India, along with 66 other countries, on Thursday adopted the OECD-anchored base erosion and profit shifting (BEPS) framework in Paris, which will help them crack down on abuse of bilateral tax treaties and treaty shopping. The BEPS strategy consists of 15 action points which pertain to several cross-border tax practices and domestic taxation, in addition to double taxation avoidance agreements. With finance minister Arun Jaitley signing the relevant multilateral convention (MLI), India’s tax treaties will be modified to curb revenue loss through treaty abuse, by ensuring that profits are taxed where substantive economic activities generating the profits are carried out and where value is created. In all, around 2,360 tax treaties could be modified under the BEPS agenda worldwide. The MLI has been signed at a time when several countries like India are autonomously including the relevant aspects into their tax laws with a view to formulating stronger anti-abuse provisions and bringing more transparency in exchange of information between countries.
Several tax experts had pointed out that the principal purpose test (as in UK-India treaty) and limitation of benefit (LOB) clause in some 40 Indian bilateral treaties including the one with the US would address issues of treaty abuse. “Governments worldwide have been patient with cross-border aggressive tax planning till now, but by signing this unique MLI, corporates have been given the final call that their game of funnelling income to low-tax or no-tax jurisdiction is up. Though the implementation by each country would be subject of its reservations, the message is clear that treaty abuse shall not be acceptable and dispute resolution would become faster in the near future,” Rakesh Nangia, managing partner, Nangia & Co, said.
Apart from conventional mechanisms for dispute resolution like the Authority of Advance Ruling and Settlement Commission, newer means like advance pricing agreements (APAs) and mutual agreement procedure (MAP) are being used to avoid/settle tax disputes. Under the mechanism of MAP, several tax disputes involving US-based and Japanese companies have been resolved amicably across the table, with the tax authorities of both countries participating.
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“One of the aspects being making available dispute-resolution mechanism for transfer pricing disputes, this signing should allow for resolution through BAPAs and MAPs with a number of countries, which was not possible earlier. This would aid in providing certainty and relief from double taxation to MNEs,” Kunj Vaidya, leader transfer pricing at Price Waterhouse & Co, said.
The convention will operate to modify tax treaties between two or more parties to the convention, the government said in a statement. It added that the instrument will not function in the same way as an amending protocol to a single existing treaty, which would directly amend the text of the covered tax agreement. Instead, it will be applied alongside existing tax treaties, modifying their application in order to implement the BEPS measures.
Experts said that after the signing of the convention, corporates as well as professional experts will have to ensure that the treaty provisions are not read on a standalone basis but with the corresponding provisions of MLI, along with related country options and reservations.
Girish Vanvari, national head of tax, KPMG in India, said : “In the context of treaty abuse, India has chosen to supplement the provisions of the Principal Purposes Test with a simplified Limitation on Benefits test.”