Basics of Multilateral Instruments

Multilateral Instrument to combat tax avoidance:

1. Multilateral Instrument (MLI) is a multilateral convention of the Organisation for Economic Co-operation and Development to combat tax avoidance by multinational enterprises through prevention of Base Erosion and Profit Shifting [“BEPS”]. MLI will not replace existing bilateral tax treaties entirely rather it will apply alongside the existing tax treaties and may supersede or complement the existing treaties between countries, as the case may be. 

2. As of now, India has entered into MLI with 30 countries. Notable exclusions with whom India has not entered into MLI are Mauritius, China and USA. 

Notable Articles accepted by India:

1. Article 8: Dividend transfer transactions An additional criteria inserted of a 365 days minimum holding period for the purpose of availing concessional tax rates under treaty. (Not to apply to India-Portugal treaty or unless reservation is made by other CTA Partners)

2. Article 5: Application of methods for elimination of double taxation- India has adopted Option C ie the credit method. 

3. Article 7: Principal Purpose Test (“PPT”)- The anti-avoidance provision of MLI requires that if one of the purposes of a transaction arrangement is to obtain tax benefit, then the arrangement fails the Principal Purpose Test (“PPT”). When PPT is not satisfied, then the benefit of the tax treaty may be denied. It is important to appreciate and note that PPT contains a stricter threshold of substance requirement as compared to GAAR. 

4. Article 12: This clause widens the definition of PE given in tax treaties to include cases where a person habitually concludes contracts or habitually plays a principal role in conclusion of contracts of another enterprise. (India has opted to apply the said provision only if any other CTA partner has chosen to apply the said provision)

5. Article 14: Splitting up of contracts – Anti-contract splitting rule, which will apply to deemed PE provisions for building sites, construction or installation projects. (India is silent on its position. Hence, it would apply to its CTA unless reservation is made by other CTA Partner.)

Note: Each party to the MLI must notify tax treaties to which the MLI provisions would apply. MLI provisions would apply to a tax treaty only if both parties to the tax treaty notify it as Covered Tax Agreement [CTA]

CA Aniket Kulkarni