India, 67 nations sign pact to check tax evasion by MNCs

India and 67 countries have put in place an agreement to plug loopholes in existing laws that allowed companies to evade taxes by artificially shifting their place of business.

Finance Minister Arun Jaitley signed the multilateral convention, an outcome of the OECD/G20 Project to tackle base erosion and profit shifting. BEPS is resorted to by MNCs through tax planning strategies by exploiting gaps and mismatches in tax rules.

"The convention will modify India's treaties in order to curb revenue loss through treaty abuse and base erosion and profit shifting strategies by ensuring profits are taxed where substantive economic activities generating the profits are carried out and where value is created," a finance ministry statement had said on Wednesday. Experts said MNCs doing businesses in India going forward will find it difficult to evade taxes by artificially shifting their place of business.

Artificial avoidance of permanent establishment (PE) by MNCs is the key concern of each signatory country since this is the main source of base erosion. MNCs often resort to artificial shifting of profits to low or no-tax locations, resulting in little or no overall corporate tax being paid.

In future, corporates will have to ensure the treaty provisions are not read on a stand-alone basis, but with the corresponding provisions of the convention.

According to EY International Tax Services Partner Rajendra Nayak, 1,100 tax treaties would be modified worldwide as a result of 68 jurisdictions signing the MLI.

In the convention, India has chosen a more stringent option to limit the specific activity exemptions from definition of PE, which is defined as a fixed place of business that gives rise to income.