RSM India

Newsflash - The OECD's Multilateral Instrument and its Impact on Indian Tax Treaties

In October 2015, the Organization for Economic Co-operation and Development (‘OECD’) had issued the final Base Erosion and Profit Shifting (BEPS) reports and released  multilateral instrument (MLI) in November 2016 to swiftly implement treaty measures on hybrid mismatch arrangements, treaty abuse, permanent establishment, and mutual agreement procedures by modifying existing  bilateral tax treaties. MLI was developed by more than 100 jurisdictions and signifies a milestone in the International tax arena as it  would  effectively update almost 3000 bilateral tax treaties at one go.

As a step towards this direction, on 7th June 2017, India along with other 67 countries has signed the MLI in Paris. It is likely that the first modifications to covered treaties will become effective in the course of 2018. The timing of entry into effect of the modifications is linked to the completion of the ratification procedures in the countries that are parties to the covered tax treaty.

With this development, so many questions arise as to how treaty would be interpreted post MLI or whether the  Principal Purpose Test (PPT) in Indian DTAAs would make it more difficult for Multinational enterprises (MNEs)  to enjoy treaty benefits, will MNEs have to restructure their business in light of the BEPS Measures, whether it will end treaty shopping.

Towards this end, it is important to understand the MLI and its potential impact on Indian tax treaties. In this newsflash, we have attempted to cover these aspects and discussed the nuances of the MLI provisions based on our understanding.

Trust you will find the same useful.

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