Are you ready for the BEPS effect?

What Base Erosion and Profit Shifting project. mean for businesses in India

How does the multilateral convention (MLC) impact Indian businesses?

The MLC will primarily impact those multinational enterprises that are using low-tax jurisdictions and favourable treaty shopping to minimise their tax liability in their global operations. “This will impact taxpayers engaging in egregious tax planning schemes,” says Rakesh Nangia, managing partner, Nangia & Co, a chartered accountancy firm. It will apply to 93 tax treaties that India has with other countries. “The MLC will essentially modify the global tax treaty framework. It will sit atop all such covered tax agreements,” adds Nangia. Experts say Indian companies having local operations alone may not be impacted by the multilateral instrument. “Indian entities with overseas operations or transactions will need to adhere to the revised tax treaty provisions. The reverse would equally apply to a foreign entity with Indian business or transactions,” says Nikhil Rohera, partner, direct tax, PwC.

The Indian government has come up with General Anti-Avoidance Rules (GAAR), a unilateral measure to address tax avoidance, applicable from April 1, 2017. “Indian GAAR is now supplemented with the tax treaty abuse provisions of the MLC,” says Nangia.

Is this the end of the road for funnelling income to low-tax or no-tax jurisdictions by multinational enterprises?

Mostly yes, feel many tax experts. The key objective of the multilateral instrument is to facilitate the prevention of base erosion and profit shifting. “Assuming both India and its foreign treaty partner sign and ratify the instrument, as also the relevant articles aimed at preventing treaty abuse, it would mean any aggressive tax planning or avoidance would no longer be permissible,” says Rohera. 

However, implementation remains the key to the success of any law. “Implementing this convention in its true spirit and appropriate understanding by tax authorities is important,” says Nangia. Provisions of this convention should not become a tool of harassment and targeting genuine business transactions and structures, he adds.

Will there be special provisions in bilateral treaties to ensure that there is no treaty abuse to evade taxes?

Many bilateral treaties contain “Limitation on Benefits” (LoB) provisions to prevent treaty abuse for evading taxes. “Even after the implementation of multilateral instruments, such anti-abuse provisions in bilateral treaties shall continue to remain in force,” says Nangia.

Further, India has also proposed to adopt the simplified LoB provision, which shall restrict the applicability of a tax treaty to a resident as prescribed in multinational convention, points out Rohera. The emphasis of these provisions is on the ‘principal purpose’ of any arrangement or transaction undertaken through a particular jurisdiction.

Will dispute resolution, especially those related to transfer pricing, become faster?

Dispute resolution in India is subject to provisions under domestic tax laws and the multilateral convention is not expected to assist in a faster dispute resolution, including transfer pricing disputes, says Nangia.

“In bilateral treaties/multilateral convention, the only way to speed up dispute resolution is through the ‘Mutual Agreement Procedure’ (MAP) between competent authorities of contracting countries,” he adds. Experts point out that India has expressed reservations on some aspects of the MAP. 

How will the convention impact the status of permanent establishment (PE), a key area of dispute between tax payers and revenue departments?

Artificially avoiding PE status by using favourable treaty provisions and taking shelter under “exclusionary provisions” have been some of the focus areas of the BEPS action plan. Part IV of the multilateral instrument lays down suggested changes in the interpretation of PE under different situations.

“Guidance has now been provided on some specific situations namely, commissionaire arrangements, specific activity exemptions and splitting up of contracts which, going forward, should plug loopholes for artificial avoidance of PE. However, the multilateral instrument does not change any rules on attribution of profits to such PE,” explains Rohera.