Multilateral Instrument and Impact on India's existing tax treaties
On June 25, 2019, India became the 28th jurisdiction to deposit its instrument of ratification for the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). Depositing the instrument is a significant step towards India’s application of the MLI to implement significant changes in respect of its existing bilateral tax treaties and may impact aircraft leasing and finance platforms with Indian airline lessees.
India’s Tax Treaties
India’s definitive list of reservations and notifications to the MLI (i.e. its MLI position) identifies 93 tax treaties that it wishes to be covered by the convention (covered tax agreements or CTAs). At the time of depositing the ratification instrument, India notified the tax agreement with Hong Kong (which has recently become effective), as a CTA. The tax treaty with China has been removed from the list of CTAs. Many of India’s major investment and trading partners including Ireland already have deposited their instruments of ratification, acceptance or approval for the MLI with the OECD: Australia, Austria, Belgium, Finland, France, Ireland, Israel, Japan, Luxembourg, Netherlands, New Zealand, Poland, Singapore, Sweden, United Arab Emirates, and the U.K. Each of the jurisdictions and India also have selected the relevant treaty as a CTA for the purposes of the MLI.
The MLI will enter into force for India three months after the deposit of its instrument of ratification, i.e. on Oct 1, 2019.
When depositing its final MLI position, India abandoned the option under Article 35 of the MLI of notifying the OECD and the relevant bilateral tax treaty partner that India’s internal procedures for bringing the changes in tax treaties into effect are complete. As a consequence, where both India and the treaty partner have selected the relevant treaty as a CTA for the purposes of the MLI, changes to the provisions in respect of withholding taxes and all other taxes covered by the CTA generally will apply in India as from April 1, 2020. Different effective dates may apply in the treaty partner jurisdiction. From an Irish lessor perspective, the effective date that the MLI will apply to Indian withholding tax on payments to Ireland will be April 1, 2020.
Key Areas of India’s Tax Treaties Potentially Impacted
Key provisions of India’s tax treaties potentially impacted once the MLI changes to tax treaties are effective (depending on the choices made by the respective treaty partner) include the following:
- The adoption of the minimum standard of the principal purpose test (PPT) to prevent treaty abuse. India also has opted to apply a simplified limitation on benefits (LOB) provision where selected by the other treaty partner. At the time of depositing its final MLI positions, India indicated that while India accepts the PPT rule as an interim measure, it intends where possible to adopt a LOB provision, in addition to or as a replacement for the PPT rule, through bilateral negotiation. However, Ireland has adopted the PPT provided for in Article 7 as opposed to any form of LOB article and therefore the minimum standard shall apply to the Irish India tax treaty;
- A broader definition of an agency permanent establishment (PE);
- Inclusion of measures to counter the artificial avoidance of PE status through the specific activity exemptions and the division of contracts to circumvent the threshold for the creation of a PE; and
- A change in the applicable tiebreaker test for dual residency in the case of taxable persons other than individuals, from the place of effective management to resolution by mutual agreement between the competent authorities of the treaty partner jurisdictions.
To read Deloitte's overview of India’s ratification of the MLI and its potential impact on tax treaties, please download our pdf file attached. Please contact us or your usual Deloitte contact should you wish to discuss further.