JUNE 14, 2017

By TIOL Edit Team

GLOBAL war against Base erosion and profit shifting (BEPS) has finally began with the signing of Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS.

India is one of the 67 countries and jurisdictions that signed it last week. It would hopefully ratify the Convention soon. Before coming to what Finance Ministry should do to minimize business uncertainty resulting from implementation of the Convention, we should put the whole subject in perspective.

The implementation of the Convention is expected to alter foreign capital flows especially foreign direct investment (FDI) as it is expected to stop tax avoidance strategies of multinational corporations (MNCs).

Global investors at present exploit gaps and mismatches in tax rules to shift profits to low or zero-tax jurisdictions/tax havens. The Convention is thus also likely to either increase or decrease tax revenue of different countries. Some countries including India would have to reduce taxes and offer other incentives to investors to offset the decline in FDI flows from zero or low-tax jurisdictions.

Overall, the Convention has the potential to act as game-changer in the global economy. It is too early to guess how much of the estimated 0 billion revenue forgone annually by all countries would get plugged by the Convention.

The Convention creates multilateral avenue for implementation of 15-actions BEPS plan prepared by experts under the aegis of Organization for Economic Cooperation and Development (OECD) and G20. The Convention helps countries incorporate BEPS Actions into their bilateral tax treaties.

As put by OECD Secretary-General (SG) Angel Gurría, "This Convention puts an end to treaty shopping and will provide taxpayers with greater certainty through improvements to the Mutual Agreement Procedures. It also gives you the tools needed to implement mandatory binding arbitration, tackle hybrid mismatches, and stop artificial avoidance of ‘permanent establishment' status in your countries. And, crucially, it goes to the heart of our efforts during this year's MCM to help restore citizens' trust in the fairness and transparency of global governance systems and the legitimacy of the processes underpinning global integration".

The companies across the world thus need clarity on timeframe within which signatories would implement 15 actions. They would like to know which countries have agreed to get bilateral tax treaties amended by getting them covered under the Convention. Uncertainty would persist for a few years as more countries join the Convention and list bilateral tax treaties for automatic amendment under the Convention. OECD is expected to prepare a consolidated version of amended covered treaties in the coming months.

A covered tax agreement is a bilateral Double Taxation Avoidance agreement (DTAA) that two countries want to bring under the ambit of the Convention to align it with BEPS Action(s).

OECD believes that the first modification to covered treaties will become effective during 2018. The timing of entry into effect of the modifications is linked to the completion of the ratification procedures in countries that are party to the covered treaty.

The signing of the Convention has paved the way for one-shot amendment of 1100 covered tax treaties. Without Convention, this exercise would have taken decades. An estimated 1900 bilateral tax treaties are still outside the Convention. It remains to be seen, how many will avoid the tax reforms net.

According to the Convention, "This Convention shall enter 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 fifth instrument of ratification, acceptance or approval".

It continues: "For each Signatory ratifying, accepting, or approving this Convention after the deposit of the fifth instrument of ratification, acceptance or approval, the Convention shall enter into force on the first day of the month following the expiration of a period of three calendar months beginning on the date of the deposit by such Signatory of its instrument of ratification, acceptance or approval".

Coming to the impact of Convention on India, Finance Ministry had started implementing certain provisions of BEPS actions through annual Finance Act. The Government should now issue a status/white paper on implementation of 15 actions.

The paper should disclose which of the bilateral agreements would be covered under the convention. There are four categories of agreements that have tax elements. These are: bilateral (DTAA), multilateral DTAAs, Comprehensive Economic Cooperation Agreements (CEPAs) and Bilateral Investment Promotion and Protection agreements (BIPPA).

Some of these agreements have been tapped by Indian companies including public sector giants such as ONGC to route their investment from one jurisdiction to the country where they locate projects.

The Status paper should indicate the timeframe for implementation of Income Tax Act and any other legal initiative required to implement 15 actions. The sooner the Government issues this paper, the better score it is likely to get in the annual World Bank's twin reports on paying taxes and ease of doing business.

The Convention confers right to the parties to make subsequent modifications to a CTA. We hope this flexibility is not used to dilute the spirit of BEPS project.

A lot can be deliberated about the likely impact of the Convention on different indicators of the economy. The priority should be minimization of economic uncertainty due to implementation of convention as economic growth, jobs creation and revenue receipts are crucial.