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Multilateral Convention to Implement Tax Treaty

  • Category
    Economy
  • Published
    27th Jun, 2019

The Union Cabinet has approved the ratification of the Multilateral Convention to implement tax treaty related measures to prevent base erosion and profit shifting and to implement OECD’s project on checking tax evasion.

Context

The Union Cabinet has approved the ratification of the Multilateral Convention to implement tax treaty related measures to prevent base erosion and profit shifting and to implement OECD’s project on checking tax evasion.

About

Multilateral Convention

  • The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, sometime abbreviated BEPS multilateral instrument, is a multilateral convention of the Organisation for Economic Co-operation and Development (OECD) to combat tax avoidance by multinational enterprises (MNEs) through prevention of Base Erosion and Profit Shifting (BEPS).
  • The BEPS Project identified 15 actions to address in a comprehensive manner.
  • It enables countries to implement the tax treaty related changes between two or more Parties to the Convention to achieve anti-abuse BEPS outcomes through the multilateral route without the need to bilaterally re-negotiate each such agreement which is burdensome and time consuming.
  • It 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.

Impact:

  • The Convention will modify India's treaties in order to curb revenue loss through treaty abuse and base erosion and profit shifting strategies by ensuring that profits are taxed where substantive economic activities generating the profits are carried out and where value is created.
  • Ratification of the Multilateral Convention will enable application of BEPS outcomes through modification of existing tax treaties of India in a swift manner.
  • This step will update international tax rules and lessen the opportunity for tax avoidance by multinational enterprises.

Multilateral Instrument (MLI)

  • The Multilateral Instrument (MLI) offers concrete solutions for governments to close the gaps in existing international tax rules by transposing results from the OECD/G20 BEPS Project into bilateral tax treaties worldwide.
  • The MLI modifies the application of thousands of bilateral tax treaties concluded to eliminate double taxation. It also implements agreed minimum standards to counter treaty abuse and to improve dispute resolution mechanisms while providing flexibility to accommodate specific tax treaty policies.

BEPS (base erosion and profit shifting)

  • BEPS refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no tax locations where there is little or no economic activity. It is of major significance for developing countries due to their heavy reliance on corporate income tax, particularly from multinational enterprises.
  • Most BEPS activity is associated with industries with intellectual property (IP), namely Technology and Life Sciences.
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