Impact of MLI on Indian Tax Treaties

Impact of MLI on Indian Tax Treaties under International Taxation

Meaning of MLI:-

Multilateral Instrument is designed to prevent the BEPS (Basic Erosion and Profit Shifting). It can be said as MLI is a formal term with the aim to prevent the Basic Erosion and Profit Shifting UNDER International Taxation.

International Taxation

Functioning of MLI

MLI implement the TAX Treaty measures that were formed through the BEPS project. This Measures will assist to prevent the treaty abuse, Hybrid Mismatch Agreement minimization, Resolving the dispute, and also no avoidance with respect to the permanent establishment.

Areas of MLI

MLI has a significant effect world widely. So the total jurisdiction and countries are approx 67. So these are the current number who have actually signed MLI. Moreover, there are 9 countries that have their letter with the intent to sign the MLI in the future.

Developing Countries are the part of the MLI

As MLI was developed by a number of countries and there in Developing countries have also been included. Developing countries have a keen interest in signing the MLI and interestingly they have prepared technically for signing the MLI.  However, there are few countries that still have need some time to complete all procedures with respect to Domestic formalities. And by the year-end, many countries will sign the MLI including the  Developing countries.

Existence of the other Tax treaty other than MLI coverage

As MLI signatories already having the 80 % approx of the treaties but they have kept this among themselves. These signatories need some time to decide whether they want to update the treaties they have or they will list that treaty that they possess in addition to the MLI coverage.

Modified Tax Treaty

It is to be noted that MLI’s modified treaties are covered under the “Covered Tax Agreement”. It is basically an agreement wherein avoidance of the Double Tax is made between MLI’s Parties and parties who are actually intending for the modification of the agreement using the MLI.

Preparation of the Consolidated MLI version

There is no such mandatory requirement for many of the countries to prepare the consolidated MLI treaties.
So it’s not compulsory to prepare the consolidated version of MLI or a Modified version of it.

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The flexibility of the MLI instrument

The modification manner of the MLI will not be the same as there is no protocol for this. Even MLI modifies the tax treaties as per the respective jurisdiction policy preferences in relation to the implementation of the BEPS measures for the Tax treaties.

Flexible Instrument MLI

As the main objective behind the flexibility is to inculcate the numerous tax policies that surely ensure the effectiveness of the implementation of BEPS of a tax treaty. MLI has been designed in such a way to inculcate all the important features of the tax treaties.

Reflection of Tax treaty

MLI consist of different types of flexibility. So therein Jurisdiction can choose alternate provisions for modification MLI. In this case, Jurisdiction having flexibility and a variety of options for inculcating the feature of different Tax treaties.

Non-Carte feature of MLI

MLI is not a carte instrument. As this instrument doesn’t provide the Treaty by Treaty choices that how it must be reflected or how the jurisdiction want their territory. However, MLI gives the option to the Jurisdiction to express how they want the MLI to modify their Covered Tax Agreement.

The signatory Tax Treaty provision

Before signing the MLI, each signatory to the MLI must determine and submit its position where they want to reflect their tax treaty policy. Even positions of the provisional MLI of signatory are available at its relevant site.

MLI provisions

MLI has facilitated the signatory to opt-in for certain MLI provisions even if signature made to the MLI. As the provisional MLI position covers the tax treaties that the signatory or the proposed signatory want to cover or the option they have been given in relation to it. Therefore, Parties to the MLI can choose to opt-in in relation to the
either Optional provisions or withdrawal of the provisions as they want.

Modification Come into force

In relation to the modification to the MLI, changes will take into the effect when signatories will inform the OECD of the completion of their ratification procedures. The OECD is in charge of the tracking of the completion of the Ratification Procedure. Consequently, all the information will be taken into effect when all such provisions effective and will be made available to the public with the effect of the MLI provisions.

Milestone for treaty standard

MLI is considered as a milestone for the International Treaty and taxation as well. As it allows the jurisdiction to update all their tax Treaty provisions that ensure the international standard has been confirmed.

Jurisdictions allow signing MLI after the ceremony

Jurisdictions are allowed to sign the MLI even after the Ceremony occurred. Hence all the interested Jurisdictions can apply for a sign of the MLI. For this various assistance will be given to the government so as to prepare this Authority can apply for sign the MLI.

MLI Positions in Online

Under the MLI Signature, each signatory is required to submit their MLI positions to the Depository. In general, MLI positions consist of 10 to 50 pages and it is actually very jurisdiction to jurisdiction as few of them opt for the number of treaties to update in MLI or few of them want not more than one treaty to update.

MLI Position to Public

MLI position will be made to the public after signing the ceremony held on 7 June. Moreover, these positions and MLI signatory will be available at the respective site.

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Impact of MLI on Tax treaties

As signatory include the developed and developing tax jurisdiction, due to this structure, Treaty-shopping structure will come to end as these were the Anti-abuse provisions.

Introduction of Arbitration

Under the MLI, signatory has opted to introduce the Arbitration provisions over the approx 150 existing treaties and some of the territory has opted default option of Final Offer Arbitration.

Treaty Shopping

It refers to the arrangements by which a person who is not a resident of one of the states who actually conclude the tax treaty so as to obtain the indirectly benefits that the treaty grants to the state’s Resident.

Addressing the Treaty abuse in the MLI

It can be addressed through a combination of the following below mentioned:-
1. Specific Anti-abuse rules.
2. General Anti-abuse rules.

Both these approaches can be equally effective so as to address the treaty abuse as per the country’s environment and policy preferences. MLI’s Signatories have the flexibility in deciding the approach of Anti-abuse which one has to opt as per their preferences and requirements.

Bilateral Agreement

The bilateral agreement will continue to exist as MLI only modify the old or existing Bilateral agreement. Further, it is expected that jurisdiction may include the related BEPS in the future Bilateral agreement.

Conclusion

In all, MLI has a great impact on the Indian tax treaty under the international Taxation wherein each provision is made flexible with respect to the either to modified treaties or to be enrolled in MLI as its signatory. Anti-Abuse BEPS is controlled through this Multilateral Instrument. In short, MLI is a boon to Indian Taxation to avoid the Tax.

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