Pooja is a qualified Chartered Accountant who held the role of Staff Accountant at KPMG, and Senior Executive ­ Finance at Symphony Teleca, prior to joining JLL in 2012.

In 2013, the Organisation for Economic Co-operation and Development (OECD) launched the base erosion and profit shifting (BEPS) project to identify tax-planning strategies used by multinational enterprises that exploit gaps and mismatches in tax rules to avoid paying tax. Developing countries higher reliance on corporate income tax means they suffer from BEPS disproportionately. BEPS practices cost countries $100-240 billion in lost revenue annually.

Working together with OECD, over 130 countries and jurisdictions are collaborating on the implementation of 15 action points to tackle tax avoidance, improve the coherence of international tax rules and ensure a more transparent tax environment. Amongst the various Action Points, one such important Action Point is Action Point 15 ­ ‘Multilateral Instrument'.

The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (Multilateral Instrument or MLI) allows governments to modify existing bilateral tax treaties in a synchronised and efficient manner to implement the tax treaty measures developed during the BEPS Project, without the need to expend re-sources renegotiating each treaty bilaterally.

As of June 25, 2019, 89 countries have signed the MLI, out of which around 28 have already been ratified, deposited and made effective (including India). The MLI comes into force on the first day of the month following the expiration of a period of three calendar months beginning on the date of deposit of the ratified instrument with the OECD depositary by such Signatory. Every Signatory to the MLI is required to notify/list the bilateral tax treaties it is desirous of amending through the MLI. Such listed treaties are known as Covered Tax Agreements (CTA).

India joined the long list of countries who have signed the MLI in June 2019 by depositing the ratified copy of MLI on 25 June 2019. The MLI would come into force in India from October 1, 2019 and would be effective from financial year 2020-2021. India has notified a total of 93 tax treaties, including India's treaty with HongKong, and the treaty with

China has been kept out of the covered agreements.

In the ensuing paragraphs, we dis-cuss one of the key articles under BEPS and MLI: Article 7 ­ Prevention of treaty abuse through various approaches.

The Action Point 6 Report provides three alternative rules to address treaty abuse. As a minimum standard, the Action Point 6 Report requires countries to implement at least one of the following anti-abuse measures in their treaties -

(i) A principal purpose test (PPT) only, which is a general anti-abuse rule based on the principal purpose of transactions or arrangements;
(ii) A PPT supplemented with either a simplified or a detailed limitation on benefits (LoB) provision, or
(iii) A detailed LoB provision, supplemented by a mutually negotiated mechanism to deal with conduit arrangements not already dealt with in tax treaties.

In order to trigger a denial of treaty benefit under the PPT, obtaining the benefit need not be the sole or dominant principal purpose of the transaction or arrangement

PPT has been introduced as a default test, which provides that no benefit under the CTA shall be granted if it is reasonable to conclude that obtaining such benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in such benefit. However, most importantly, there is a carve out in the MLI, for granting such treaty benefits if availing such benefits was in accordance with the object and purpose of the relevant provisions of the CTA. The PPT supersedes existing general anti-abuse provisions of the CTA, or is added to the CTA in the absence of such provisions.

Existing PPTs in treaties may either be blanket PPTs which cover all treaty benefits or PPTs which are targeted at benefits under specific articles such as capital gains, dividends, interest, royalties etc. In this regard under Article 7, reference to provisions that deny ‘all or part of benefits' is intended to ensure that such narrower provisions will be replaced with the broader PPT under Article 7(1). Further, existing PPTs, which use similar terms such as ‘main purpose or primary purpose', will also be replaced by the phrase ‘one of the principal purposes' as used in Article 7(1) of the MLI reflecting a relaxation in the threshold for meeting this test compared to some of the existing PPT tests in CTAs.

Thus, in order to trigger a denial of treaty benefit under the PPT, obtaining the benefit need not be the sole or dominant principal purpose of the transaction or arrangement. It would suffice even if one of its principal purposes were to obtain such benefit.

India's Final Position
In its provisional notification, India had chosen to apply the PPT with the Simplified LOB (SLoB) across all its Notified Treaties. As far as the PPT is concerned, being a default test, it should apply across the board in all of India's treaties irrespective of the other position adopted by the other countries.

In its final notification, India has accepted to apply PPT as an interim measure and intends where possible to adopt LoB provision, in addition or replacement of PPT, through bi-lateral negotiations along with SLoB. Further, most of its other Treaty Partners (including several European countries) have chosen not to allow a one sided symmetric or asymmetric application of the SLOB, thereby resulting in application of only a PPT to those treaties.

With a very short period remaining for the MLI to come into effect, we move into a new era of international taxation driven by substance over form and over-arching anti-avoidance rules, underlying documentation would be of paramount importance to substantiate these commercial considerations.