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India signs multilateral pact to check tax evasion by MNCs

New Delhi: The Finance Minister Arun Jaitley has signed the multilateral convention, an outcome of the OECD/G20 Project to tackle base erosion and profit shifting. India along with 67 other countries have the pact in place for not letting MNCs evade taxes by the artificial shifting of profits.

“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 stated yesterday.

Going forward for the MNCs operating in India, it will be difficult for them to evade taxes by artificially shifting their place of business, DH reports.

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

There are several rules modified for all the countries but India has chosen a more stringent option to limit the specific activity exemptions from the definition of PE, which is defined as a fixed place of business that gives rise to income.

This implies that corporates involved in a certain level of business activities through India will constitute PE in India. Earlier, these businesses could claim exemption from the definition of a PE.

Foreign companies usually claim tax concession under bilateral tax treaties and pay taxes in their home countries.

However, if it is established that a company has a PE in India, it has to pay taxes in India for the income generated in the country. India has recently amended treaties with countries such as Singapore, Cyprus and Mauritius, providing for the levy of taxes in the country where income is generated rather than the country of residence of the company.