Direct Tax Laws & International Taxation · Application and Interpretation of Tax Treaties

Anti-Avoidance, MLI, Exchange of Information and MAP in Tax Treaties

Updated 5 October 2026 · Fact-checked

Treaty anti-avoidance rules stop people from using a tax treaty only to get lower tax. The Principal Purpose Test denies benefit if obtaining it was a principal purpose of an arrangement. The MLI updates treaties together. Exchange of information shares tax data. MAP lets the two tax authorities settle treaty disputes. Solve by identifying the rule, applying it to the facts, and concluding.

Understand Anti-Avoidance, MLI, Exchange of Information and MAP

A tax treaty (DTAA) is meant to remove double taxation and prevent fiscal evasion. Some taxpayers use it for a different goal: they route income through a country only because its treaty with the source country gives a low rate. This is treaty shopping. Anti-avoidance rules exist to deny treaty benefits in such cases.

There are two main tools. The Principal Purpose Test (PPT) is a general, purpose-based test. Treaty benefit is denied if it is reasonable to conclude, having regard to all facts and circumstances, that obtaining the benefit was one of the principal purposes of the arrangement or transaction. The benefit is still allowed if granting it would be in line with the object and purpose of the treaty. Limitation of Benefits (LOB) is a rule-based test. It gives benefit only to a person who meets objective conditions, such as a minimum level of expenditure or genuine business operations in the residence country, or ownership and listing conditions. Some Indian treaties, for example with Singapore, contain LOB-type clauses. Always read the clause in the question rather than assuming its content.

The Multilateral Instrument (MLI) is a convention developed under the OECD/G20 BEPS project. It lets countries modify many bilateral treaties at once, without renegotiating each one. It applies to a treaty only where both countries have signed it and listed that treaty as a Covered Tax Agreement. Each country makes choices and reservations. Optional provisions apply to a treaty only where the choices of both countries match or are compatible, as each article requires. The minimum standards, including the one against treaty abuse, apply regardless of matching choices. The minimum standard against treaty abuse can be met through the PPT alone, the PPT plus a simplified or detailed LOB, or a detailed LOB with a mechanism to deal with conduit arrangements. The simplified LOB is an addition to the PPT and applies to a treaty only if both countries choose it (Art 7(6)). If the two countries choose different ways of meeting the minimum standard, they are expected to reach a mutually satisfactory arrangement. Where one country chose the PPT alone and the other chose a different option, the PPT applies to that treaty, after considering any bilateral agreement the countries reach. Do not write that the PPT always prevails. India has opted for the PPT alone for Article 7 under the MLI. India has also used the MLI to change the preamble of its Covered Tax Agreements so that they state the intent of not creating opportunities for non-taxation or reduced taxation through avoidance.

Exchange of Information (EOI) is the article under which treaty partners share information that is foreseeably relevant for applying the treaty or their domestic tax laws. It can be on request, spontaneous or automatic. Information received is confidential and used only for tax purposes as the treaty allows. A country generally cannot refuse merely because it has no domestic interest, or because the information is held by a bank.

The Mutual Agreement Procedure (MAP), found in Article 25 of the OECD and UN models, resolves disputes. A person who believes the actions of one or both states lead to taxation not in line with the treaty can present the case to the competent authority of their residence state, within the time stated in the treaty. If that authority cannot resolve it alone, it tries to settle it with the other state's authority. MAP is an administrative route and runs separately from domestic appeals, though the two interact. Whether the competent authorities must reach agreement depends on the treaty. Many treaties require only best efforts, while some include arbitration.

Key rules to remember

Principal Purpose Test: Benefit denied if: obtaining the benefit was one of the principal purposes of the arrangement, judged on all facts and circumstances, unless granting it accords with the object and purpose of the treaty; Purpose-based and fact-driven. The taxpayer can still show the benefit fits the treaty's object.
Limitation of Benefits: Benefit allowed only if the person meets the objective tests in the clause; Rule-based. Read the exact test in the treaty, such as expenditure level, listing or genuine business operations.
MLI application: MLI modifies a treaty only if: both countries are parties + the treaty is notified by both as a Covered Tax Agreement. Optional provisions apply only where both countries' choices match or are compatible, as each article requires. The minimum-standard anti-abuse provision applies regardless of matching.; For optional provisions, where choices do not match or are not compatible, the MLI provision does not apply. For the anti-abuse minimum standard, if the countries choose different ways of meeting it, they are expected to reach a mutually satisfactory arrangement. Where one chose the PPT alone and the other a different option, the PPT applies after considering any bilateral agreement. It is not a blanket rule that the PPT always prevails.
India's MLI anti-abuse choice: Minimum standard met through PPT alone; India opted for the PPT alone for Article 7 under the MLI. A simplified LOB under Art 7(6) is an optional addition that applies only if both countries choose it.
Exchange of Information: Information foreseeably relevant to apply the treaty or domestic tax laws; kept confidential; Bank secrecy or lack of domestic interest generally cannot be used to refuse, as under the OECD model wording.
MAP (Article 25): Case presented to the competent authority of residence within the treaty time limit; authorities endeavour to resolve by mutual agreement; Time limit differs by treaty. The OECD model uses three years from first notification of the action.

How to solve Anti-Avoidance, MLI, Exchange of Information and MAP questions

Use this order for any case or theory question on treaty anti-avoidance, MLI, EOI or MAP.

1Identify which tool the question tests: PPT, LOB, MLI, EOI or MAP.
2Note the facts that matter: who owns the entity, where it is resident, what substance it has, what the tax benefit is, and when the arrangement was made.
3For PPT or LOB, state the rule in one or two lines, then test the facts against it. For LOB, use the exact conditions given in the question.
4For MLI, check that both countries are parties and the treaty is a Covered Tax Agreement. Then check the provision type: an optional provision applies only where both countries' choices match, but the minimum-standard anti-abuse provision applies even if the choices differ.
5For EOI, check that the information is relevant, that it is requested or shared under the treaty, and that confidentiality is kept.
6For MAP, check who may apply, to which authority, within what time, and whether domestic remedies also apply.
7Write a clear conclusion: benefit allowed or denied, treaty modified or not, information shared or not, case admissible or not.
8Add the reason in one line. Mention interaction with domestic law such as GAAR only if the question raises it.

Quickest way: Rule, facts, conclusion in three lines

When to use it: Use for case-scenario MCQs and for short descriptive parts where time is tight.

Name the rule in one phrase, such as PPT, LOB, Covered Tax Agreement or Article 25.
Pick the one fact that decides the answer, such as no substance, one party only signed, or time limit crossed.
Link the fact to the rule and write the conclusion in one sentence.
For MCQs, eliminate options that treat the MLI as automatically overriding every treaty, or that treat PPT as a mechanical ownership test.

Common mistakes in Anti-Avoidance, MLI, Exchange of Information and MAP

Saying the MLI automatically changes every Indian treaty.
Students remember that the MLI is multilateral and assume it works like a single new treaty.
Fix: Check that both countries are parties and that the treaty is listed as a Covered Tax Agreement. For optional provisions, also check that the choices match. The minimum-standard anti-abuse provision applies even where choices differ.
Treating the PPT as satisfied just because the company is resident in the treaty country.
Students confuse treaty eligibility (residence) with entitlement to benefits.
Fix: Residence only gets you in. The PPT then asks whether obtaining the benefit was a principal purpose of the arrangement.
Writing that PPT needs tax saving to be the sole purpose.
The word principal is read as only.
Fix: The test is one of the principal purposes. It can apply even if there are other commercial reasons, subject to the object and purpose exception.
Mixing up PPT and LOB as the same test.
Both are anti-abuse rules that deny treaty benefits.
Fix: PPT is subjective and fact-based. LOB is objective, with defined conditions. Say which applies and why.
Assuming MAP replaces domestic appeals or that agreement is guaranteed.
MAP is described as a dispute resolution route, so students read it as binding.
Fix: MAP is a parallel route. Authorities usually only endeavour to agree unless the treaty provides arbitration. Check the time limit and interaction with domestic remedies.
Stating that information obtained under EOI can be used freely.
Students focus on the sharing and forget the secrecy conditions.
Fix: Information is confidential and may be used only for purposes permitted by the treaty, usually tax assessment, collection, enforcement and related appeals.

Worked examples

Example 1

X Holdings Ltd is resident in Country A and holds all shares of an Indian company. It was set up two months before the sale of the shares, has no employees, no office and no business except holding these shares. Its shareholders are residents of Country C, which has no favourable treaty with India. The India–Country A treaty exempts capital gains on such shares, and both countries have listed the treaty as a Covered Tax Agreement and chosen the PPT. Can X Holdings claim the exemption?

Show the solution

Rule: under the PPT, treaty benefit is denied if obtaining it was one of the principal purposes of the arrangement, judged on all facts, unless granting it fits the treaty's object and purpose.
Facts: the entity was formed just before the sale, has no substance, and the owners are in a third country with no such treaty benefit.
Application: these facts point to the structure being set up to access the Country A treaty. That is treaty shopping, so obtaining the benefit was reasonably a principal purpose.
Object and purpose: a treaty is meant to avoid double taxation and prevent evasion, not to give benefit to a conduit. Granting the benefit would not fit that object.

Answer: X Holdings is unlikely to get the exemption. The PPT applies because the arrangement appears to have been made mainly to obtain the treaty benefit, so India can deny it.

Example 2

An Indian resident company believes that Country B has taxed a service payment in a way that is not in line with the India–Country B treaty, leading to double taxation. The treaty has a MAP article with a three-year time limit from first notification of the action. The action was notified 14 months ago. Advise on the remedy.

Show the solution

Remedy: MAP under the treaty lets a resident who believes taxation is not in line with the treaty present the case to the competent authority of the state of residence, which is India.
Time limit: the treaty allows three years from the first notification. Only 14 months have passed, so the application is within time.
Process: the Indian competent authority will consider the case. If it cannot resolve it unilaterally, it will try to reach agreement with Country B's competent authority.
Caution: agreement is usually an endeavour, not a guarantee, unless the treaty provides for arbitration. Domestic remedies in Country B may also need to be considered, depending on the treaty and the domestic rules.

Answer: The company can present a MAP application to the Indian competent authority, as it is within the three-year limit. Resolution depends on both authorities agreeing, unless the treaty provides arbitration.

Exam tips

In case questions, always name the rule first (PPT, LOB, Covered Tax Agreement, Article 25), then apply the facts. This is the pattern examiners reward.
For MLI questions, write the conditions for it to modify a treaty: both countries are parties and the treaty is a Covered Tax Agreement. Add that optional provisions need matching choices, while the minimum-standard anti-abuse provision applies even if choices differ. Missing one costs marks.
When LOB is tested, use only the conditions given in the question or the treaty extract. Do not add tests from memory.
For MAP, mention the time limit, the competent authority and the fact that the outcome is not automatic. Add that it is separate from domestic appeals.
In theory answers, link EOI and MAP to BEPS and transparency. Keep the answer in provision, facts, conclusion form.

Practice questions from Application and Interpretation of Tax Treaties

Anti-Avoidance, MLI, Exchange of Information and MAP: frequently asked questions

What is the difference between PPT and LOB?

PPT is a general test of purpose. It denies benefit if obtaining it was one of the principal purposes of the arrangement. LOB is a set of objective conditions that a person must meet to get the benefit. PPT depends on judgment of facts. LOB depends on ticking conditions.

Which anti-abuse option has India chosen under the MLI?

India has opted for the Principal Purpose Test alone as its way of meeting the minimum standard against treaty abuse under Article 7. The PPT applies to a treaty only where the treaty is a Covered Tax Agreement. If the other country chose a different option, the countries are expected to reach a mutually satisfactory arrangement, and the PPT applies where one chose it alone, after considering any bilateral agreement.

Does the MLI replace the DTAA?

No. The MLI works alongside the existing treaty and modifies specific provisions. It applies to a treaty only if both countries have listed it as a Covered Tax Agreement. The two documents are read together.

Who can use the Mutual Agreement Procedure?

A person who believes the actions of one or both countries result in taxation not in line with the treaty can use it. The case is generally presented to the competent authority of the country of residence within the treaty's time limit. The authorities then try to resolve it by agreement.

Can a country refuse to share information because it does not need it for its own tax purposes?

Under the OECD model wording, a country generally cannot refuse for that reason, and bank secrecy is not a ground to refuse. The information must still be foreseeably relevant and is kept confidential. Specific treaty text should be read in the question.