All through the decades Big Corporates escaped paying taxes by operating from tax havens. This process is called Base Erosion and Profit Sharing (BEPS), wherein the Multi-National Companies (MNCs) could exploit the variations in tax structures across nations. Organisation of Economic Cooperation and Development (OECD) and G20 have been rigorously working to prevent this phenomenon using BEPS project. One of the outcomes of these efforts is Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Sharing (Multilateral Instrument or MLI).
MLI also prevents abuse of bilateral treaties by the third parties. The abuse is basically done in the form of Treaty Shopping by the MNCs. I would explain this with an example. Suppose, India and Mauritius have entered into a bilateral treaty to prevent double taxation. If this treaty is used by Chinese citizen for tax savings in capital gains, then it comes under Treaty Shopping. To prevent this, MLI has introduced the Principle Purpose Test (PPT) and Limit of Benefit (LoB) clauses. So, if a bilateral treaty is signed under PPT, then that treaty will be implemented under MLI. It restricts the usage of bilateral treaty to particular country citizens. Also, if the treaty is utilises for anything other than the intended purpose (spirit) of the treaty, then that transaction comes into question. Thus, the abuse of bilateral treaties could be prevented.
This landmark Convention was signed by 68 countries including India. India deferred implementation of General Anti-Avoidance Rules (GAAR) from 2015. At this particular juncture, it is unclear whether it would go ahead with GAAR or MLI. GAAR provisions are more stringent compared to MLI. It may also have a huge dent on Foreign Portfolio Investors (FPIs). Each and every International transaction can be traced in case of GAAR whereas the MLI allows questioning of those transactions which are in conflict with underlying treaties. India is yet to decide on the same.
However, Mauritius and Singapore are yet to sign the treaty. Investments from these two countries are huge and needs to be tracked and traced back for effective implementation of any anti-tax abuse policy. With the recent changes to Double Taxation Avoidance Agreement signed between Singapore and Mauritius, there have been even more investments. Tracking them is crucial for India’s development. We should wait and watch to see which way the ball would roll.