BEPS implementation seen clashing with domestic laws

Experts say there are several hurdles for Indian govt to implement agreement

Although India has signed the multilateral instrument (MLI) to curb tax evasion as a part of the Organisation for Economic Co-operation and Development (OECD), lawyers and tax experts see implementation hurdles.

According to them, several provisions of the instrument are not maintainable under domestic laws. Further, even the implementation of the basic structure of MLI would need amendments to the current law.

Last month, Union Finance Minister Arun Jaitley signed the MLI along with 100 other countries in Paris. The basic idea of the instrument is to curb tax evasion by multinational companies (MNCs) that exploit the lacunae in the current tax treaties. To address the issue, the OECD had developed a framework called base erosion and profit sharing (BEPS).

One of the important contentions is that the Indian government is currently allowed to get into such tax arrangements with sovereign nations only. The OECD, with whom the MLI has been signed, is not a nation but an umbrella of nations. Legal experts say the government will have to make a constitutional amendment to Article 50 to accommodate the treaty.

There is also an issue with the proposed arbitration mechanism in the MLI. According to the instrument, any MNC can initiate arbitration proceedings in the country it is based in if it has any grievances. Such arbitration is not permitted under domestic laws.

Article (3) of the MLI defines a company which could be called a ‘transparent entity’. However, under the Income Tax Act there is no such categorization, and experts say the government will not be able to bring such categorisation just for the sake of MLI, as it could be in conflict with India’s existing tax agreements with other countries.

“There are several hurdles to implementing the MLI. The government is likely to limit the implementation to only those provisions which are maintainable under domestic law. But this will weather down the arrangement significantly,” said a source.

From an industry perspective, there are concerns about the interplay between an MLI and general anti-avoidance rules (GAAR). According to the current law, GAAR overrides all the other tax treaties. However, according to the OECD, the MLI would override any domestic law or tax arrangement in case of conflict. In this context, it is still not clear which law would prevail.

“The implications of both the MLI and GAAR are yet to be known. The MLI is quite similar to a tax treaty and GAAR has the effect to override the tax treaty. Therefore, the interplay between MLI and GAAR needs to be seen and how both will co-exist. Separately, India also has to initiate requisite changes domestically to implement the various aspects of the MLI,” said Amit Singhania, partner, Shardul Amarchand Mangaldas.

Few experts also suggest the Indian government will also try to adopt the basic provisions of the instrument due to legal complications. “The MLI is expected to be a supplementary law, not a primary law for taxation. The idea is to plug leaks in current treaties, not to overhaul tax laws,” said Shailesh Kumar, director-direct taxation, Nangia & Co.

The BEPS framework aims at bringing parity in tax laws globally. It reduces treaty shopping and tax evasion by companies. One of the key benefits of being part of the BEPS framework is the fact that a nation needn’t amend each and every tax arrangement it has with other countries. The desired changes can be brought about in multiple tax treaties by changing the terms in a single MLI.

Signing of the MLI is a part of the Indian government’s efforts to fix lacunae existing in the current tax laws. Last year, India amended the tax treaties with Mauritius and Singapore to prevent abuse. India has also proposed the so-called GAAR rules which target the companies or entities that decide a jurisdiction of operation only on the basis of tax benefits. Besides, the Centre has also amended the transfer pricing rules and regulations pertaining to indirect transfers in the past one year.