India signs OECD convention to plug tax treaty loopholes

09 Jun 2017


India has signed the Organisation for Economic Cooperation and Development (OECD) convention on Base Erosion and Profit Shifting (BEPS) that will help update existing tax treaties and close loopholes in thousands of cross-border transactions.

Finance minister Arun Jaitley signed the multilateral instrument at the OECD headquarters in Paris on Wednesday.

The OECD multilateral convention aims to crack down on anybody trying to create a structure for tax evasion, including stashing of profits and investment funds abroad primarily with a view to evade taxes.

The convention will help modify India's existing treaties to curb revenue loss through treaty abuse and Base Erosion and Profit Shifting strategies by ensuring that profits are taxed where substantive economic activities generating the profits are carried out.

The signing of the multilateral convention on tax treaty related measures under the OECD-G20 BEPS project would also help resolve double taxation or transfer pricing issues face by several taxpayers.

The signing of the multilateral instrument (MLI) at Paris on 7 June could open the doors for India to entertain bilateral advance pricing agreements (APAs) or mutual agreement procedures (MAP) with several countries for resolving transfer pricing issues.

India can now swiftly implement a series of tax treaty measures to update existing bilateral treaties and reduce chances of tax avoidance by multinational enterprises.

It will also strengthen provisions to resolve treaty disputes, including mandatory binding arbitration, thereby reducing double taxation and increasing tax certainty.

The new convention, developed through negotiations involving more than 100 countries and jurisdictions, has the mandate of G20 finance ministers and central bank governors. Ministers and high-level officials from 76 countries and jurisdictions have signed or formally expressed their intention to sign the multilateral convention.

According to OECD Secretary-General Angel Gurría: ''We are moving towards rapid implementation of the far-reaching reforms agreed under the BEPS project in more than 1,100 tax treaties worldwide, and radically transforming the way that tax treaties are modified.''

Beyond saving signatories from the burden of re-negotiating these treaties bilaterally, the new convention will result in more certainty and predictability for businesses, and a better functioning international tax system ''for the benefit of our citizens'', says Gurria.

The OECD/G20 BEPS project helps governments close the gaps in existing international rules that allow corporate profits to ''disappear'' or be artificially shifted to low- or no-tax environments, where companies have little or no economic activity.

It is estimated that governments lose an estimate $100-240 billion (or about 4-10 per cent of global corporate income tax liabilities) in annual revenues from BEPS.

The multilateral convention signed at Paris has identified 15 actions requiring changes to more than 3,000 bilateral tax treaties, a burdensome and time consuming process. This convention would swiftly modify all covered bilateral tax treaties (including investment agreements) to implement BEPS measures.

While India has made a provisional list of Covered Tax Agreements and a provisional list of reservations while signing the convention, the final lists for both will be submitted at the time of submission of instrument of ratification.

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