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Multilateral Convention to Implement Tax Treaty Related Measures

Topic:

Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests.

 

Multilateral Convention to Implement Tax Treaty Related Measures

 

What to study?

For prelims and mains: key features, need for and significance of the convention.

 

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 (MLI).

 

Background:

India has already ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting.

 

What you need to know about the convention?

The Convention is an outcome of the OECD / G20 BEPS Project to tackle base erosion and profit shifting through 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, resulting in little or no overall corporate tax being paid.

The Convention implements two minimum standards relating to prevention of treaty abuse and dispute resolution through Mutual Agreement Procedure.

The Convention 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 Agreements. Instead, it will be applied alongside existing tax treaties, modifying their application in order to implement the BEPS measures.

The Convention ensures consistency and certainty in the implementation of the BEPS Project in a multilateral context. The Convention also provides flexibility to exclude a specific tax treaty and to opt out of provisions or parts of provisions through making of reservations.

A list of Covered Tax Agreements as well as a list of reservations and options chosen by a country are required to be made at the time of signature or when depositing the instrument of ratification.

 

Benefits for India:

  • The Multilateral Convention will enable the application of BEPS outcomes through modification of existing tax treaties of India in a swift manner.
  • It is also in India’s interest to ensure that all its treaty partners adopt the BEPS anti-abuse outcomes.
  • The Convention will enable curbing of 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.

 

Sources: the Hindu.