BEPS MLI Changes- Prevention of Treaty Abuse

[By Shivam Parashar]

The author is a fourth year student of University School and Law and Legal Studies, GGSIPU Delhi and can be reached at


In 2017, India became a signatory to a unique multilateral instrument- Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“BEPS MLI”). At the time of signing, it aimed to amend over eleven hundred (1,100) Double Taxation Avoidance Agreements (“DTAA”). India ratified the treaty in June 2019. The Indian instrument of ratification was received by the Organization for Economic Co-operation and Development (“OECD”) on 25 June 2019 and came into force on 1 October 2019. It will change the way Tax Treaties are used by assessees in India, from the next financial year, when it comes into effect.

How it functions

The BEPS MLI lays down provisions, which have been evolved from deliberations over a total of fifteen (15) Action Plans. Two of these Action Plans were treaty related minimum standards. That is to say, Action Plan 6, dealing with Prevention of Treaty Abuse provisions, and Action Plan 14, providing for a dispute resolution mechanism, are to be mandatorily adopted by the signatories of the BEPS MLI. Each ratifying country in its instrument of ratification can reserve the application of any of the sections of the BEPS MLI, other than those corresponding to the mandatory action plans- Action plan 6 and Action Plan 14.

The BEPS MLI was intended to bring changes to tax treaties without the contracting states undergoing the laborious procedure of individual amendments. To achieve this, the instrument, in Article 2 of BEPS MLI instructs every signatory to notify in its ratification the tax agreements it intends to alter by way of the BEPS MLI. Each agreement that appears in such a list is referred to as a “Covered Tax Agreement” (“CTA”). No separate action on behalf of the countries is required to incorporate the changes introduced by BEPS MLI. [i]

Treaty Abuse – Article 7

Action Plan 6 (a mandatory action plan) refers to measures for prevention of treaty abuse. It corresponds to two articles of the BEPS MLI, namely –

  • Article 6- Purpose of a Covered Tax Agreement; and
  • Article 7 – Prevention of Treaty Abuse

Both of these provisions are to be mandatorily ratified by the signatory nation. Article 6 of BEPS MLI refers to amendment to the preamble of the Covered Tax Agreement. The Preamble becomes essential in interpreting the intent of the provisions that follow.

Article 7 changes substantial provisions of the Covered Tax Agreements. Article 7 acts as a firewall against individuals who seek to exploit the treaty benefits unfairly. A choice is provided to the signatories with regards to the provisions they wish to implement. They may either adopt the Principal Purpose Test (“PPT”) in its Covered Tax Agreements or create a combination of a Simplified Limitation of Benefit clause along with the PPT. A Simplified Limitation of Benefit clause allows a state to restrict tax treaty benefits to a person on the basis of his ‘residential status’.

The Principal Purpose Test allows a country to deny tax benefits arising from a tax treaty. Such a denial of benefits can be done if it is ‘reasonably concluded’ that obtaining of the benefit was ‘one of the principal purpose’ of the ‘transaction or arrangement’. [ii] Countries by notifying a list of tax treaty and the required part of the tax treaty can replace the existing anti-treaty abuse provisions of the treaty with the PPT of the BEPS MLI (specified in its Article 7(1)). Where such a provision is not already found in a Covered Tax Agreement, the provisions of PPT shall be inserted.

The other alternative provided in Article 7 is the Simplified Limitation of Benefits (“SLOB”) Clause. This is also applied in a similar manner- by notifying the provisions of existing treaties that stand to be replaced. However, for the application of SLOB provisions, it is imperative that both countries agree to its application. A SLOB clause restricts benefits of a treaty only to a pre-specified list of qualified persons. It must be noted that the SLOB is applied only in addition to the PPT test, thereby making PPT the ‘default setting’ of Article 7. When any entity would henceforth seek treaty benefits from a Covered Tax Agreement, it will have to necessarily pass the Principal Purpose Test.

Position in India

India in its Instrument of Ratification has stated that it shall replace the erstwhile anti-treaty abuse provisions of 36 tax treaties with the PPT laid down by the BEPS MLI. It has also expressed, in pursuance of Article 7(6) of BEPS MLI, its desire to bilaterally negotiate limitation of benefit clauses with countries. India intends to apply the Simplified Limitation of Benefits Clause with 9 countries.

India has intended to amend Tax Agreements with 93 countries. These may be classified into two subsets. Firstly, those agreements that do not contain anti-abuse provisions, for example, Australian Tax Treaty. Secondly, agreements that contain anti-abuse provisions, for example, treaties with UAE and Singapore. When India ratified Article 7 of the Multilateral Instrument, it dealt with the second subset. In doing so, India has listed out the provisions that it seeks to replace. However, even within this subset not all countries are listed for replacement (treaty with UAE finds mention, but treaty with Singapore does not). This effectively creates the following three categories of countries:

  1. Treaties mentioned as CTA that do not contain anti-abuse provisions
  2. Treaties mentioned as CTA that contain anti-abuse provisions and are mentioned under Article 7 ratification
  3. Treaties mentioned as CTA that contain anti-abuse provisions and are not mentioned under Article 7 ratification

(1) Treaties mentioned as CTA that do not contain anti-abuse provisions

For those agreements that do not have an anti-abuse provision, the BEPS MLI’s Article 7(1) shall effectively be inserted.

(2) Treaties mentioned as CTA that contain Anti-Abuse provisions and are mentioned under Art. 7 ratification

The existing provision(s) shall stand replaced by Article 7(1) of the BEPS MLI. While a majority of the mentioned Tax Treaties already feature an anti-abuse provision, the new changes will bring about stricter measures, for instance India’s DTAA with UAE. Article 29 of the India-UAE Tax Treaty contained a ‘purpose test’ that was considerably more lax than the BEPS MLI replacement. The erstwhile test talks about preventing treaty benefits to an entity created solely for obtaining benefits, as opposed to the new provisions that could prevent benefits to an entity created otherwise, but now transacting with the principal purpose of obtaining tax benefits. Further, a point of divergence arises between the two when the old test allows benefits to be granted when the assessee would have been ‘otherwise’ entitled to them. The BEPS provision is silent on this. This becomes a valid defence for transnational companies. [iii]

(3) Treaties mentioned as CTA that contain Anti-Abuse provisions and are not mentioned under Art. 7 ratification

Singapore is an example of a country with such a treaty. Here Article 7(1) shall ‘supersede the provision of the agreement to the extent of incompatibility’. [iv] Thus, it would be reasonable to conclude that where the Singapore Tax Treaty in its Article 24A talks about preventing treaty abuse only with regards to Capital Gains provisions, it would be read to understand that abuse of all provisions is covered under its anti-abuse tests.

Thus, the net that has been cast by the new multilateral instrument’s purpose test is much wider and much less porous.


The General Anti-Avoidance Rules (GAAR) inserted by the 2013 amendment to the Income Tax Act, 1961, came into force from the assessment year 2018-19. [v] The GAAR are meant to be a domestic barrier to taxation law abuse. In this duplicity of provisions between BEPS MLI and GAAR, a reconciliation is required between the two. Section 90(2A) of the Income Tax Act, 1961 instructs that GAAR provisions shall necessarily apply to assessees seeking benefit from tax treaties. Once the GAAR provisions are applied, it would seem that, there would be no use of having BEPS MLI tests. There are however reasons why a ratification of BEPS MLI was required. The intended safeguard for preventing of treaty abuse would be achieved with having both GAAR and BEPS MLI test in place. Several factors point to them filling in the loopholes of the other.  Firstly, the BEPS PPT provisions are wider in their application than the GAAR tests. When the GAAR talks about a ‘main purpose’ test, the ‘principal purpose’ test ends up covering a wider ambit of transactions.

The second factor that helps us is the fact that not all Indian tax treaties are part of the MLI changes. The Central Board of Direct Taxes, also clarifies that in instances where the Limitation of Benefits clause (refers to the anti-abuse provisions,) has been ‘sufficiently’ satisfied, GAAR provisions will not be attracted. [vi]

Thus the route to tax benefit, once the above discussed provisions are into effect, would be to ‘sufficiently’ satisfy the treaty’s anti-abuse provision. The phrase ‘sufficiently satisfied’ is still mired in uncertainty. However, given the chronology of implementation and ratification of the measures it will be safe to infer that only a treaty with BEPS MLI changes will be able to reach that threshold. For treaties with no changes, GAAR would be the touchstone where the seeking of benefits will be assessed.


[i] Note by OECD Directorate of legal affairs on Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting : Functioning under Public International Law, available at

[ii] Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, Article 7(i),OECD, available at

[iii] A similar argument was made in Martrade Gulf Logistic FZCO-UAE v. ITO:

[iv] OECD’s BEPS-MLI: Matching Database, available at:

[v] Section 26, Finance Act, 2013 (17 of 2013)

[vi] CBDT Circ. No. 7 of 2017 available at:


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