TAX treaties now have a long history starting from the year 1899. For most part, however, tax treaties are bilateral in nature. Although there are a few multilateral treaties like the Nordic Convention but these are between groups of homogeneous states. Taxation is intimately connected to the sovereignty of states and each state taxes income according to its particular needs. This is the reason for double taxation of income that is undoubtedly a bad thing but this is also the reason for MNCs to exploit the gaps in the various states' laws creating opportunities for aggressive tax planning. However, States are wary of giving up their sovereign powers and multilateralism has not been considered as a viable option for tackling the problem of double taxation and double non-taxation. There have been attempts though even under the aegis of the League of Nations and in fact a plurilateral draft of a model treaty was produced as far back as in 1931 but the efforts did not bear much fruit.

The BEPS project that started in 2013 intend to make significant change in the current system of international taxation. The main aim is to prevent erosion of tax base of the market economies and prevent shifting of profits to tax havens and low tax jurisdictions. The OECD, at the instance of G-20, prepared 15 action plans to achieve the objective. Since multinational tax avoidance mostly occurs through exploiting the differences in the provisions of domestic tax laws, the BEPS reports suggest many changes in the domestic tax laws of the parties concerned. However, BEPS occur also through exploiting the gaps between the provisions of the domestic law and tax treaties, and hence it would be necessary to change the language of some of the treaty provisions as well.

For example the BEPS action plans provide for the introduction of an anti-treaty abuse provision, changes to the definition of permanent establishment, changes to transfer pricing provisions and the introduction of treaty provisions in relation to hybrid mismatch arrangements.

Since OECD is leading the BEPS project, the base document is the OECD Model. However, not everybody follows the OECD Model in its entirety and many compromises are made in formulating an actual tax treaty. Thus mere changes to the OECD Model Tax Convention are not directly effective without amendments to bilateral tax treaties. There are more than 3000 comprehensive double tax treaties and if the parties try to modify each treaty through bilateral negotiations, as is normally done, it would take ages for the process to complete and the effectiveness of the whole process will be undermined. Thus originated the idea of a multilateral instrument to amend bilateral treaties.

The action plans released by the OECD in July, 2013 therefore contained the following:

Action15: Develop a multilateral instrument

"Analyse the tax and public international law issues related to the development of a multilateral instrument to enable jurisdictions that wish to do so to implement measures developed in the course of the work on BEPS and amend bilateral tax treaties. On the basis of this analysis, interested Parties will develop a multilateral instrument designed to provide an innovative approach to international tax matters, reflecting the rapidly evolving nature of the global economy and the need to adapt quickly to this evolution." (Emphasis added)

As a first step, the feasibility of the process had to be examined. It is in this context, that the OECD's Committee on Fiscal Affairs set up an informal group of experts both in public international law and in international taxation to advice on the feasibility of a multilateral instrument to implement BEPS measures. These experts were Philip Baker (United Kingdom), Théodore Christakis (Greece), Frank Engelen (Netherlands), Concepción Escobar Hernandez (Spain), Mathias Forteau (France), Itai Grinberg (United States), Jan Klabbers (Netherlands), Vaughan Lowe (United Kingdom), Philippe Martin (France), Yoshihiro Masui (Japan), Ekkehart Reimer (Germany), Giorgio Sacerdoti (Italy), Dire Tladi (South Africa). Thus, there were two experts from France, Germany, Netherlands, the UK and one each from Greece, Italy, Spain and the USA.

These experts, taking inspiration from examples in other areas, notably the Agreement on extradition between the European Union and the United States of America (2003) concluded that a multilateral instrument to implement the measures developed in the course of the work on BEPS was feasible and would be the most efficient way to modify the existing network of bilateral tax treaties.

Particular reference was also made to the recent success of the Convention on Mutual Administrative Assistance in Tax Matters that was originally opened for signature by the member states of the Council of Europe and the OECD in 1988, had only 14 signatories as of 2009. However, after the call by the G-20 Leaders at its London summit in 2009, to open it to all countries, a Protocol to the Convention was negotiated in 2009 and the amended Convention and Protocol were opened for signature by a wide range of countries on 1st June 2011. It was pointed out that this Convention – a single multilateral legal instrument – performs functions that would have otherwise required negotiating over 1800 new bilateral agreements. By means of the Convention, the G20 swiftly and successfully initiated a step change in transparency in cross-border tax matters globally.

Deliberating on the interaction between the Multilateral Instrument to be developed and the existing bilateral treaties, the expert group pointed out that the underlying goal of the BEPS Project is to develop and implement new common rules to tackle BEPS among all interested parties. Therefore, the multilateral instrument need not and would not terminate the pre-existing network of bilateral treaties in order to achieve this goal. Instead it would aim to achieve a concurrent and integrated application of the provisions of the multilateral instrument and the bilateral treaties as they relate to BEPS. The bilateral treaties will not only remain in force but they will continue to play a major role in defining the specific relations of each pair of parties with regard to co-operation in tax matters.

As to how this could be achieved, the expert group mentioned that under international law, the basic principle is that a subsequent treaty prevails over a previously concluded treaty on the same subject matter. Accordingly, without formally amending each and every bilateral treaty, a new multilateral instrument would operate to modify the overlapping provisions in all bilateral treaties.

Therefore, as part of its 2014 deliverables, the OECD released in September 2014 its report on Action 15- Developing a Multilateral Instrument to Modify Bilateral Tax Treaties. The2014 report considered a number of technical issues that might arise.

In particular, the report referred to potential conflicts that may arise from the interaction between new multilaterally agreed provisions and similar provisions included in some existing bilateral treaties that fully or partly cover the same subject matter and suggested that the issue could be resolved through the inclusion of specific "compatibility" clauses (or "primacy" clauses) in the multilateral instrument.

The report also mentioned that introducing multilaterally agreed changes through a multilateral instrument may raise technical challenges due to variations in the wording of existing bilateral tax treaties.But suggested that the variations in the wording of similar provisions of existing bilateral treaties can be addressed through superseding language in a multilateral instrument.

The report rightly pointed out that as is reflected in the existing network of bilateral tax treaties, parties to a multilateral instrument may have tax policies that differ from one another and could not be harmonised amongst all the parties to the instrument. They may not be ready to accept the same precise commitments vis-à-vis all other parties. One of the main challenges for negotiators of a multilateral instrument will therefore be to ensure flexibility regarding the extent of the rights and obligations established by the treaty vis-à-vis all the other parties, as well as the level of commitments towards certain parties, while at the same time maintaining consistency, in order to create a level playing field, and transparency, in order to provide certainty.

Being convinced that a multilateral approach was feasible and desirable, the 2014 report suggested convening an International Conference to develop the multilateral instrument in 2015. The G-20 having endorsed the proposal in February, 2015, the OECD set up an ad-hoc group to draft the multilateral instrument. All interested parties, whether members of the OECD, G-20 or not could participate in the same. The ad hoc group was established in May, 2015 and was headed by Mike Williams of the HMRC. Liao Tizhong (from China), Mohammed Amine Baina (from Morocco) and Kim S. Jacinto-Henares (from the Philippines) were appointed as vice chairs.

The work of the ad-hoc group was held in secret and the proposed document was not made public on the ground that treaty negotiations are not done in public. OECD documents show that 99 countries participated as members while four non-state jurisdictions and seven international organisations participated as observers. According to the OECD webcast, the countries and jurisdictions participated 'on an equal footing 'in the project and finally on November 24, 2016, the OECD released the text of the Multilateral Instrument.

By all accounts, this is a unique experiment. So, one was really excited to see the outcome. However, the first reaction after a glance at this 48 page document is that it is indeed Complex. Even in the OECD webcast, the OECD officials admitted that it is a complex document. Part of the reasons for the complexity is the fact that there were too many differences and too many options needed to be adopted. The document is followed by an Explanatory Statement (ES) of 86 pages. And this explanatory statement has particular significance of its own.

The important features of this document are that it is a separate agreement titled- 'Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting.' The Convention has 39 Articles divided in the following parts:

Part 1- Scope and Interpretation of terms (Articles 1&2)

Part-II- Hybrid Entities (Articles 3-5)

Part-III- Treaty Abuse (Articles 6-11)

Part-IV- Avoidance of PE status (Articles 12-15)

Part-V- Improving Dispute Resolution (Articles 16-17)

Part-VI- Arbitration (Articles 28-36)

Part-VII – Final Provisions (Articles 27-39)

It is stipulated that the Multilateral Instrument will enter into force only after five countries have ratified it and will be open for signature as of 31 st December 2016 and the first signing ceremony is expected to take place in the week beginning 5 June 2017.

The basic purpose of the MLC is to implement the BEPS minimum standard, as contained in action points 6 and 14 and other treaty related BEPS measures and the optional provision of mandatory binding arbitration. Even though a record number of countries have apparently participated in the project, not all countries are likely to adopt all the proposals. The United States is reportedly interested only in the aspect of binding arbitration which was developed by a separate sub-group. It has been reported that the UK will not accept the provisions relating to avoidance of PE while Australia has indicated that it may adopt most of the proposals and has released a consultation paper. As for India, nothing is known as yet. One only hopes that there is serious consultation at least among a group of officers well versed in the nuances of tax treaties and capable of anticipating the implications of the interactions amongst the various provisions, particularly considering the fact that there are many options and countries can opt-in and opt out of specific provisions.

As stated earlier, the purpose of the MLC is to modify existing bilateral tax treaties. Article 1 states- "This Convention modifies all Covered Tax Agreements as defined in subparagraph a) of paragraph 1 of Article 2 (Interpretation of Terms)"

The countries/ jurisdictions therefore have to first identify which of the treaties they intend to amend/modify and inform the same to the depositary, which is the OECD. These treaties will then be the covered tax agreements (CTA). The parties have the option of excluding specified tax treaties, they also have the option of meeting the BEPS minimum standards in some other way, besides the countries can opt out of the non-minimum standard provisions. Besides, they have the chance to apply optional and alternative provisions.

As mentioned earlier, this is a complex document and is accompanied by an 86 page Explanatory Statement. Each of the articles of the MLC has been explained in the statement. So, one really has to read the existing bilateral treaty, the particular provision of the MLC adopted by the country and its partner country along with the Commentary besides the relevant Commentary of the OECD Model.

There are already conflicting decisions about the Commentaries in resolving actual disputes involving bilateral tax treaties. Now, one has also to take into account the implications of the explanatory statement. However, the fact that it has been developed multilaterally probably imparts somewhat greater legitimacy to this document. In this context, the following statement in the explanatory statement is worth noting:

"The text of this explanatory statement to accompany the Convention ("Explanatory Statement") was prepared by the participants in the ad hoc Group, and in the Sub-Group on Arbitration, to provide clarification of the approach taken in the Convention and how each provision is intended to affect tax agreements covered by the Convention ("Covered Tax Agreements"). It therefore reflects the agreed understanding of the negotiators with respect to the Convention. It includes descriptions of the types of treaty provisions which are intended to be covered and the ways in which they are intended to be modified. The members of the ad hoc group adopted this Explanatory Statement on 24 November 2016 at the same time as adopting the text of the Convention." (Emphasis added)

However, it has been clarified that the ES is not intended to address interpretation of the underlying BEPS measures and that Articles 3 through 17 of the MLC should be interpreted in accordance with the ordinary principle of treaty interpretation, which is that a treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in light of its object and purpose.

Considering the number of parties that participated in the project, the MLC needed to provide flexibility in relation to provisions that did not reflect minimum standards. This is proposed to be achieved in the following way:

- Allowing the parties to specifying the tax treaties to which the Convention applies (the "Covered Tax Agreements").

- Allowing flexibility with respect to provisions that relate to a minimum standard. Even here it is possible to opt out albeit in limited circumstances, such as where a Party's Covered Tax Agreements already meet that minimum standard. Where a minimum standard can be satisfied in multiple alternative ways, the Convention does not give preference to a particular way of meeting the minimum standard.

- It is also possible to opt out of provisions or parts of provisions with respect to all Covered Tax Agreements in certain circumstances.

- Parties can also express reservations that are permitted. There are specific reservation clauses. It has been mentioned that a Party making a reservation that applies to a subset of Covered Tax Agreements based on objective criteria is required to provide a list of the existing provisions in their Covered Tax Agreements that fall within the defined scope of that reservation. Also, where a Party has made a reservation with respect to a provision, that reservation will apply as between that Party and all other Parties to the Convention.

Treaty Abuse: One of the minimum standards of BEPS is prevention of treaty abuse. This is proposed to be achieved through inclusion of a Preamble and incorporation of the Action point 6 minimum standards i.e., a principal purpose test or a principal purpose test along with a simplified (or detailed) Limitation on Benefits clause or a detailed limitation on benefits clause only along with some anti-conduit provision. While there are possible complications regarding the anti-abuse provisions also and I will try to discuss the same in a subsequent article, the preamble is clear and is a welcome development. A Covered Tax Agreement shall be modified to include the following preamble text:

"Intending to eliminate double taxation with respect to the taxes covered by this agreement without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in this agreement for the indirect benefit of residents of third jurisdictions)." It is possible to opt out of this provision only if the Covered Tax Agreements already contain preamble language describing similar intent.

Thus, prevention of double non-taxation will be a specific objective of a DTAA, both tax evasion and tax avoidance are covered and even indirect benefits received by third country residents are prohibited. One is eagerly waiting to see how the Indian Courts respond particularly in the light of the observations of the Supreme Court in the Azadi case.