AT the instance of the G-20, the OECD pilots the BEPS project. At least, that is the official line. It used to work exclusively at the bidding of the G-7. The OECD never tires of informing the world that its BEPS related work is now being overseen by the 'Inclusive Framework' that consists of more than 100 countries, apparently working on an 'equal footing'.

This constant refrain of work on equal footing is quite irritating. The outcome of BEPS project was largely dictated by the superpowers.As for the role played by the developing countries, the best I have read so far is from the vice Chair of the Working Party on the much talked about MLI. I wish every other participant from the developing countries were as candid.

"On a personal note, sitting as vice chair of the Working Party on the multilateral instrument was a unique experience. During the discussions, consensus was noted as an important factor, but to my mind, a consensus is not a consensus unless all voices are heard and each voice matters. When I learned that the signatures of 44 OECD countries have the equivalent of a binding effect on whatever has been discussed, I felt that developing countries were intended to be witnesses and not participants, with no other purpose other than to make it appear that developing countries are actively participating and have been consulted and their positions considered. At the end of the day, a participant is not a participant if the extent of participation stops short of a voting right. On the contrary, developing country input appears to be in a perpetual station at the wayside." [ K. Jacinto-Henares, Chapter 6: A Commentary on the BEPS Project and Its Influence on Developing Countries in Asian Voices: BEPS and Beyond (S. Sim & M- 7 J. Soo eds., IBFD 2017).

Interestingly, the OECD was also careful enough to mention that the inclusive framework was restricted to the development of the MLI alone and that this "cannot be interpreted to create a precedent in the context of OECD procedures for participation of non-members in OECD activities "

It is true that with the rise of China, (and to a lesser extent of the other BRICS) the leadership in the matter of international economic relations has somewhat shifted, but the G-7 still exists as a separate grouping. The OECD remains as it is. In so far as taxes are concerned, the OECD wants to maintain its pole position since it has been seriously challenged in recent years.

The apparent 'success' of the OECD model is largely due to the homogeneous nature of its members and the understanding that member countries will follow the standards it sets. It is widely recognised that the OECD Model is not fit for the developing countries. That is the reason that some efforts are being made to make source taxation a little more effective. But, it falls short. Therefore, the current desperate effort to make the OECD Model the only model is unlikely to succeed.

It is also to be noted that despite the success of the OECD Model (at least amongst the OECD member countries) there is enough difference of opinion amongst its 35 member countries. There are reservations/ observations galore in the Model. It is for this reason and taking into account the actual working of the OECD Model based treaties amongst its member states that every few years, the OECD comes up with a new model and more importantly modifies its commentary, which though a soft law; commands some moral authority for its members to follow. Starting from the draft OECD model in 1963, there have been a number of versions brought out. Even in the noughties, there were the 2003 model, followed by 2005 model, 2008 model and the latest running version is the 2014 model. In between, came the BEPS project and now, the OECD is planning to come up with its 2017 model.

The 2017 update will be the most comprehensive one and will primarily comprise changes that have been approved as part of the BEPS Package. These have been extensively debated and the respective action plans already contain the changes that the OECD proposes to make in the Commentary as also in the language of some articles. (For areas to be covered in the same, see TII Brief).

OECD releases discussion drafts before final adoption mainly for businesses to respond. However, these BEPS related issues have already been discussed and have already been approved. Therefore, no fresh discussion draft has been issued in respect of these measures. The OECD press release mentions the same.

Apart from the BEPS related issues, he OECD also proposes to incorporate some new areas. Public comments were invited in respect of the following issues:

Most important of these, from a developing country perspective, is the third point that further restricts the scope of creating a PE in source countries. It may be noted that in some states, one of the markers used for identifying a PE is whether the foreign enterprise has taken registration for VAT purposes. To thwart any such attempt of finding a PE in the source state only because of this, the Commentary now will specifically state as follows:

"5. In many States, a foreign enterprise may be allowed or required to register for the purposes of a value added tax or goods and services tax (VAT/GST) regardless of whether it has in that State a fixed place of business through which its business is wholly or partly carried on or whether it is deemed to have a permanent establishment in that State under paragraph 5 of Article 5. By itself, however, treatment under VAT/GST is irrelevant for the purposes of the interpretation and application of the definition of permanent establishment in the Convention; when applying that definition, one should not, therefore, draw any inference from the treatment of a foreign enterprise for VAT/GST purposes."

The OECD has also released the comments received about the proposed changes. As expected, the business organisations have welcomed the move. One law firm wants the OECD to go even further. It has been pointed out that in a number of instances a foreign enterprise might be obliged, or have the possibility, to appoint a representative in the other State. Such representative could either be a third party (e.g. a professional) or a related party (e.g. a local subsidiary). In this respect, it has been urged that the Commentary should further clarify that even the appointment of such a representative does not per se constitute a permanent establishment.

One hopes that the OECD does not pay heed to such a suggestion. As it is, in digital environment, it is difficult to establish that a foreign firm has a PE. In such circumstances, if the conditions of doing business are such that a PE within the present definition does get created, then there is no reason why the same should not constitute a PE for direct tax purposes.

Out of the other three proposed changes the one relating to the determination of residence in case of dual residency, is of some interest. As of now, the tie breaker rule in Article 4 of the Convention, gives a hierarchy of tests to break the tie in favour of one or the other of the Contracting States. The hierarchy is availability of a permanent home, center of vital interest, habitual abode, nationality and finally determination by Competent Authorities.

As regards the concept of home, the new Commentary says that though any form of home may be taken into account (house or apartment belonging to or rented by the individual, rented furnished room). But the permanence of the home is essential; this means that the individual has arranged to have the dwelling available to him at all times continuously, and not occasionally for the purpose of a stay which, owing to the reasons for it, is necessarily of short duration (travel for pleasure, business travel, educational travel, attending a course at a school, etc.). For instance, a house owned by an individual cannot be considered to be available to that individual during a period when the house has been rented out and effectively handed over to an unrelated party so that the individual no longer has the possession of the house and the possibility to stay there.

As regards the tie-breaker test, it has been stated that determination of habitual abode requires a determination of whether the individual lived habitually, in the sense of being customarily or usually present, in one of the two States but not in the other during a given period; the test will not be satisfied by simply determining in which of the two Contracting States the individual has spent more days during that period; that the phrase refers to a notion that refers to the frequency, duration and regularity of stays that are part of the settled routine of an individual's life and are therefore more than transient.

The Commentary gives an example of an individual who works in State A where he habitually lives but returns to State B two days a month and once a year for a three-week holiday. In that case, the individual will have an habitual abode in State A but not in State B. If however, over the same period of five years, the individual works short periods of time in State A, where he returns 15 times a year for stays of two weeks each but is present in State B for the rest of the time,in that case, the individual will have an habitual abode in both State A and State B.

The Commentary also clarifies that the relevant provision does not specify over what length of time the comparison for the determination of whether an individual has an habitual abode in one or both States must be made. It is said that the comparison/determination must cover a sufficient length of time for it to be possible to ascertain the frequency, duration and regularity of stays that are part of the settled routine of the individual's life to determine whether the residence in each of the two States is habitual and to determine also the intervals at which the stays take place. It is also mentioned that care should be taken to consider a period of time during which there were no major changes of personal circumstances that would clearly affect the determination (such as a separation or divorce).

The Commentary also clarifies that the relevant period for purposes of the determination of whether an individual has an habitual abode in one or both States will not always correspond to the period of dual-residence, especially where the period of dual-residence is very short. The Commentary gives the following example:

Assume that an individual resident of State C moves to State D to work at different locations for a period of 190 days. During that 190-day period, he is considered a resident of both States C and D under their respective domestic tax laws. The individual lived in State C for many years before moving to State D, remains in State D for the entire period of his employment there and returns to State C to live there permanently at the end of the 190-day period. During the period of his employment in State D, the individual does not have a permanent home available to him in either State C or State D. In this example, the determination of whether the individual has an habitual abode in one or both States would appropriately consider a period of time longer than the 190-day period of dual-residence in order to ascertain the frequency, duration and regularity of stays that were part of the settled routine of the individual's life.

In the Indian context, the tie breaker rule may be of limited use since the residence under the Indian domestic law is purely determined on the basis of stay of the individual in India.

As regards the availability of the beneficial rate of interest under the treaties in case of dividends, the proposed deletion of reference to transparent partnership on the ground that partnership will be entitled to the benefits if either the partners or the partnership is subject to full taxation in the resident state; that is a position not accepted by India. Besides, our present system of taxation of dividend makes this provision redundant.

Apart from the points discussed above, the BEPS monitoring group points out that changes to paragraph 2 of Article 3 and related changes to the Commentaries on Articles 3 and 25 are equally important and for which no comments were called for.

It has been pointed out that these changes provide that if the competent authorities agree on an interpretation of a treaty provision, that interpretation should override domestic law. The BMG mentions that this proposal was not included in the report on Action 14 of the BEPS project, but is presented here as part of the follow-up work to 'clarify the legal status of a competent authority mutual agreement'.

This is a view that should not be accepted by India and other developing countries. As it is, in India, tax treaties that affect the taxing rights of citizens and others are entered into without any parliamentary oversight. Therefore, however competent the competent authorities are, it is not desirable to allow their interpretation to prevail over domestic law provisions or interpretations put in by domestic courts. The non-OECD countries need to forcefully argue their cases in this regard.