BEPS

A tax treaty is a bargain between two countries. It stops the same income being taxed twice.

But treaties were also used the other way. A group could route an investment through a third country purely to reach a treaty, and end up taxed lightly or not at all. Profit was shifted to where tax was low. The tax base of the country where the business actually happened was eroded.

BEPS is the name of the project set up to stop that. The G20 gave the mandate. The OECD did the work and wrote 15 action plans.

Fixing this treaty by treaty would have taken decades. India alone has dozens. So the fifteenth action plan did something clever. It produced a single treaty that amends all the others at once — the Multilateral Instrument, or MLI.

For an AIF the point is practical. Offshore fund structures are built on treaties. BEPS changed what those treaties say.

The sequence Chapter 14 gives (section 14.4):

The condition that decides whether it bites. The workbook is explicit that application of the MLI to a particular tax treaty depends on ratification as well as the positions adopted by both countries signing that treaty. India ratifying alone changes nothing; the effect can be known only once each partner's MLI positions are known.

The statutory hook. Section 159 of the ITA is where BEPS enters Indian law twice over. First, the provisions of the ITA apply to the extent they are more beneficial than the treaty — but that is subject to GAAR and to the MLI. Second, section 159 directs that the Central Government shall enter into double taxation agreements without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty shopping arrangements aimed at obtaining relief for the indirect benefit of residents of a third country.

Where it meets GAAR. Chapter 14 also records the CBDT clarification that where tax avoidance is sufficiently addressed by the Limitation of Benefit clause in a treaty, GAAR shall not be invoked — and that GAAR is not invoked merely because an entity sits in a tax-efficient jurisdiction.

Why a fund structurer cares (Chapter 6, section 6.4.1). The combination of GAAR and the MLI has a significant influence on offshore fund structures for AIF investments, because India has moved from a form over substance approach to a substance over form approach — both in domestic taxation and in treaty relief.

A date the workbook gives twice, differently. Chapter 14 dates the 15 Action Plans to 2015 and India's signature of the MLI to 7 June 2017. Chapter 6 instead says the OECD enunciated the BEPS project through the MLI in 2018, and that India became a signatory to it then. Learn both placements and cite the chapter; the detailed timeline sits in Chapter 14.

The fund and amounts are illustrative, and so is the treaty rate; the withholding rates, sections and the substance test are the workbook's.

Meridian Global Opportunities Fund is an offshore pooling vehicle in a treaty jurisdiction. It holds units in an Indian Category III AIF. In the tax year the AIF distributes Rs 25 crore of dividend income to it.

Without treaty benefit, withholding on dividend paid to a non-resident is 20%:

Rs 25 crore x 20% = Rs 5 crore withheld

With treaty benefit at an illustrative 10%, the deduction would be Rs 2.50 crore. So Rs 2.50 crore turns on whether the treaty applies.

Three gates now stand in the way, and BEPS built two of them.

1. The MLI gate. India ratified the MLI and notified it under section 159 with effect from 1 October 2019. Whether the amendments reach this treaty depends on the positions both countries adopted. If the partner has not ratified, or its positions do not match India's on the relevant article, the treaty is unamended.
2. The substance gate. Chapter 6 says India now judges such structures on substance over form. A pooling vehicle with no people, no decisions and no purpose beyond reaching the treaty is exactly what the project was written against.
3. The domestic gate. GAAR still sits behind the treaty. But if the treaty already carries a Limitation of Benefit clause that sufficiently addresses avoidance, the CBDT clarification says GAAR shall not be invoked.

And whatever the answer on all three, the mechanics are unchanged: the fund must hold a Tax Residency Certificate and file Form 41 to claim the treaty rate at all.

Chapter 14, section 14.4 (Multilateral Instrument) is the main treatment, and section 14.3 on GAAR sits immediately before it — the paper examines the pair. Chapter 6, section 6.4.1 introduces BEPS earlier, in the context of offshore fund structuring. The chapter's learning objectives name basics of GAAR and MLI outright.

Expect: what BEPS stands for, which action plan produced the MLI (Action Plan 15 of 15), the 2017 signature with 66 other countries and 93 treaties, the section 159 hook, and the condition that the MLI applies only if both treaty partners' ratifications and positions align.

• BEPS is the project; the MLI is the instrument. BEPS produced 15 action plans; only the fifteenth created the MLI. Answering "Action Plan 1" is the standard error.
• India signed in 2017 but the MLI entered into force on 1 October 2019. Signature, Cabinet approval (12 June 2019), deposit of ratification (25 June 2019) and entry into force are four different dates.
• The workbook gives two different framings of when this happened. Chapter 14 says 2015 for the action plans and 7 June 2017 for signature; Chapter 6 says the OECD enunciated BEPS through the MLI in 2018. Both are in the paper — cite the chapter rather than choosing.
• Ratification by India is not enough. The MLI reaches a treaty only if the partner country has also ratified and their adopted positions match.
• GAAR and the MLI are not the same tool. GAAR is domestic law, effective from 1 April 2017. The MLI amends treaties. Section 159 makes the ITA's more-beneficial rule subject to both.
• A Limitation of Benefit clause can displace GAAR, not the MLI. The CBDT clarification is about GAAR alone.
• Being in a low-tax jurisdiction is not by itself fatal. The workbook records that GAAR shall not be invoked merely because an entity is located in a tax-efficient jurisdiction.