CENTRE RATIFIES INTERNATIONAL CONVENTION TO CURB COMPANY PROFIT SHIFTING

Prelims level : Economics E5 - Taxes and Taxation Mains level : Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
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  • Context: India has recently ratified the international agreement to curb Base Erosion and Profit Shifting (BEPS)
  • India has ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (multilateral instruments (MLI), which was signed by the Finance Minister in Paris in June, 2017 on behalf of India, along with representatives of more than 65 countries.

About MLI:

  • It is a multilateral convention of the Organisation for Economic Co-operation and Development (OECD) to combat tax avoidance by multinational enterprises (MNEs) through prevention of Base Erosion and Profit Shifting (BEPS).
  • The BEPS multilateral instrument was negotiated within the framework of the OECD G20 BEPS project and enables countries and jurisdictions to swiftly modify their bilateral tax treaties to implement some of the measures agreed.
  • The BEPS multilateral instrument was adopted on 24 November 2016 and signed on 7 June 2017 by 67 jurisdictions for the first signing ceremony.
  • As of July 2018, 83 jurisdictions have signed the BEPS multilateral instrument, covering more than 1,400 bilateral tax treaties.
  • It entered into force on 1 July 2018, among the first jurisdictions that ratified it.

India and MLI:

  • India was part of the Ad Hoc Group of more than 100 countries and jurisdictions from the G20, Organisation for Economic Co-operation and Development (OECD), and other interested countries, which worked on the finalising the text of the Multilateral Convention.
  • The MLI will modify India’s tax treaties to curb revenue loss through treaty abuse and base erosion and profit shifting strategies by ensuring that profits are taxed where substantive economic activities generating the profits are carried out.
  • The MLI will be applied alongside existing tax treaties, modifying their application in order to implement the BEPS measures.
  • Out of 93 tax treaties notified by India, 22 countries have already ratified the MLI so far and the Double Taxation Avoidance Agreement (DTAA) with these countries will be modified by MLI.
  • For the remaining countries with tax treaties with India, the MLI will come into force when they ratify it. The MLI will come into force for India from October 1, 2019.

What is Base Erosion and Profit Shifting (BEPS)?

  • It refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no tax locations.
  • BEPS is of major significance for developing countries due to their heavy reliance on corporate income tax, particularly from multinational enterprises (MNEs).
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