1961.

Article 7 of Multilateral Convention contains provisions for “Preventionof Treaty Abuse”. Considering India has already built in necessaryprovisions in form of “Limitation of Benefits” clause in various itsbilateral tax treaties, India has adopted a “Simplified Limitation ofBenefits Provisions” as provided in Model Multilateral Convention withan exception that certain provisions of Model Convention shall notapply to some of its existing bilateral treaties, which sufficientlyaddress this issue.

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What Multilateral Convention is all about?

The Multilateral Convention, is the first multilateral treaty of its kind,which allows jurisdictions to transpose results from the OECD/G20BEPS Project into their existing networks of bilateral tax treaties.

The Multilateral Convention has been developed through inclusivenegotiations involving more than 100 countries and jurisdictions,under a mandate delivered by G20 Finance Ministers and Central BankGovernors at their meeting in February 2015

The Multilateral Convention will save its signatory countries from theburden of re-negotiating covered tax treaties bilaterally. It will alsoresult in more certainty and predictability for businesses, and a betterfunctioning international tax system across the world.

The Multilateral Convention intends to provide solution forgovernments to close the gaps in existing international rules that allowcorporate profits to disappear or be artificially shifted to low or no taxenvironments, where companies have little or no economic activity.

Treaty measures that are included in the new multilateral conventioninclude those on hybrid mismatch arrangements, treaty abuse,permanent establishment, and mutual agreement procedures,including an optional provision on mandatory binding arbitration,which has been taken up by 25 signatories.

India’s position & key reservations to model Multilateral Convention

Article 3 of the Model Multilateral Convention contains provisionsregarding income derived by or through an entity or arrangement thatis treated as wholly or partly “fiscally transparent”. As per this Article,income of such “fiscally transparent entity/ arrangement” isconsidered as income of “a resident of a Contracting Jurisdiction”.

India has expressed its reservation against applicability of this entirearticle to its covered tax jurisdictions. Accordingly, India will continueto tax income of such “fiscally transparent entity/ arrangement” as perits domestic GAAR rules or as per provisions already available under itsbilateral tax treaties.

In relation to Article 4 of Model Convention, which provides fortaxation in case of “Dual Resident Entities”, India has expressed thatprovisions of Article 4 would have only limited applicability in respectof India’s covered tax agreements, since India’s bilateral treaties withall its 93 covered tax jurisdictions/ countries already provide fornecessary mechanism for resolution of issue relating to “Dual ResidentEntities”. This reservation also gains importance in light of POEMguidelines recently notified by Indian government under domesticincome tax provisions.

Article 5 of the Model Multilateral Convention contains provisionsregarding “Application of Methods for Elimination of Double Taxation”.India has expressed its reservation against applicability of this entirearticle to its covered tax jurisdictions. Accordingly, in respect of India’stax treaties, “Methods for Elimination of Double Taxation” willcontinue to apply as provided under corresponding Article inrespective bilateral tax treaties and Section 90-91 of Income Tax Act,1961.

Article 7 of Multilateral Convention contains provisions for “Preventionof Treaty Abuse”. Considering India has already built in necessaryprovisions in form of “Limitation of Benefits” clause in various itsbilateral tax treaties, India has adopted a “Simplified Limitation ofBenefits Provisions” as provided in Model Multilateral Convention withan exception that certain provisions of Model Convention shall notapply to some of its existing bilateral treaties, which sufficientlyaddress this issue.

India’s position & key reservations to model Multilateral Convention(contd.)

Article 8 of the Model Multilateral Convention contains provisions toaddress issue of “Dividend Transfer Transactions” with an objective tominimize tax liability on dividends. The Article prescribes a limitationof minimum holding period of 365 days in respect of shares/ stock/ownership interest, for which dividend is paid out. India has primarilyaccepted provisions of Article 8, except certain treaties where itconsiders provisions of bilateral treaties sufficient to address this issue.

Article 9 of the Model Multilateral Convention contains provisionsregarding taxation of “Capital Gains from Alienation of Shares orInterests of Entities Deriving their Value Principally from ImmovableProperty”, which provides that such gains will taxable in the Country,where such immovable property is situated, if at any time during the365 days preceding the transfer, these shares or comparable interestsderived more than 50 per cent of their value directly or indirectly fromsuch immovable property. India has primarily accepted provisions ofArticle 9, except certain treaties where it considers provisions ofbilateral treaties sufficient to address this issue.

India has primarily accepted and adopted provisions of Article 10 andPart IV containing Articles 12-15, which deal with Anti-abuseprovisions involving Permanent Establishments. India has also notifiedexisting provisions in its listed/ covered tax agreements.

Article 16 of the Model Multilateral Convention contains provisionsregarding dispute resolution through “Mutual Agreement Procedure”.The Article provides that resident of a contracting state can approachCompetent Authority of any of involved contracting states. India hasmade its reservation to this specific aspect to the extent that anapplication for MAP shall be made only before the competentauthority of the Contracting Jurisdiction of which the person is aresident and not to the Competent authority of other contracting statedirectly.

Article 17 of the Model Multilateral Convention contains provisions“Corresponding Adjustments”, mostly on account of transfer pricingadjustment in respect of transactions between 2 related parties. Indiahas made reservations against applicability of Article 17 in respect ofits covered tax agreements, which already contain similar provisionsunder bilateral tax treaties.

Regarding “Entry into Effect” of Model Convention, India has suitablymodified applicability of these provisions for “taxable period” asagainst “calendar year” as prescribed in these provisions to match with“Previous Year” concept under India domestic tax laws.

India has also not opted for optional provision on mandatory bindingarbitration, which has been taken up by 25 signatories contained inPart VI of Model Convention.

NANGIA’S TAKE

Signing of Multilateral Instrument marks a historic and the “first ever ofits kind” event changing the face of how corporates devise their crossborder transaction to misuse the gap in tax treaties and domestic lawsfunneling their incomes to low or no tax jurisdiction. This also showsresolve and seriousness of various countries across the world regardingtheir commitment to widen the tax net and prevent misuse and abuse oftax treaty provisions by multinational enterprises.

India has suitably modified and adopted these provisions for its coveredtax agreements, in alignment with Indian domestic tax law provisions aswell as some existing provisions in bilateral tax treaties, where Indiaconsiders that existing provisions are sufficient to cover and protect itsrevenue interests or where existing provisions appear to be better thanprovisions of Model Multilateral Convention.

www.nangia.com

India’s position & key reservations to model Multilateral Convention(contd.)

Article 8 of the Model Multilateral Convention contains provisions toaddress issue of “Dividend Transfer Transactions” with an objective tominimize tax liability on dividends. The Article prescribes a limitationof minimum holding period of 365 days in respect of shares/ stock/ownership interest, for which dividend is paid out. India has primarilyaccepted provisions of Article 8, except certain treaties where itconsiders provisions of bilateral treaties sufficient to address this issue.

Article 9 of the Model Multilateral Convention contains provisionsregarding taxation of “Capital Gains from Alienation of Shares orInterests of Entities Deriving their Value Principally from ImmovableProperty”, which provides that such gains will taxable in the Country,where such immovable property is situated, if at any time during the365 days preceding the transfer, these shares or comparable interestsderived more than 50 per cent of their value directly or indirectly fromsuch immovable property. India has primarily accepted provisions ofArticle 9, except certain treaties where it considers provisions ofbilateral treaties sufficient to address this issue.

India has primarily accepted and adopted provisions of Article 10 andPart IV containing Articles 12-15, which deal with Anti-abuseprovisions involving Permanent Establishments. India has also notifiedexisting provisions in its listed/ covered tax agreements.

Article 16 of the Model Multilateral Convention contains provisionsregarding dispute resolution through “Mutual Agreement Procedure”.The Article provides that resident of a contracting state can approachCompetent Authority of any of involved contracting states. India hasmade its reservation to this specific aspect to the extent that anapplication for MAP shall be made only before the competentauthority of the Contracting Jurisdiction of which the person is aresident and not to the Competent authority of other contracting statedirectly.

Article 17 of the Model Multilateral Convention contains provisions“Corresponding Adjustments”, mostly on account of transfer pricingadjustment in respect of transactions between 2 related parties. Indiahas made reservations against applicability of Article 17 in respect ofits covered tax agreements, which already contain similar provisionsunder bilateral tax treaties.

Regarding “Entry into Effect” of Model Convention, India has suitablymodified applicability of these provisions for “taxable period” asagainst “calendar year” as prescribed in these provisions to match with“Previous Year” concept under India domestic tax laws.

India has also not opted for optional provision on mandatory bindingarbitration, which has been taken up by 25 signatories contained inPart VI of Model Convention.

NANGIA’S TAKE

Signing of Multilateral Instrument marks a historic and the “first ever ofits kind” event changing the face of how corporates devise their crossborder transaction to misuse the gap in tax treaties and domestic lawsfunneling their incomes to low or no tax jurisdiction. This also showsresolve and seriousness of various countries across the world regardingtheir commitment to widen the tax net and prevent misuse and abuse oftax treaty provisions by multinational enterprises.

India has suitably modified and adopted these provisions for its coveredtax agreements, in alignment with Indian domestic tax law provisions aswell as some existing provisions in bilateral tax treaties, where Indiaconsiders that existing provisions are sufficient to cover and protect itsrevenue interests or where existing provisions appear to be better thanprovisions of Model Multilateral Convention.

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DELHISuite - 4A, Plaza M-6, Jasola, New Delhi–110 025

Ph: +91-11-4737 1000, Fax: +91-11-4737 1010

GURGAONOffice No. 9, 14th Floor, Building No. 9B, DLF Cyber City,

Phase III, Gurgaon - 122 002

MUMBAI11th Floor, B Wing, Peninsula Business Park,

Ganpatrao Kadam Marg,Lower Parel, Mumbai–400 013, India

DEHRADUNFirst Floor, “IDA”, 46 E. C. Road

Dehradun – 248001

SINGAPORE24 Raffles Place, #25-04A

Clifford CentreSingapore- 048621