[Opinion] Implementation Issues in Multilateral Tax Convention

Anil Chachra – [2025] 177 taxmann.com 774 (Article)

1. Overview

Synthesised Texts is the version of the modifying the Covered Tax Agreement [“CTA“] or Double Avoidance Agreement [“DTAA“] or Tax Treaty by incorporating the Multilateral Conventions [MLI], which was arisen due to the action plan of the Base Erosion and Profit Shifting [herein referred as “BEPS“] initiated by the Organization for Economic Cooperation and Development (“OECD“). The Government has notified the implementation of MLI by way of notification no 57/2019 dated 9th August, 2019. The question that needs to answer is whether the separate notification is required for the implementation of the Synthesised text once the Government has already notified the MLI through a separate notification. Recently, the Mumbai Tribunal has dealt the issue. In this write we will discuss about the BEPS, Implementation of MLI in India and the legal status of the MLI through judicial prouncements:

2. Base Erosion and Profit Shifting [“BEPS”]

Due to changing in international tax environment, a number of countries have expressed a concern about how international standards on which bilateral tax treaties are based allocate the taxing rights between source and residence states. This Action Plan is focused on addressing “BEPS“. While actions to address BEPS will restore both source and residence taxation in a number of cases where cross-border income would otherwise go untaxed or would be taxed at very low rates, these actions are not directly aimed at changing the existing international standards on the allocation of taxing rights on cross-border income.

‘OECD‘ launched an Action Plan on “BEPS” in July 2013, at the request of G20 finance ministers. The package of measures developed under the OECD/G20 BEPS project (hereinafter referred to as the “OECD/G20 BEPS package”). As a package of measure 15 action plan were suggested which includes tax treaty-related measures to address certain hybrid mismatch arrangements, prevent treaty abuse, address artificial avoidance of permanent establishment status, and improve dispute resolution.

3. Implementation of BEPS through Multilateral Convention/ treaty [“MLI”]

There was conscious need to ensure swift, co-ordinated and consistent implementation of the treaty related ‘BEPS‘ measures in a multilateral context and also to ensure that existing agreements for the avoidance of double taxation on income are interpreted to eliminate double taxation with respect to the taxes covered by those agreements without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in those agreements for the indirect benefit of residents of third jurisdictions.

Recognising the need for an effective mechanism to implement agreed changes in a synchronised and efficient manner across the network of existing agreements for the avoidance of double taxation on income without the need to bilaterally renegotiate each such agreement; the modification of tax treaties between respective country was required.

The OECD characterizes the BEPS MLI as a path-breaking multilateral instrument which enables sovereign Governments to incorporate agreed minimum standards to counter treaty abuse and to strengthen dispute resolution mechanism while retaining sufficient flexibility to preserve specific tax treaty policy objectives.

The MLI’s genesis lay in the desire to overcome the protracted nature of bilateral treaty renegotiations. For a country like India, with over ninety DTAAs, and for treaty partners with similarly extensive networks, individual renegotiation would have been a herculean task. The operational mechanics of the MLI is structured in a manner that promotes efficiency and consensus. Each member state (e.g. India) is required to deposit a signed instrument with the OECD specifying treaties it designates as covered tax agreements, together with the amendments or reservations it proposes qua each tax agreement. Where the counterparty to a bilateral treaty (e.g. Netherland) also identifies the same bilateral treaty (e.g. India-Netherland DTAA) as a covered tax agreement and agrees to the same amendments, then it can be said consensus has been reached qua the amendments.

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