Multinational Entities (MNE) through aggressive international tax planning are shifting profit to the locations where they are paying no tax or very less tax. Being mindful of this fact, more than 100 tax jurisdictions came together to defeat the ill intentions of these MNEs under the OECD/G20 BEPS project. The key object of this project to address certain hybrid mismatch arrangements, prevent treaty abuse, address artificial avoidance of permanent establishment status, and improve dispute resolution. Understanding the urgency led to the birth of Multilateral Instrument, an innovative instrument, to modify more than 3000 bilateral/multilateral agreements. Here are some of the key concepts of “Multilateral Instrument (MLI) – An Introduction” in Q & A form:
A: Multilateral Instrument(MLI) is single agreement/instrument that enable to modify multiple bilateral tax treaty in a synchronised efficient manner to implement tax treaty related BEPS measures recommend by BEPS Action Plan-2 (Neutralising the effect of hybrid mismatch arrangements), Action Plan-6 (prevention of treaty abuse), Action Plan-7 (prevention of artificial avoidance of PE status), and Action Plan-14 (making DRP mechanism more effective).
MLI will not replace the existing tax treaties, instead will apply alongside the existing treaties and either supplement, complement, super side or modify their application unlike protocol to a single existing treaty, which would directly amend the text of the treaty.
A: CTA-Covered tax agreement- an existing bilateral tax treaty which is to be modified by the provisions of MLI is called as CTA. To qualify CTA all the 3 conditions must be satisfied simultaneously;
i) both the contracting jurisdiction have sign the MLI; and
ii) both the contracting jurisdiction have ratified the MLI as per their domestic procedure; and
iii) both the contracting jurisdiction have deposited the rectified MLI document with registry at OECD.
A: MLI provides two important dates for implementation of CTA are:
(1) Entry into force MLI Article-34: Initially MLI to be in force when at least 5 jurisdictions have deposited ratified MLI documents with OECD i.e. 1.7.2018 (as on this date initial condition satisfied. the fixed date) and after that date Entry into force shall be 1st day of the month following the expiry of 3 months from the date of deposit of ratified copy of MLI with OECD. Example-1: India has deposed the ratified MLI documents with OECD on 25.6.2019 therefor for India Entry into force of MLI is 1.10.2019 for all CTAs. (As Entry into force is qua Country not qua each CTA)
(2) Entry into Effect MLI Article-35: Entry into force is effective for the determination of Entry into Effect to be as under:
(i) Once the Entry into force date is determined for both jurisdictions the latter Entry into force MLI date will be “cut-off date” used in determining Entry into force MLI date.
(ii) Entry into Effect date to be determined separately w.r.t. A) Withholding taxes and B) Other taxes
(A) For withholding taxes, on or after 1st day of calendar year or taxable years if the Country so choose, India choose Taxable year that begins on or after the cut-off date as above.
Example-2: The Cut-off date for India is 1.10.2019 as in example-1 above, Entry into Effect date for withholding taxes is 1.4.2020.
(B) For other taxes the MLI Entry into Effect for the taxable period beginning on or after the expiration of six calendar months (or shorter period, if so notified by all parties to CTA) from the “cut-off date” as above.
Example-3: The Cut-off date for India is 1.10.2019 as in example-1 above, Entry into Effect date for other taxes is also 1.4.2020.
(3) So for the CTA between India and such Contracting Jurisdiction that have ratified and deposited MLI with OECD till 30.6.2019, the Entry into Effect date for both withholding taxes and other purpose shall be same i.e. FY 2020-2021. It seems India chooses the date of ratification accordingly.
A: There are bare some minimum recommendations of OECD and G20 BEPS project which have been agreed to be adopted and implemented by the signatories to MLI on non-negotiable basis (marginal exceptions) like a country can choose to opt out of minimum standard provisions of MLI, only in limited circumstances where existing CTA already have adequate provisions similar to minimum standard or it is willing to negotiate a comparable provision with treaty partner.
These minimum standards are:
A: The MLI offers various flexibilities to the Contracting Jurisdictions through the mechanism of reservations. Some of the key points to understand reservation under MLI are as under:
A: Compatibility is again a mechanism to align the various provisions of CTA with the relevant article of MLI based upon the reservations and options of the contracting jurisdictions notified to the depository. To achieve Compatibility some terms are used in MLI, here is the terms and its impact on CTA:
A: Post MLI the reading of tax treaties would requires altogether a different approach. As MLI does not amend treaties like an amending protocol. Instead, the MLI modifies the treaties by sitting alongside the treaties. In the absence of amended text of CTA, it may be challenge for both taxpayers and tax authorities. Therefore, an efforts has been made by contracting jurisdictions along with OECD to make available a MLI synthesized text of CTAs for facilitating the uses with a disclaimer of transferring risk on user.
The beauty MLI as an instrument not only to ensure achieving its defined objective but also to safeguard the sovereignty of every Contracting Jurisdiction. Amending more than 3000 bilateral tax treaties in a single stroke through Multilateral Instruments- A Big Challenge for tax professionals in the times to come while advising the clients.
(Disclaimer: This content is meant for our clients or professional friends only for stimulating discussion on the subject matter not to frame any commercial opinion. All efforts are made to compile correctly with no guarantee of extreme accuracy)
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