The Central Board of Direct Taxes (CBDT) on Tuesday said that India has ratified the Multilateral Convention to Implement Tax Treaty Related Measures (MLI) to prevent Base Erosion and Profit Shifting (BEPS), which will pave way for amendments to double taxation avoidance agreements (DTAA) with the countries signatories to the convention to plug revenue leakages.
"On 25th June, 2019, India has deposited the instrument of ratification to OECD, Paris along with its final position in terms of Covered Tax Agreements (CTAs), reservations, options and notifications under the MLI, as a result of which MLI will enter into force for India on October 1, 2019 and its provisions will have effect on India's DTAAs from FY20-21 onwards," CBDT said in a statement.
The board said that the MLI will modify India's tax treaties 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.
It added that the MLI will be applied alongside existing tax treaties, modifying their application in order to implement the BEPS measures. "Out of 93 CTAs notified by India, 22 countries have already ratified the MLI as on date and the DTAA with these countries will be modified by MLI," the board said.
After the MLI takes effect, India's DTAA will have a new Preamble and the Principal Purposes Test (PPT). The changes would also lead to curbing of artificial avoidance of Permanent Establishment (PE) status through various arrangements. Further, avoidance of PE formation through specific activity exemptions and splitting up of contracts would also be prevented, the board said.
Additionally, the new DTAAs would help governments in curbing avoidance of capital gains from alienation of shares/interests deriving value principally from immovable property. It would also plug dividend transfer transactions that are intended to lower withholding taxes payable on dividends artificially would be prevented.
MLI is an outcome of the OECD/G20 project to tackle Base Erosion and Profit Shifting (the "BEPS Project"). This project was designed to work on anti-evasion measures that could curb tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations. Such geographies have little economic activity, resulting in little or no overall corporate tax being paid.