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Multilateral Instrument - The clock is ticking!!
By Samir Shah and Hitesha Surana
Aug 14, 2019

ON 25 June 2019, India deposited its instrument of ratification for Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI), along with the list of reservations and notifications.This article discusses the basic concepts of MLI, reason and the mechanism for implementation of MLI and India's position with respect to certain Articles of MLI.

Simon Sinek introduced the concept of Golden Circle, which provides the theory on how great ideas can turn into action. Applying the said concept to the global tax scenario, let us analyse and understand the concept of MLI:


The purpose of MLI is to provide a more transparent tax environment and to tackle the Base Erosion and Profit Shifting (BEPS) tax planning strategies, wherein profits are shifted to jurisdictions having low tax or no tax, usually known as tax havens.


To implement the above purpose, BEPS Action Plan 15 provides a mandate for development of a Multilateral Instrument to modify bilateral tax treaties to tackle BEPS. The MLI will thus serve to achieve BEPS outcomes across the network of existing tax treaty agreements without the need of bilaterally renegotiating the tax treaty entered into by each of the country.Each of the signatories to the MLI have to file an instrument of ratification with the Organisation for Economic Co-operation and Development (OECD)providing their position on the MLI.


The extent to which the purpose mentioned above will be achieved is dependent on the instrument of ratification and list of reservations and notifications deposited by each of the signatories with respect to its notified covered tax agreement.

India, being a part of G20 group of countries, is committed to adopt required strategies recommended by the OECD. In addition to the steps taken internationally to prevent tax abuse, India has gradually amended its domestic tax law by introducing following changes suggested by the BEPS Action plans:

1.  Equalisation levy (Action Plan 1);

2.  Introduced the concept of Significant Economic Presence by expanding the definition of Business Connection (Action Plan 1);

3. Limitation on deduction of interest paid to Associated Enterprise (Action Plan 4);

4.  Preferential rate of tax on income from patents (Action Plan 5);

5.  Widening of scope of business connection arising out of dependent agents (Action Plan 7); and

6.  Master file and Country-by-Country Reporting (Action Plan 13).

Let us understand some important and basic concepts of MLI.

MLI contains 38 Articles, which can be classified into different buckets:

-  Articles 1 to 17 contain substantive provision which deals and addresses specific BEPS concern,

-  Articles 18 to 26 contain provision related to mandatory arbitration, and

-  Articles 27 to 39 contain final procedural provisions.

Signatories of MLI

Currently, there are 89 countries, which have signed the MLI. Each of the 89 countries have provided their position son various Articles of MLI at the time of signature.

Covered tax agreement

Each country (i.e. signatory) will have to specify the existing list of tax treaties to which MLI provision would apply. The tax treaty of these countries is required to be read along with the ratified MLI. The list of tax treaties specified by signatories to MLI is known as Covered Tax Agreement (CTA). MLI provision will be applicable only when both parties have notified each other in the list of their CTAs. For example, India has notified tax treaty with Germany as CTA .However, Germany has not notified tax treaty with India as CTA. In such a scenario, the MLI provisions will not be effective between India and Germany and the existing tax treaty between India and Germany would prevail.

Ratification of MLI

Ratification of an instrument helps each country to specify its definite position on each of the Articles of MLI.

India is the 28 the country to have deposited its instrument of ratification with the OECD.As of now, 23countries, which have deposited their instruments of ratification with the OECD,have included India in the list of CTAs. This will modify India's tax treaties with these countries once MLI enters into force. These countries are Australia , Austria , Belgium, Finland , France , Georgia , Ireland , Israel , Japan , Lithuania , Luxembourg , Malta , the Netherlands , New Zealand , Poland , Russia , Serbia , Singapore , the Slovak Republic , Slovenia , Sweden , the United Arab Emirates , and the United Kingdom . The list of countries will further increase as other countries deposit their instruments of ratification with OECD and notify India in the list of CTAs.

Entry into force

The deposition of ratified instrument with the OECD triggers the concept of entry into force. As per the MLI provision, the MLI enters into force from the first day of the month following the expiry of three calendar months from the date on which the country deposits its ratified copy of MLI. Applying this, from India's perspective, as the instrument is ratified on 25 June 2019, the MLI provision will enter into force on 1 October 2019. There would be different entry into force dates for different countries with respect to its covered tax agreement depending on the date of deposit of ratified instrument with OECD.

Entry into effect

Entry into effect is the date from which the tax treaties of each of the covered tax agreement needs to be read along with the MLI provision. For applicable date of entry into effect, India has opted for taxable year instead of calendar year.As per the MLI, the timeline for MLI to come into effect is based on the type of taxation:

-  For provision relating to withholding taxes:

The effective date will be first day of the next taxable year that begins on or after the latest of the dates on which the Convention enters into force for each of the Contracting Jurisdictions to a Covered Tax Agreement.

With respect to the above-mentioned 23 countries, which have already deposited their instruments of ratification, the MLI provision with respect to withholding tax will enter into effect from 1 April 2020, i.e. 1 st day of taxable year that begins on or after 1 October 2019. For other countries, entry into effect will depend on date of entry into force of MLI of those countries.

-  For provision relating to other taxes:

The effective date is the taxable period beginning on or after the expiry of a period of six calendar months from the latest of the dates on which the Convention enters into force for each of the contracting jurisdictions to a CTA.

With respect to the above-mentioned 23 countries, which have already deposited the instrument of ratification, the MLI provision relating to other taxes will enter into effect from 1 April 2020, i.e. taxable period beginning on or after the expiration of a period of six calendar months from 1 October 2019. For other countries, entry into effect will depend on date of entry into force of MLI of those countries.

Mandatory Minimum standard

Parties to MLI are required to meet certain prescribed minimum standards in their tax treaties. The following are minimum standards of MLI:

-  Article 6 - Purpose of CTA

Article 6 seeks to insert statement in the preamble of the tax treaties to the effect that the purpose of the treaty is not to create opportunities for double non-taxation or reduced taxation through tax avoidance or evasion including treaty shopping. The countries may also make reference to the intention of developing economic relationship and enhancement of cooperation in tax matters.

-  Article 7 - Prevention of treaty abuse

BEPS Action Plan 6 states that countries, at a minimum, should implement one of the following three treaty abuse provisions:

-  Principal Purpose Test (PPT);

-  PPT plus either simplified or detailed Limitation of Benefit (LOB);

-  Detailed LOB supplemented by a mechanism that would deal with conduit arrangement.

PPT is considered as default option under MLI. Parties to MLI are permitted to supplement the PPT by choosing to apply a simplified LOB provision. MLI does not include detailed LOB provision.

India has notified application of PPT as an interim measure. India has further stated that simplified LOB provision will be adopted through bilateral negotiation where possible, as replacement or in addition to PPT.

-  Article 16 - Mutual Agreement Procedure

This article provides for mandatory inclusion of Mutual Agreement Procedure in CTAs.

Parties to MLI can opt out of minimum standard in limited situations such as where the CTA already meets the minimum standards, if parties decide to reach a mutually satisfactory solution, etc.


For anything that is not a BEPS minimum standard, the MLI provides flexibility to opt out of provision entirely or, in some cases, partly through reservations. The reservations apply symmetrically i.e. if a party uses reservation to opt out of a provision,then that provision will not apply between the reserving party and all other parties to the CTA under the MLI. Party to MLI may reserve the right for provisions of the MLI not to apply to a subset of CTAs.

Optional provision

MLI provides flexibility with respect to application of optional and alternative provisions to address the same issue. Each signatory to MLI is required to notify the option it would like to choose. For an example, Article 13- "Artificial avoidance of permanent establishment status through the specific activity exemptions" provides two options under Article 13(1), which are as under:

-  Option A under Article 13(2) - provides exemption if activity carried on is preparatory and auxiliary in nature.

-  Option B under Article 13(3) - provides automatic exemption to each and every activity covered under Article 5(4) of the Covered tax Agreement and the same is not subject to preparatory and auxiliary condition.

Parties to MLI are required to choose one of the options and notify the depositary of their choice. It may be noted that in case the position taken by one country on certain Articles of MLI Convention do not match with position taken by another country on the same Article, then the tax treaty between the countries would prevail over MLI. Thus, it is important to have matching concept on position taken by each of the signatories with respect to each other, for effective application of MLI.

India has chosen to opt for option A of Article 13(2)of MLI whereas Singapore has chosen to opt for option B of Article 13(3) of MLI. In such a scenario,as per Article 13(7) of MLI, in the absence of matching concept on the position adopted by each of the countries, the MLI provision of Article 13(1) would not be effective with respect to the India-Singapore tax treaty.

Considering that the MLI provision will be effective soon, the implementation of the same may open doors to new areas of disputes and litigation.


As India has already deposited its ratified instrument with the OECD, which will enter into force on 1 October 2019, taxpayer swill now have to start looking into their current transactions and arrangement to understand taxability under MLI,i.e. post BEPS regime. Entities will also have to analyse potential PE exposures with respect to high-risk areas depending on the industry, business model, arrangement entered already, country involved, and position taken by the concerned country and so on.

(Samir Shah is Senior Manager and Hitesha Surana is Deputy Manager in Deloitte Haskins and Sells LLP.)

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