Multinational instrument on taxation

Why in news?

Recently OECD’s Multilateral Instrument (MLI) to collect or retain revenues was signed by 67 countries, including India, in Paris.

What is OECD?

• The Organisation for Economic Co-operation and Development is an intergovernmental economic organisation.
• It has 35 member countries, India is not a member of this organization.
• It was founded in 1960 to stimulate economic progress and world trade.
• It is a forum of countries describing themselves as committed to democracy and the market economy.
• Most OECD members are high-income economies with a very high Human Development Index (HDI) and are regarded as developed countries.

What is BEPS?

• Base Erosion and Profit Shifting (BEPS)  refers to those instances where  gaps between different tax rules leads to tax avoidance causing harm to the government.
• Due to gaps in application of the bilateral tax treaties, cross border activities may go untaxed in any of the two countries.
• No or low tax is paid by shifting profits to low tax jurisdictions and shifting losses and high expenditures to high tax jurisdictions.
• Further, the spread of the digital economy has also posed challenges for international taxation.
• Over the years, the MNCs have artificially reduced their corporate tax outgo by shifting to lower tax jurisdictions.

What is the present initiative by OECD?

• The OECD’s Base Erosion and Profit Shifting (BEPS) project is done to reduce global tax burdens through hybrid arrangements, transfer pricing and permanent establishments. 
• Broadly there are two initiatives

1. Inclusive Framework for BEPS
2. Global Forum on Tax Transparency(GFTT)

What is MLI about?

• The MLI’s Action 15 of BEPS, objective is to simultaneously modify bilateral tax treaties of countries that sign the MLI.
• This enables BEPS Actions to take immediate effect instead of through a slower process of modifying bilateral treaties.
• The MLI document is additional to a bilateral treaty and does not replace the latter.
• There are minimum standards to be met by every country before signing the MLI
• there is also considerable flexibility allowing a signatory to register its reservations on selected aspects of the MLI

What are constrains on MLI Implementation?

• There is more transparency needed on the working of the MLI
• There is pressure on countries for, when countries do not sign the MLI.
• This is not the Final solution, there is continuing need for specialised platforms.
• This is not universal, that is it is not an international taxation.

What is the role of India in OECD policy?

• In GFTT which India is in a key position and is participating on equal footing with OECD members. 
• India has not signed on to mandatory arbitration which it should reconsider.
•  India played a lead role in the MLI.
• It comprises a good step for India in benchmarking itself in international taxation.
• India’s participation should continue at the highest knowledge level for its success.

Source: Business Standard