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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
The Multilateral Convention Panel Discussion
15 June 2017
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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
Need for BEPS
215-06-2017
Income tax developed in the 19th century - an alignment between economic reality and tax rules
Globalisation resulted in the rise of multinationals (MNCs) with operations in various jurisdictions – opportunity to look at tax ‘cost’ savings
Saving = erosion of tax bases in high tax countries and shifting taxable profits to no or low tax jurisdictions
Significant revenue losses through tax leakages in many countries
G20 countries and OECD felt a need to end tax avoidance or evasion by way of Base Erosion Profit Shifting (BEPS) Project
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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
Changes to the international taxation landscape
BEPS Actions
315-06-2017
Action 6: Prevent treaty abuse
Action 7: Prevent the artificial avoidance of permanent establishment status
Action 8: Consider transfer pricing for intangibles
Action 9: Consider transfer pricing for risks and capital
Action 10: Consider transfer pricing for other high-risk transactions
Action 15: Development of amultilateral instrument foramending bilateral treaties
Action 11: Establishmethodologies to collect andanalyse data on BEPS andactions addressing it
Action 12: Require taxpayers todisclose their aggressive taxplanning arrangements
Action 13: Re-examine transferpricing documentation
Action 14: Making disputeresolutions more effective
Action 2: Neutralise the effectsof hybrid mismatcharrangements
Action 3: Strengthen CFC rules
Action 4: Limit base erosion viainterest deductions and otherfinancial payments
Action 5: Counter harmful taxpractices more effectively,taking into accounttransparency and substance
Action 1: Address the taxchallenges of the digitaleconomy
Action Plan on Base Erosion and
Profit Shifting (BEPS)
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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
Development of MLI – Timeline
415-06-2017
July 2013: Submission of BEPS Action Plans
February 2015: Formation of ad-hoc group for developing MLI
October 2015: Final BEPS reports released
November 2016: Adoption of MLI text by the ad-hoc group
June 2017: MLI’s first signing ceremony
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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
68 jurisdictions have signed the MLI on 7 June 2017
India has signed the MLI and notified tax treaties of 93 countries including Mauritius, Singapore, United States ofAmerica, Netherlands, etc.
United States of America has not signed the MLI
Mauritius has deferred signing of MLI till 30 June 2017
Notable treaty partners of India such as United Arab Emirates, Malaysia, Brazil have yet not signed the MLI
Germany and China have not notified their tax treaties with India
Totally, 1105 treaties covered under the MLI – aim is to cover most of existing 3000 tax treaties
All positions notified under the MLI are currently provisional – final positions will be notified subsequently
How does MLI Apply?
515-06-2017
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How does MLI Apply?
615-06-2017
What are the pre-requisites for application of MLI?
Both countries should have signed the MLI
MLI should have entered into force in both countries
Concerned tax treaty should be duly notified as a Covered Tax Agreement by both countries
When provisions of MLI would apply to a covered tax agreement?
Generally, provision of MLI will not apply unless both countries have specifically agreed to it
Can MLI provisions be treaty specific?
Selective application of MLI provisions to a particular country is not permitted, unless that country’s tax treaty is not a covered tax agreement at all
Accordingly, MLI positions of one country (i.e. whether a provision is applicable or not) would have to be constant across all covered tax agreements
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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
MLI does not replace existing tax treaties
Parallel text to interpret and apply provisions of existing tax treaties
Expected to be operational from late 2018 or early 2019
MLI operation based on Vienna Convention’s principle of ‘later in time’
Does not prohibit or hamper bilateral modifications of tax treaties
MLI Provisions vis-à-vis Existing Bilateral Treaties
715-06-2017
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India’s Position on Prevention of Treaty Abuse – An Overview
815-06-2017
Actions Required Article of MLI Whether minimum standard under MLI? India’s Position
Purpose of a Covered Tax Agreement
Article 6 Yes Adopted
Prevention of Treaty Abuse
Article 7 Yes (to the extent of PPT) Adopted
Dividend Transfer Transactions
Article 8 No Adopted
Transactions dealing with indirect transfer of Immovable Property
Article 9 No Adopted
Anti-abuse rule for PE in 3rd Jurisdictions
Article 10 No Adopted
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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
Article 6 of MLI – requires every covered tax agreement to include preamble
Preamble to bring out that the purpose of the tax treaty is to:
eliminate double taxation
without creating opportunities for non-taxation or reduced taxation
through tax evasion or avoidance
including through treaty-shopping arrangements aimed at obtaining reliefs for the indirect benefit of residents of third jurisdictions
The preamble would assist in interpretation and application of tax treaty provisions in the required spirit
This article being a minimum standard will apply to all of India’s tax treaties who are signatories to the MLI
Article 6 of MLI – Preamble
915-06-2017
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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
Article 7 of MLI requires:
implementing a Principal Purpose Test (PPT) only (minimum standard); or
a PPT along with SLOB (optional); or
a DLOB (instead of PPT or SLOB) in line with BEPS recommendations (optional)
PPT to deny treaty benefits if one of the principal purposes of an arrangement or transaction is to obtaintax treaty benefits
PPT is broad and generic whereas supplementary SLOB is more defined and clear with suitable carve outs
India has opted for PPT plus SLOB
However, Netherlands, Singapore, Cyprus, France , Luxembourg, have not opted for SLOB
Accordingly, only PPT should apply in such tax treaties
Interesting to understand interplay between PPT and GAAR
Article 6 of MLI – Prevention of Treaty Abuse
1015-06-2017
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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
India, Singapore and Cyprus have covered the recently re-negotiated treaties in the MLI
Mauritius has given commitment to sign the MLI by 30 June 2017
Singapore and Cyprus have not opted for:
SLOB
dividend transfer transactions
source-based taxation of capital gains from sale of share or comparable interest in entity deriving value fromimmovable property in source country
Position of Mauritius expected to be on similar lines as Singapore and Cyprus to maintain parity in Indiancontext
Nothing may really change, except introduction of PPT
Introduction of PPT – Will the grandfathering provided under Mauritius and Cyprus tax treaties to investments inshares before 1 April 2017 be challenged under PPT if not subject to LOB currently
Future of Tax Treaties with Mauritius, Singapore and Cyprus
1115-06-2017
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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
Commissionaire arrangement
Specific activity exemption – preparatory and auxiliary services
Splitting-up of contracts
Action Plan 7 – Artificial Avoidance of PE
1215-06-2017
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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
Commissionaire Arrangements
Pre BEPS
Typical conditions for constituting DAPE
Habitually concludes contract
Habitually maintain stock of goods
Habitually secures order
Post BEPS
Commissionaire Arrangement – conditions
Habitually concludes contracts or plays principal roleleading to conclusion of contract – without materialmodification by foreign company
New inclusion – contract of services and transfer ofownership/granting of right to use property of foreigncompany covered – contract may not be in name offoreign company
1315-06-2017
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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
Commissionaire Arrangements
Impact on Liaison Office
Activities of liaison office – whether playing principal role?
Whether activities are preparatory and auxiliary?
1415-06-2017
Impact on EPC Contracts
Taxability trigger – onshore services
Impact – onshore services split between entities
Impact on Marketing Entities
DAPE conditions – wider and subjective
Operations in India – needs a relook
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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
Article 4 of the MLI deals with determination of residency of dual resident entities (tie-break)
Such cases to be solved only by mutual agreement of competent authorities
in absence of mutual agreement, no relief or exemption would be granted unless otherwise provided
Factor such as
POEM
place of incorporation or constitution and
other relevant factors
would be considered for tie-breaking
Countries that have opted for this article along with India
Australia, Netherlands, United Kingdom
Countries that have not opted for this article along with India
Singapore, Cyprus, Luxembourg, Denmark
Article 4 of MLI – Tie-break For Dual Resident Entities
1515-06-2017
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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
Article 4 of MLI – Impact on Key Treaties
1615-06-2017
Treaty Partners Pre BEPS Adoption of Article 4 of MLI Post BEPS
Australia POEM Yes MAP replaces POEM
Netherlands POEM Yes MAP replaces POEM
United Kingdom POEM Yes MAP replaces POEM
Japan MAP Yes MAP provisions strengthened
Singapore POEM NoExisting article remains unchanged as Singapore has opted out of this article
Cyprus
- POEM,- If cannot be determined by
POEM, then by MAP within 2 years
NoExisting article remains unchanged as Cyprus has opted out of this article
Luxembourg
- POEM,- If cannot be determined by
POEM, then by Mutualagreement
NoExisting article remains unchanged as Luxembourghas opted out of this article
Denmark POEM NoExisting article remains unchanged as Denmark has opted out of this article
CanadaMAP, in absence of which no tax benefits available
NoExisting article remains unchanged as Canada has opted out of this article – however, similar to Article 4 of MLI
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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
Fiscally transparent entities are “pass-through” entities i.e. income derived by such entities is not taxed at an entity level but at the level of individual partners or members
Article 3 permits fiscally transparent entities to claim tax treaty benefits in their home country to the extent its income is treated as income of a resident of such home country (i.e. in hands of their partners or members
Availability of tax treaty benefits to such entities in India has been subject to litigation unless specifically provided under the tax treaty (e.g. United States of America, United Kingdom) – authorities have however ruled in favour of taxpayers in the past
India has chosen not to apply Article 3 to any of its Covered Tax Agreements
Existing provisions of Indian tax treaties will remain unchanged and possible litigation will continue
Article 3 – Fiscally Transparent Entities
1715-06-2017
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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
Advance Pricing Agreement (APA) is a dispute avoidance tool (agreement in advance)
Mutual Agreement Procedure (MAP) is a dispute resolution tool
Article 17 of MLI covers provisions relating to corresponding adjustments
India has opted for these provisions, except for covered tax agreements where these provisions already exist
Will facilitate bilateral APAs/MAPs for avoiding / resolving its transfer pricing and double taxation related disputes
Countries like France, Belgium, etc. are signatories to the MLI and have opted for the corresponding adjustment clause in the MLI
For Germany – although it has signed the MLI, it has not notified treaty with India to be covered as of now. Therefore, MAP/bilateral APA will still not be possible as of now
MLI Impact on Transfer Pricing
1815-06-2017
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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
Entry into Force
For the first five countries that ratify MLI 1st day of the month after expiry of 3 calendar months after deposit of 5th instrument of ratification or acceptance or approval
For countries that ratify subsequently 1st day of the month after expiry of 3 calendar months after deposit of instrument of ratification or acceptance or approval
India’s position on entry into effect initiation date – 30 days after both countries notify completion of internal procedures
on withholding taxes – applicable to credits or payments that occur in the taxable year beginning after the initiation date
on other taxes – applicable to taxable year beginning after expiry of 6 months from the initiation date
For instance, India-Australia tax treaty, if date of notification to the OECD of completion of internal procedures by India is 1 March 2019 and by Australia is 1 January 2019, then initiation date will be 31 March 2019 i.e. 30 days after the later of the aforesaid dates
applicability for withholding taxes – credits or payments that occur in FY 2019-20 (taxable year starting after 31 March 2019)
applicability for other taxes – in FY 2020-21 i.e. taxable year starting after expiry of 6 months from initiation date of 31 March 2019
Entry into Force or Entry into Effect of MLI
1915-06-2017
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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
Multinationals to understand whether their strategies are BEPS-ready
Multinationals to analyse their group functions in light of substance and transfer pricing policies
Multinationals to re-check financing options, treasury functions and operating model
Specifically
BEPS impact on sales and marketing operations from PE perspective
Limited Risk Distributor model
Limit on interest deduction
Carrying out a value chain analysis of the overall value chain
Employee mobility and recruitment
Action Points for Multinationals in India
2015-06-2017
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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
MLI is a landmark change from perspective of taxation of cross border transactions
Interpretation of tax treaty no longer straightforward or simple
Tax treaty to be read along with MLI provisions (including inclusions or exclusions or reservations)
Important for businesses and advisors to analyze and understand the potential impact of MLI on commercial operations
Conclusion
2115-06-2017
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Winner of India Tax Firm of the Year 2016 at the Asia Tax Awards
About SKP
2215-06-2017
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