Answer By law4u team
The Multilateral Instrument (MLI) is a key outcome of the OECD/G20 Base Erosion and Profit Shifting (BEPS) project aimed at curbing tax avoidance strategies that exploit gaps and mismatches in international tax rules. The MLI allows countries to swiftly amend their existing bilateral tax treaties to implement BEPS measures without renegotiating each treaty separately. India is a proactive participant in the MLI framework, using it to strengthen its tax treaty network against abuse and improve tax transparency.
Key Objectives of the MLI:
Prevent Treaty Abuse:
The MLI introduces anti-abuse provisions such as the Principal Purpose Test (PPT) to prevent treaty shopping and ensure treaties are used only for legitimate business purposes.
Strengthen Permanent Establishment (PE) Rules:
Expands and clarifies the definition of PE to capture more taxable business activities, reducing tax avoidance.
Improve Dispute Resolution:
Enhances the Mutual Agreement Procedure (MAP) to resolve tax treaty disputes more efficiently and reduce double taxation.
Increase Transparency and Exchange of Information:
Incorporates provisions to improve tax information exchange and cooperation between countries.
India’s Involvement and Implementation:
India signed the MLI in June 2018 and ratified it in July 2019.
The MLI came into effect for India on 1 January 2020, applying to its covered tax agreements (CTAs) with other MLI signatories.
India has used the MLI to implement stricter anti-abuse rules, amend PE definitions, and improve dispute resolution in its tax treaties.
India has opted for provisions that align with its domestic tax policies and economic interests.
Through MLI, India aims to protect its tax base from aggressive tax planning and enhance compliance with international standards.
Impact of MLI on India:
Strengthens India’s ability to tax cross-border transactions fairly.
Reduces opportunities for treaty abuse and tax avoidance by multinational enterprises.
Facilitates smoother resolution of tax disputes with treaty partners.
Aligns India’s tax treaties with global BEPS standards, improving investor confidence.
Example:
Before MLI, some tax treaties allowed entities to route investments through low-tax jurisdictions to avoid Indian taxes. With MLI’s Principal Purpose Test (PPT) and anti-abuse provisions, such treaty shopping is significantly curtailed, ensuring that benefits are granted only for genuine business activities.
Conclusion:
The MLI is a transformative tool in the global fight against tax avoidance. India’s active participation reflects its commitment to uphold tax integrity, enhance transparency, and protect its revenue interests in an increasingly globalized economy.