India signs Multilateral Agreements at Paris, now common tax agreement for all investors

On June 7, 2017, more than 100 countries including India, signed the OECD multilateral convention in Paris that aims to curb cross border tax evasion by multinational companies.  This multilateral instrument (MI) is an outcome of the OECD/G20 BEPS project. 

Common Tax Agreement for all investors:

• Adoption of common tax agreement by Indian Government will lead to uniform tax regulations for all investors, irrespective of which destination they come from.
• From Indian perspective, this multilateral agreement under the base erosion and profit shifting (BEPS) framework could solve a lot of confusion around tax treaties and tax arbitrage issues.
• It will also expedite dispute resolutions in areas like international tax and transfer pricing where countries will not be required to amend individual treaties after agreeing to the broad terms in the multilateral instrument.
• Financial experts believe that a common tax treaty for all investors will create transparency for both foreign portfolio investors investing in capital markets and private equity investors investing in Indian companies through offshore destinations.

In this context, it is to be noted that India has recently amended treaties with Singapore, Cyprus and Mauritius.

What is BEPS?

Base Erosion and Profit Shifting (BEPS)refers to tax planning strategies adopted by multinational companies, to exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity.

• All BEPS methods cannot be explicitly categorised as illegal. However such practices tacitly undermine the spirit of taxation system.
• Developing countries, which heavily rely on corporate income tax, lose a lot of revenue on account of BEPS practice by multinationals.
• Under this agreement, countries will now have the policy tools to ensure that profits are taxed at the destination where economic activities generating the profits are performed.