Multilateral Instrument

India has a separate tax treaty with each of many countries. Each one is a Double Taxation Avoidance Agreement (DTAA). Changing them one at a time would take decades. Meanwhile, some foreign investors were sending money through treaty countries just to get the tax benefit.

The Multilateral Instrument (MLI) is the shortcut. The workbook explains that the Organisation for Economic Cooperation and Development (OECD) saw a problem. Many international investors had turned to treaty shopping and tax avoidance. So the OECD began a framework to deal with it. Under this framework, countries can sign the MLI.

The MLI is a treaty signed by many countries together. It lets them quickly change their two-country (bilateral) tax treaties. The changes are meant to deal better with tax avoidance. One signature changes many treaties at once.

How it interacts with a DTAA (section 12.5.1). "The MLI will apply alongside the DTAA and either supplement, complement, supersede or modify the application of the DTAA, thus impacting the tax implications relevant to the offshore investor." So "the DTAA will therefore need to be read along with the tax treaties and the MLI of India coming into effect".

The layers an offshore AIF investor has to work through.

1. The DTAA itself. DTAAs are bilateral tax treaties that aim to avoid or eliminate double taxation of the same income — source-based taxation in one country and residence-based taxation in the other.
2. The MLI, which may modify how that DTAA applies.
3. Section 90(2) of the Income-tax Act. The provisions of the Act apply to the extent they are more beneficial than the DTAA — subject to GAAR.
4. GAAR itself, which lets the tax authorities re-characterise arrangements that lack commercial substance; the workbook notes complicated fund structures are likely to be scrutinised under it.
5. Documentation. To claim DTAA benefits the investor must have a valid Tax Residency Certificate (TRC) from its country of residence, renewed annually, with the information in Form 10F where not in the TRC, and must keep documents to substantiate it.

Without treaty benefits, the taxability of income earned from the AIF by offshore investors is as per the Income-tax Act.

Why distributors care. The workbook says availability of DTAA benefits "should be a relevant factor in determining the Indian tax consequences" for offshore investors, that distributors "need to take note of this fact while marketing AIF products to offshore investors", and that DTAA benefits should be examined with suitable professional advice. The MLI is one of the reasons a treaty benefit that appeared on the face of a DTAA may not be available in the form expected.

Structuring link. Offshore investors choose pooling jurisdictions with a good tax treaty with India (Chapter 5). The MLI is aimed precisely at jurisdictions chosen for the treaty and nothing else.

Illustrative figures; the tax rates below are hypothetical and are not the actual rates under any Act or treaty. A Singapore-resident family office invests Rs 40 crore in an Indian Category II AIF and expects Rs 10 crore of income from it.

Its adviser works through the layers:

If the treaty benefit is available:   10% × Rs 10 crore = Rs 1 crore
If it is not (MLI or GAAR bites):     20% × Rs 10 crore = Rs 2 crore

The Rs 1 crore difference depends on the MLI and GAAR analysis, not on the DTAA text alone. A shell company in a treaty jurisdiction with no substance would be the classic target of both.

Chapter 12 (Taxation — India Specific) introduces the MLI at 12.5.1 within Double Taxation Avoidance Agreements, followed by the Tax Residency Certificate at 12.5.2 and taxation of non-resident investors at 12.5.3; GAAR is at 12.6, and Chapter 5 covers choice of pooling jurisdiction. Expect a question on who framed the MLI (OECD), what it does (swiftly modifies bilateral treaties to address tax avoidance) and how it relates to a DTAA (applies alongside it).

• The MLI is multilateral; a DTAA is bilateral. The MLI modifies DTAAs; it does not replace the Income-tax Act.
• It applies alongside the DTAA — to supplement, complement, supersede or modify it — so the DTAA must be read with it.
• OECD framework, aimed at treaty shopping and tax avoidance.
• Section 90(2): the Act applies to the extent more beneficial than the DTAA — subject to GAAR.
• No TRC, no treaty relief. The TRC must be renewed annually; Form 10F supplies information not in the TRC.
• Do not confuse it with the IOSCO MMoU, which is a securities regulators' cooperation arrangement, not a tax treaty.