An Indian Perspective
CA Vikram Naik HIGHLIGHTS • Guidance on construct of Multilateral instrument and how to read the instrument • Detailed explanation on each provisions of Multilateral instruments • Examples to simplify complex provisions • Position of India on various provisions of Multilateral Instruments • Position of major trading companies on Multilateral Instruments • Impact of the provisions of Multilateral Instruments on various open issues on international taxation in India
Bloomsbury Professional India
Multilateral Instruments
Contents at a glance Dedication and Personal Acknowledgement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii About the author. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi Table of contents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv Chapter 1
Background. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1
Chapter 2
Scope and Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1
Chapter 3
Fiscally Transparent Entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1
Chapter 4
Dual Resident Entities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1
Chapter 5
Application of Methods for Elimination of Double Taxation . 5.1
Chapter 6
Purpose of a Covered tax agreement. . . . . . . . . . . . . . . . . . . . . 6.1
Chapter 7
Prevention of treaty abuse. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1
Chapter 8
Dividend Transfer Transactions . . . . . . . . . . . . . . . . . . . . . . . . . 8.1
Chapter 9
Capital Gains from Alienation of Shares or Interests of Entities Deriving their value Principally from Immovable Property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.1
Chapter 10
Anti-abuse Rule for Permanent Establishments Situated in Third Jurisdictions. . . . . . . . . . . . . . . . . . . . . . . . . . 10.1
Chapter 11
Application of Tax Agreements to Restrict a Party’s Right to Tax its Own Residents. . . . . . . . . . . . . . . . . . . . . . . . . 11.1
Chapter 12
Artificial Avoidance of Permanent Establishment Status through Commissionaire Arrangements and Similar Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.1
Chapter 13
Artificial Avoidance of Permanent Establishment Status through the Specific Activity Exemptions . . . . . . . . . . 13.1
Chapter 14
Splitting-up of Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.1
Chapter 15
Definition of a Person Closely Related to an Enterprise. . . . 15.1
Chapter 16
Improving Dispute Resolution. . . . . . . . . . . . . . . . . . . . . . . . . 16.1
Chapter 17
Arbitration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.1
Chapter 18
Final Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.1
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Table of contents Acknowledgement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii About the author. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi Contents at a glance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii Chapter 1 Background. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 1.1 Tax planning before Base Erosion and Profit Shifting (BEPS) Action Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 1.2 Introduction to BEPS Action Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 1.3 Multilateral Instrument (MLI). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 1.4 BEPS Action Plan and MLI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 1.5 Other BEPS Action Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6 1.6 MLI mechanics and application. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6 1.7 India’s MLI position. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.9 Chapter 2 Scope and Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 2.1 Background. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 2.2 Scope of MLI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 2.3 Important Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 2.3.1 Covered Tax Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 2.3.2 Party. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 2.3.3 Contracting Jurisdiction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 2.3.4 Signatory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 2.4 Other Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 Chapter 3 Fiscally Transparent Entities. . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 3.1 BEPS Action Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 3.2 Provisions of Article 3 of MLI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 3.2.1 Article 3(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 3.2.2 Article 3(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 3.2.3 Article 3(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6 3.2.4 Article 3(4). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6 3.2.5 Article 3(5). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.7 3.2.6 Article 3(6). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.8 3.3 India’s Position. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.10 3.4 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.10
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Chapter 4 Dual Resident Entities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 4.1 BEPS Action Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 4.2 Provisions of Article 4 of MLI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 4.2.1 Article 4(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 4.2.2 Article 4(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5 4.2.3 Article 4(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6 4.2.4 Article 4(4). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7 4.3 India’s Position. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.9 4.4 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.10 Chapter 5
Application of Methods for Elimination of Double Taxation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 5.1 BEPS Action Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 5.2 Provisions of Article 5 of MLI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 5.2.1 Article 5(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 5.2.2 Article 5(2) and Article 5(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4 5.2.3 Article 5(4) and 5(5). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5 5.2.4 Article 5(6) and 5(7). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.6 5.2.5 Article 5(8) and 5(9). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.7 5.2.6 Article 5(10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.8 5.3 Case Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.9 5.4 India’s Position. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.10 5.5 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.10 Chapter 6 Purpose of a Covered tax agreement. . . . . . . . . . . . . . . . . . . . 6.1 6.1 BEPS action plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1 6.2 Provisions of Article 6 of MLI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 6.2.1 Article 6(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 6.2.2 Article 6(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5 6.2.3 Article 6(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5 6.2.4 Article 6(4). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.6 6.2.5 Article 6(5). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.7 6.2.6 Article 6(6). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.7 6.3 India’s position. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.8 6.4 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.9 Chapter 7 Prevention of treaty abuse. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1 7.1 BEPS action plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1 7.2 Provisions of Article 7 of MLI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3 7.2.1 Article 7(1) to 7(5) - Principal Purpose Test (‘PPT’). . . . . . . . 7.3 7.2.2 Article 7(6) to 7(14) - Simplified LOB . . . . . . . . . . . . . . . . . . . 7.9 7.2.3 Article 7(15) and 7(16) - Reservation Paragraphs. . . . . . . . . 7.20 7.2.4 Article 7(17) - Notification Paragraphs. . . . . . . . . . . . . . . . . .7.22 xvi
Table of contents
7.3 India’s position. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.25 7.4 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.26 Chapter 8 Dividend Transfer Transactions. . . . . . . . . . . . . . . . . . . . . . . . 8.1 8.1 BEPS action plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1 8.2 Provisions of Article 8 of MLI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2 8.2.1 Article 8(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2 8.2.2 Article 8(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.4 8.2.3 Article 8(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5 8.2.4 Article 8(4). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5 8.3 India’s position. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.6 8.4 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.7 Chapter 9
Capital Gains from Alienation of Shares or Interests of Entities Deriving their value Principally from Immovable Property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.1 9.1 BEPS action plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.1 9.2 Provisions of Article 9 of MLI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2 9.2.1 Article 9(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2 9.2.2 Article 9(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.3 9.2.3 Article 9(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.3 9.2.4 Article 9(4). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.3 9.2.5 Article 9(5). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.4 9.2.6 Article 9(6). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.4 9.2.7 Article 9(7). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.5 9.2.8 Article 9(8). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.6 9.3 India’s position. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.7 9.4 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.8 Chapter 10 Anti-abuse Rule for Permanent Establishments Situated in Third Jurisdictions. . . . . . . . . . . . . . . . . . . . . . . 10.1 10.1 BEPS action plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.1 10.2 Provisions of Article 10 of MLI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.2 10.2.1 Article 10(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.2 10.2.2 Article 10(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3 10.2.3 Article 10(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3 10.2.4 Article 10(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.4 10.2.5 Article 10(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.5 10.2.6 Article 10(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.5 10.3 India’s position. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.6 10.4 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.6
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Chapter 11 Application of Tax Agreements to Restrict a Party’s Right to Tax its Own Residents. . . . . . . . . . . . . . . . . . . . . . . 11.1 11.1 BEPS action plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.1 11.2 Provisions of Article 11 of MLI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.2 11.2.1 Article 11(1) and 11(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.2 11.2.2 Article 11(3) - Reservation provisions. . . . . . . . . . . . . . . . . . 11.6 11.2.3 Article 11(4) - Notification provision. . . . . . . . . . . . . . . . . . . 11.6 11.3 India’s position. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.7 11.4 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.7 Chapter 12 Artificial Avoidance of Permanent Establishment Status through Commissionaire Arrangements and Similar Strategies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.1 12.1 BEPS action plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.1 12.2 Provisions of Article 12 of MLI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.3 12.2.1 Article 12(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.3 12.2.2 Article 12(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.8 12.2.3 Article 12(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.10 12.2.4 Article 12(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.11 12.2.5 Article 12(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.11 12.2.6 Article 12(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.12 12.3 India’s position. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.12 12.4 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.13 Chapter 13 Artificial Avoidance of Permanent Establishment Status through the Specific Activity Exemptions. . . . . . . . 13.1 13.1 BEPS action plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.1 13.2 Provisions of Article 13 of MLI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.4 13.2.1 Article 13(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.4 13.2.2 Article 13(2) - Option A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.4 13.2.3 Article 13(3) - Option B. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.5 13.2.4 Article 13(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.6 13.2.5 Article 13(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.8 13.2.6 Article 13(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.9 13.2.7 Article 13(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.9 13.2.8 Article 13(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.10 13.3 India’s position. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.10 13.4 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.11 Chapter 14 Splitting-up of Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.1 14.1 BEPS action plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.1
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14.2
Provisions of Article 14 of MLI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.2 14.2.1 Article 14(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.2 14.2.2 Article 14(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.4 14.2.3 Article 14(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.4 14.2.4 Article 14(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.5 14.3 India’s position. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.6 14.4 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.6 Chapter 15 Definition of a Person Closely Related to an Enterprise. . 15.1 15.1 BEPS action plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.1 15.2 Provisions of Article 15 of MLI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.2 15.2.1 Article 15(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.2 15.2.2 Article 15(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.4 15.3 India’s position. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.4 15.4 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.4 Chapter 16 Improving Dispute Resolution. . . . . . . . . . . . . . . . . . . . . . . 16.1 16.1 BEPS action plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.1 16.2 Provisions of Article 16 of MLI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.3 16.2.1 Article 16(1) to 16(3) - MAP Provisions. . . . . . . . . . . . . . . . . 16.3 16.2.2 Article 16(4) - Compatibility Clause. . . . . . . . . . . . . . . . . . . .16.6 16.2.3 Article 16(5) - Reservation. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.9 16.2.4 Article 16(6) - Notification clause. . . . . . . . . . . . . . . . . . . . . 16.13 16.3 India’s position on Article 16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.16 16.4 Provisions of Article 17 of MLI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.17 16.4.1 Article 17(1) - Corresponding Adjustments. . . . . . . . . . . . 16.17 16.4.2 Article 17(2) - Compatibility clause. . . . . . . . . . . . . . . . . . . 16.18 16.4.3 Article 17(3) - Reservation clause. . . . . . . . . . . . . . . . . . . . . 16.19 16.4.4 Article 17(4) - Notification clause. . . . . . . . . . . . . . . . . . . . . 16.20 16.5 India’s position on Article 17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.21 16.6 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.21 Chapter 17 Arbitration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.1 17.1 BEPS action plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.1 17.2 Provisions of Article 18 to Article 26 of MLI . . . . . . . . . . . . . . . . . . . 17.2 17.2.1 Article 18 – Choice to Apply Part VI . . . . . . . . . . . . . . . . . . . 17.2 17.2.2 Article 19 – Mandatory Binding Arbitration. . . . . . . . . . . . . 17.2 17.2.3 Article 20 – Appointment of Arbitrators. . . . . . . . . . . . . . . 17.13 17.2.4 Article 21 – Confidentiality of Arbitration Proceedings . . 17.16 17.2.5 Article 22 – Resolution of a Case Prior to the Conclusion of the Arbitration. . . . . . . . . . . . . . . . . . . . . . . . 17.17 17.2.6 Article 23 – Type of Arbitration Process . . . . . . . . . . . . . . . 17.18 xix
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17.2.7 Article 24 – Agreement on a Different Resolution. . . . . . . 17.24 17.2.8 Article 25 – Costs of Arbitration Proceedings. . . . . . . . . . . 17.25 17.2.9 Article 26 – Compatibility. . . . . . . . . . . . . . . . . . . . . . . . . . . 17.26 17.3 India’s position on Arbitration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.29 17.4 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.30 Chapter 18 Final Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.1 18.1 BEPS action plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.1 18.2 Provisions of Article 27 to Article 39 of MLI . . . . . . . . . . . . . . . . . . . 18.2 18.2.1 Article 27 – Signature and Ratification, Acceptance or Approval. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.2 18.2.2 Article 28 – Reservations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.3 18.2.3 Article 29 – Notifications. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.14 18.2.4 Article 30 – Subsequent Modifications of Covered Tax Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.21 18.2.5 Article 31 – Conference of the Parties. . . . . . . . . . . . . . . . . 18.21 18.2.6 Article 32 – Interpretation and Implementation. . . . . . . . . 18.22 18.2.7 Article 33 – Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.23 18.2.8 Article 34 – Entry into Force. . . . . . . . . . . . . . . . . . . . . . . . . 18.24 18.2.9 Article 35 – Entry into Effect. . . . . . . . . . . . . . . . . . . . . . . . . 18.25 18.2.10 Article 36 – Entry into Effect of Part VI . . . . . . . . . . . . . . . . 18.34 18.2.11 Article 37 - Withdrawal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.38 18.2.12 Article 38 – Relation with Protocols. . . . . . . . . . . . . . . . . . . 18.39 18.2.13 Article 39 – Depositary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.39 18.3 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.41
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Background Synopsis 1.1
Tax planning before Base Erosion and Profit Shifting (BEPS) Action Plan .................................................................... 1.1
1.2 1.3
Introduction to BEPS Action Plan ............................................. 1.3 Multilateral Instrument (MLI) ................................................... 1.4
1.4
BEPS Action Plan and MLI ........................................................ 1.5
1.5 1.6
Other BEPS Action Plans ........................................................... 1.6 MLI mechanics and application ................................................ 1.6
1.7
India’s MLI position ................................................................... 1.9
1.1
TAX PLANNING BEFORE BASE EROSION AND PROFIT SHIFTING (BEPS) ACTION PLAN
The international tax landscape has changed dramatically in the recent years. With political support of Group of 20 (G20) leaders, the international community has taken joint action to increase transparency and exchange information on tax-related matters, and to address weaknesses of the international tax system that create opportunities for Base Erosion and Profit Shifting (BEPS). As the economy became more globally integrated, so did corporations. Multi-national enterprises (MNE) now represent a large proportion of the global Gross Domestic Product (GDP). Also, intra-firm trade represents a growing proportion of the overall trade. Globalisation has resulted in a shift from country-specific operating models to global models based on matrix management organisations and integrated supply chains that centralise several functions at a regional or global level. These developments have been exacerbated by the increasing sophistication of tax planners in identifying and exploiting the legal arbitrage
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opportunities and the boundaries of acceptable tax planning, thus providing MNEs with more confidence in taking aggressive tax positions. Over time, the current rules have also revealed weaknesses that create opportunities for BEPS, which relates chiefly to instances where the interaction of different tax rules leads to double non-taxation. It also relates to arrangements that achieve no or low taxation by shifting profits away from the jurisdictions where the activities creating those profits take place. No or low taxation is not per se a cause of concern, but it becomes so when associated with practices that artificially segregate taxable income from the activities that generate it. In other words, tax policy concerns are created due to gaps in the interaction of different tax systems, and in some cases because of the application of bilateral tax treaties, income from cross-border activities may go untaxed anywhere or be only unduly taxed less. Some common examples of BEPS are provided below:
1.2
(1)
ABC Ltd a multinational company earns income from various countries such as India, the UK, the USA, Australia etc and has a local presence in all such jurisdictions, but it forms a company in Mauritius, a low tax jurisdiction, and earns almost all its incomes in the region but incurs huge expenses in all the other jurisdictions. Using such a planning, ABC Ltd is able to transfer all its profits from a high tax jurisdiction to low tax jurisdiction (ie Mauritius) artificially and pay low tax.
(2)
Incurring high debt in a high tax jurisdiction provided by a related party in low tax jurisdiction consequently results in a high tax deduction on account of interest expenses in the high tax jurisdiction.
(3)
Threshold for a project permanent establishment (PE) under the India-Germany tax treaty is six months. Therefore, if a project requires more than six months, an MNC can split the contract between its group companies in such a manner that the time limit for each contract does not exceed six months and therefore avoid PE establishment artificially.
(4)
The spread of digital economy also poses challenges for international taxation. The digital economy is characterised by an unparalleled reliance on intangible assets, the massive use of data (notably personal data), the widespread adoption of multi-sided business models capturing value from externalities generated by free products, and the difficulty of
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determining the jurisdiction in which value creation occurs. This raises fundamental questions on how enterprises in the digital economy add value and make profits, and how the digital economy relates to the concepts of source and residence or the characterisation of income for tax purposes.
1.2
INTRODUCTION TO BEPS ACTION PLAN
The 2008 financial crisis led to an increased global focus on such practices. In September 2013, the G20 Leaders endorsed the BEPS Action Plan and developed the same with Organisation for Economic Cooperation and Development (OECD) members. Based on this Action Plan, the OECD and G20 countries developed and agreed upon a comprehensive package of measures in just two years. These measures were designed to be implemented domestically and through tax treaty provisions in a co-ordinated manner, supported by targeted monitoring and strengthened transparency. The BEPS Action Plan identified 15 actions to address BEPS in a comprehensive manner and set out deadlines to implement those actions. The 15 action plans are: ●
Action 1: Address the tax challenges of the digital economy
●
Action 2: Neutralise the effects of hybrid mismatch arrangements
●
Action 3: Strengthen Controlled Foreign Corporation (CFC) rules
●
Action 4: Limit base erosion via interest deductions and other financial payments
●
Action 5: Counter harmful tax practices more effectively, taking into account transparency and substance
●
Action 6: Prevent treaty abuse
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Action 7: Prevent the artificial avoidance of PE status
●
Action 8, 9, 10: Assure that transfer pricing outcomes are in line with value creation
●
Action 11: Establish methodologies to collect and analyse data on BEPS and the actions to address it
●
Action 12: Require taxpayers to disclose their aggressive tax planning arrangements
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Multilateral Instruments, an Indian Perspective
1.3
Chapter 1
●
Action 13: Re-examine transfer pricing documentation
●
Action 14: Make dispute resolution mechanisms more effective
●
Action 15: Develop a multilateral instrument
MULTILATERAL INSTRUMENT (MLI)
The above action plans set out a variety of measures ranging from new minimum standards, the revision of the existing standards, as well as common approaches which will facilitate the convergence of national practices, and guidance drawing on the best practices. In particular, four minimum standards were agreed upon, to tackle issues in cases where no action by some countries or jurisdictions would have created negative spillovers (including adverse impacts of competitiveness) on others. Their consistent implementation will allow countries to protect their taxable base. The above action plans provided measures which should be introduced in local laws of the countries and also provided measures to be introduced in double tax avoidance agreements (also termed as tax treaty) of countries. With more than 3,000 tax treaties, updating of the BEPS Action Plans in a tax treaty would be burdensome and time consuming. Therefore, Action 15 of the BEPS Action Plan recognised MLI, a multilateral treaty, as a mechanism that would allow a more coordinated approach with immediate effect and retaining the flexibility required to implement the measures in a broadly consensual framework to tackle BEPS. On 24 November 2016, the OECD released the widely anticipated text of the MLI to implement tax treaty-related measures. An explanatory statement that accompanied the release provided clarification on the approach taken and how each article is intended to affect treaties covered by the MLI. As of January 29, 2019, around 87 countries (eg India, Australia, the UK, France, the Netherlands, Singapore, Ireland etc) have become signatories to the MLI and 19 countries (eg Australia, France, Ireland, Jersey etc) have deposited the instrument of ratification, acceptance and approval to make ther MLI effective in the respective countries’ tax treaties1.
1
1.4
http://www.oecd.org/tax/treaties/beps-mli-signatories-and-parties.pdf
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Background
While India is a signatory to the MLI, the country has not yet deposited the instrument of ratification, acceptance and approve to make the MLI effective.
1.4
BEPS ACTION PLAN AND MLI
The MLI includes the provisions of BEPS Action Plan with respect to amendment in treaty. The BEPS actions that are included in MLI and India’s position are as follow: Action Plan
MLI Article
India’s position
Action 2
Article 3 - Transparent Entity
Reserved right to not apply
Article 4- Dual Residency Entities
Opted for provision
Article 5- Application of methods for elimination of double taxation
Reserved right to not apply
Action 6
Article 6 - Purpose of Covered Applicable to tax treaty Tax Agreement minimum standard Article 7 - Prevention of treaty Opted for Principle Purpose abuse Test (minimum standard) plus Simplified Limitation of benefit clause Article 8 - Dividend transfer transaction
Opted for provision except for the India-Portugal tax treaty
Article 9 - Indirect transfer of immovable property
Opted for provision
Article 10 - Anti abuse rule for No specific reservation PE in third country
Action 7
Article 11 - Restriction on party’s right to tax its own residents
No specific reservation
Article 12 - Commissionaire Arrangement
Opted for provision
1.5
Multilateral Instruments, an Indian Perspective
Action Plan
Action 14
MLI Article
India’s position
Article 13- Specific activity exemption
Opted Option A
Article 14-Spliting up contracts
No specific reservation
Article 16- Mutual Agreement Reserved right to not apply Procedure Article 17- Corresponding Adjustments
1.5
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Reserved right to not apply
OTHER BEPS ACTION PLANS
Other BEPS Action Plans provide recommendations for the amendment of the local laws of the country and not tax treaties. Therefore, these are not covered under the MLI. Other BEPS Action Plan introduced in Indian domestic tax law are as follow: Action Plan
India’s Domestic tax law
Action 1
● ●
Equalisation levy Significant Economic Presence (Introduced in Finance act 2018)
Action 3
●
Place of Effective Management regulations can be said to be similar to CFC rules recommendation
Action 4
●
Section 94B - Limit for interest deduction
Action 5
● ●
Section 115BBF – Patent box regime Amendment to AAR forms to implement Action 5 on tax rulings exchange
Action 8-10
●
Several guidance of BEPS Action plan is in line with Indian transfer pricing regulation and therefore, there is no discussion on application of Action 8-10
Action 13
●
Country by Country (CbC) reporting and master file requirement
1.6
MLI MECHANICS AND APPLICATION
The MLI would not replace the provisions of tax treaties but would be read along with tax treaties. As mentioned earlier, the MLI documents 1.6
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Background
have been issued along with the explanatory statement to clarify how to read the MLI and have provided clarification over the provisions of the same. Given that the provisions of the MLI are as per the BEPS Action Plans, the commentary issued by the OECD with respect to each BEPS Action Plan would be useful to interpret the provisions of the MLI. Although some of the provisions of the BEPS Action Plan would differ from the provisions of the MLI, such difference is not substantial. Accordingly, the provisions of the MLI can be interpreted by reading all the three documents – the MLI provisions, explanatory statement and relevant paragraphs of BEPS Action Plans. The recommendation of the OECD outline certain minimum standards in the MLI, which should be applied by all the countries signing and applying the MLI. Apart from the minimum standard, the MLI provides flexibility to apply the other provisions in the following ways: ●
Specifying tax treaties to which the MLI applies: A country can select the tax treaties to which the MLI provisions would apply. Where both the countries of a tax treaty notify each other for the purpose of an MLI, only then would the provisions of the MLI apply to such tax treaty. For instance, India has notified tax treaty with 93 countries for the purpose of MLI, including Germany. However, Germany has not notified the India-Germany tax treaty for the purpose of MLI and therefore, the MLI provisions would not apply to the India-Germany tax treaty.
●
Opting out of provisions or part of the provisions: A country may opt out of a specific provision of the MLI (which is not a minimum standard) or part of the provisions of the MLI, depending on such option given in the MLI. For instance, Singapore has reserved rights to apply Article 12 of the MLI – “Artificial Avoidance of Permanent Establishment Status through Commissionaire Arrangements and Similar Strategies”. Therefore, Article 12 would not apply to any of Singapore’s tax treaties, including the IndiaSingapore tax treaty.
●
Opting out of provisions or part of provision which is already covered in the existing tax treaty: A country may opt out from the applicability of the provisions of the MLI, wherein its tax treaty already has such provision or has provisions more specific than the provisions of the MLI. For instance, India has reserved the rights to apply Article 8 of the MLI – “Dividend Transfer Transactions” – for 1.7
Multilateral Instruments, an Indian Perspective
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the India-Portugal tax treaty as it already contains a provision more specific than Article 8 of the MLI. ●
Choosing to apply optional provisions and alternative provisions: Countries have an option to apply the additional provisions or any one of the alternative provisions if the provision of MLI provides such option. For instance with respect to Article 7 of the MLI –“Prevention of Treaty Abuse” – India has chosen to apply the “Simplified Limitation of Benefit” provisions along with “Principle Purpose Test”.
The provisions of the MLI are structured in the following manner: ●
Law: This section provides the actual provisions of the BEPS Action Plan applicable in case of a tax treaty. The provisions may be same as that of the BEPS Action Plan or there may be certain modifications from the BEPS Action Plan’s provision.
●
Compatibility clause: Where the provisions of the MLI are already covered in a tax treaty or a similar provision is covered in a tax treaty or where there is a conflict between the provisions of a tax treaty and the MLI, this section provides for compatibility wherein the MLI provision may supersede or apply in place of the provision of a tax treaty, if so notified by a country.
●
Reservation clause: As mentioned earlier, almost every MLI provision (except the minimum standard) has a clause wherein the countries have an option to reserve the right to apply the whole or a part of the provisions of the MLI.
●
Notification clause: The notification clause provides for countries to notify the existing provisions (similar to the provisions of the MLI) of tax treaties to the Secretary-General of OECD (depository) and clarify whether it wants to apply the provisions of the MLI in place or in the absence of such provision or does not want to apply the MLI provision as per reservation clause. The notification clause also provides for a country to notify the option in case of optional provisions in the MLI.
Part VII of the MLI provides for the mechanics by which its provisions becomes effective for countries and would apply to the tax treaties notified by that country.
1.8
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1.7
Background
INDIA’S MLI POSITION
Pursuant to the cabinet’s approval, India’s Finance Minister participated in the signing of the MLI in Paris on 7 June 2017. At the signing of the MLI, India gave a provisional list of expected reservations and notifications. India notified 93 tax treaties, indicating the intention of applying the selected MLI provisions to all these tax treaties. The signing of the MLI would have a major impact on taxation of crossborder businesses. Its entry into effect will have significant repercussions for Indian businesses with cross-border operations and foreign investors keen on investing in India. Specifically, the provisions of the MLI requiring the mandatory amendment of bilateral tax treaties to allow for certain minimum standards to be applied in respect of bilateral treaties. Importantly, the minimum standards include the denial of treaty benefits if obtaining those benefits was one of the purposes of a transaction resulting in that benefit. From a business point of view, this will lead to difficulties for businesses based on the manner of subjective application. While these provisions raise the level of uncertainty when it comes to structuring business operations, their applicability, alongside the recently introduced Indian General Anti Avoidance Rules, may reduce the ease of doing business. The few major countries that have trade relationships with India and have signed the MLI include the UK, Mauritius, Canada, Germany, Italy, Russia. Though Germany has signed the MLI, it has not notified the India-Germany tax treaty. Therefore, the India-Germany tax treaty would be out of the purview of the MLI. Some countries such as the USA and Brazil have not signed the MLI. Lastly, it would be very important to also check the positions of the countries that have notified the Indian tax treaties on provisions of the MLI because these provisions would apply only if both the countries notify the provisions. In the subsequent chapters, we would analyse the various provisions of MLI and provide the impact of such provisions on the Indian tax treaties with respect to several major countries.
1.9
Multilateral Instruments, an Indian Perspective
1.10
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