Direct Tax Laws & International Taxation · Fundamentals of BEPS

Multilateral Instrument and India's Adoption of BEPS

Updated 5 October 2026 · Fact-checked

The Multilateral Instrument (MLI) is a treaty born from BEPS Action 15. It lets countries amend many bilateral tax treaties together, without renegotiating each one. It changes a treaty only where both countries have listed it, and how each article applies depends on their choices. To solve questions, identify the treaty, check both parties' MLI positions, then apply the modified rule.

Understand Multilateral Instrument and India's Adoption of BEPS

BEPS means Base Erosion and Profit Shifting. It describes tax planning that shifts profits to low-tax places where little real activity exists. The OECD/G20 project produced 15 Action Plans to stop this.

Most BEPS fixes on treaty abuse and permanent establishment (PE) need changes in tax treaties. India alone has hundreds of such treaties. Renegotiating each one would take decades. Action 15 solved this by proposing a multilateral instrument. The result is the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS, called the MLI.

The MLI does not replace your treaties. It sits beside them and modifies them. Think of it as an overlay. A treaty is changed only if it is a Covered Tax Agreement (CTA). That means both countries have signed the MLI and have each listed that treaty as one they want covered. Each country also files reservations (opt-outs) and notifications (choices). The compatibility rules differ from article to article. For many optional provisions, the provision applies only where both countries have made matching choices. The minimum-standard provisions are different. They apply to every CTA, even where the two countries choose different methods to meet them.

The MLI covers several areas, including hybrid mismatches, treaty abuse (including the Principal Purpose Test), avoidance of PE status, and better dispute resolution. It also has other provisions, for example a tie-breaker for entities that are resident in both countries, rules on dividend transfer transactions, and rules on capital gains from shares or interests that derive their value mainly from immovable property. Do not treat the first four areas as a complete list.

There are two minimum standards. First, prevention of treaty abuse, which includes the preamble language that a treaty is not meant to create double non-taxation or opportunities for treaty shopping, and the Principal Purpose Test (PPT) or Limitation on Benefits (LOB) options. Second, improving dispute resolution through the mutual agreement procedure (MAP).

India has acted on BEPS in two ways. First, through treaties, by signing the MLI and listing its treaties. Second, through domestic law, for example transfer pricing documentation and Country-by-Country Reporting, and limits on interest deduction. India also introduced an equalisation levy following Action 1, but it is no longer in force. The 6% levy on online advertising was abolished from 1 April 2025, and the 2% levy on e-commerce supply was withdrawn from 1 August 2024. GAAR is also part of India's domestic anti-avoidance framework. It is a domestic rule that predates BEPS and complements treaty anti-abuse measures. It is not India's implementation of Action 6. For the exact section numbers under the Income-tax Act, 2025, use your ICAI material. Learn the logic and the link between each BEPS action and the Indian measure.

Key rules to remember

When the MLI modifies a treaty: Treaty is modified = Both parties are MLI signatories + both have listed the treaty as a CTA + the provision is not excluded by a permitted reservation of either side; If the first two conditions fail, the original treaty text continues. Reservations are allowed only where the MLI permits them, and minimum-standard provisions cannot simply be opted out of.
Compatibility of choices: Optional provisions: apply only where the MLI's compatibility rule for that article is met. Minimum-standard provisions (preamble, PPT/LOB, MAP): apply to every CTA, even where the parties' chosen methods differ; The compatibility rule varies by article. Check the exact outcome for each article. Do not assume the stricter or softer view applies automatically.
Minimum standards: Minimum standards = (1) Prevention of treaty abuse, including the preamble statement on no double non-taxation and the PPT/LOB options + (2) Improved dispute resolution (MAP); Countries must meet both. The treaty abuse standard can be met by the PPT alone, by the PPT plus a Limitation on Benefits rule, or by a detailed LOB rule supplemented by a mechanism to deal with conduit arrangements. The MAP standard is met through the MLI's MAP article or an equivalent treaty provision, and compliance is reviewed through peer review.
Principal Purpose Test (PPT): Treaty benefit denied if it is reasonable to conclude that obtaining the benefit was one of the principal purposes of the arrangement, unless granting it accords with the object and purpose of the treaty; The test is objective. It does not need proof that the benefit was the only purpose.
BEPS action to Indian measure: Action 15 → MLI; Action 13 → Master File, CbCR and local file; Action 4 → interest limitation; Action 1 → equalisation levy (introduced by India, now withdrawn); Action 6 → PPT through the MLI; Use this as a map to link the global action with the Indian response. India introduced an equalisation levy following Action 1. The 6% levy on online advertising was abolished from 1 April 2025 and the 2% levy on e-commerce supply was withdrawn from 1 August 2024, so do not present it as a current measure. India's interest limitation rule applies only to specified interest paid to non-resident associated enterprises, so check its scope in your ICAI material. GAAR is a separate domestic rule that predates BEPS and complements treaty anti-abuse measures.

How to solve Multilateral Instrument and India's Adoption of BEPS questions

Use this method for any question on the MLI or India's BEPS measures, whether it is theory or a case.

1Name the BEPS action involved. For treaty changes, it is Action 15, or Actions 2, 6, 7 and 14 delivered through the MLI.
2Identify the treaty and the two countries. Ask whether both have signed the MLI.
3Check whether the treaty is a Covered Tax Agreement, meaning both have notified it.
4Check each country's reservations and notifications on the relevant article. For optional provisions, apply the MLI rule only where the compatibility rule for that article is met. For minimum-standard provisions, the rule applies to every CTA.
5State the modified rule, for example PPT, the PE anti-fragmentation rule or the changed preamble.
6Apply it to the facts in the case and test whether the treaty benefit or PE outcome changes.
7Link to domestic law where the question asks about implementation, such as GAAR, transfer pricing documentation or interest limitation. If you mention the equalisation levy under Action 1, state that it has been withdrawn.
8Write a clear conclusion in provision, facts and conclusion form.

Quickest way: Three-gate check for MLI cases

When to use it: Use when a case gives two countries, a treaty and a structure, and asks whether the treaty benefit survives.

Gate 1: Are both countries MLI parties? If not, stop. The old treaty applies.
Gate 2: Is the treaty listed by both as a CTA? If yes, check whether either has validly reserved the relevant article. For an optional article, a valid reservation or a mismatch means that article may be unchanged. A minimum standard still applies to the CTA.
Gate 3: Apply the modified rule, usually the PPT, to the facts. Ask whether getting the treaty benefit was a principal purpose.
Write one line for each gate, then the conclusion.

Common mistakes in Multilateral Instrument and India's Adoption of BEPS

Saying the MLI automatically changes all of India's treaties
Students think a multilateral treaty overrides every bilateral one.
Fix: State that only Covered Tax Agreements are modified, and that each article applies according to the parties' positions and the MLI's compatibility rules.
Saying the MLI replaces the existing treaty
The word 'instrument' suggests a new treaty.
Fix: Say it is read alongside the existing treaty and modifies its application. The original text remains.
Treating the PPT as requiring tax avoidance to be the sole purpose
Students read 'principal purpose' as 'only purpose'.
Fix: Write that it is enough if the benefit was one of the principal purposes, with the object-and-purpose exception.
Mixing up BEPS actions and their Indian measures
There are 15 actions with similar-sounding themes.
Fix: Learn the short map: Action 1 digital, 4 interest, 6 treaty abuse, 13 documentation, 14 disputes, 15 MLI. Remember that India's equalisation levy under Action 1 is no longer in force.
Ignoring reservations in a case
Students jump straight to applying the new rule.
Fix: Always check whether either country has reserved the article. For an optional article, the old treaty text may stay. Remember that minimum-standard provisions apply to every CTA even where the parties' methods differ.
Writing only the global theory and no Indian implementation
Students prepare the OECD side and skip domestic law.
Fix: Add one line on how India acted in treaties and in domestic law, such as CbCR and interest limitation, and mention GAAR as a domestic anti-avoidance rule that complements treaty measures. If you cite the equalisation levy, say it was abolished or withdrawn.

Worked examples

Example 1

Country X and Country Y have a tax treaty. Both have signed the MLI. Country X has listed the treaty as a Covered Tax Agreement, but Country Y has not listed it. A company in Y claims a reduced withholding rate on dividends from X. X wants to apply the MLI Principal Purpose Test. Can it?

Show the solution

Rule: the MLI modifies a treaty only if it is a Covered Tax Agreement, meaning both parties have listed it.
Facts: both have signed the MLI. But Y has not listed the treaty.
Test: the treaty is therefore not a CTA. The MLI cannot modify it.
Effect: the original treaty continues to apply. The MLI's PPT is not available under the treaty.
Note: X may still use its own domestic anti-avoidance rules, subject to the treaty.

Answer: No. Because the treaty is not listed by both countries, it is not a Covered Tax Agreement and the MLI does not modify it. X cannot apply the MLI PPT. It may rely only on its domestic anti-avoidance law, subject to the treaty.

Example 2

A holding company in Country B, set up shortly before a share sale, claims treaty relief from tax in Country A on the gain. It has no staff or real operations. Both countries have signed the MLI, have listed the treaty as a CTA, and apply the PPT. No separate protocol to the treaty governs this gain. Advise whether the treaty benefit can be denied.

Show the solution

Rule: under the PPT, a treaty benefit is denied if it is reasonable to conclude that getting that benefit was one of the principal purposes of the arrangement, unless granting it accords with the treaty's object and purpose.
Gates: both are MLI parties, the treaty is a CTA, and both apply the PPT. So the PPT applies.
Facts: the company was set up shortly before the sale and has no staff or real operations. These point to a tax-driven purpose.
Test: it is reasonable to conclude that obtaining the benefit was one of the principal purposes.
Exception: nothing suggests that granting the benefit would match the treaty's object and purpose, since there is no real economic activity.
Domestic link: Country A's general anti-avoidance rule, a domestic rule separate from the MLI, may also apply, subject to its own conditions.

Answer: Yes. The PPT applies and the facts show that the treaty benefit was one of the principal purposes of the arrangement. The benefit can be denied, and Country A's domestic general anti-avoidance rule may also be considered where its conditions are met.

Exam tips

Start every MLI answer with the conditions: both signed, treaty listed by both, and each party's reservations and choices on the article.
Use the term Covered Tax Agreement and spell out the PPT. Examiners look for these keywords.
In a case on implementation, give both routes: treaty changes through the MLI and domestic law such as CbCR and interest limitation. If you mention the equalisation levy, say that the 6% levy on online advertising was abolished from 1 April 2025 and the 2% levy on e-commerce supply was withdrawn from 1 August 2024. Mention GAAR as a domestic anti-avoidance rule that complements the treaty measures.
Check whether a specific treaty protocol governs the point before applying the MLI. For example, capital gains on shares under the India-Mauritius treaty are affected by its 2016 Protocol, so a pure MLI/PPT analysis may not be enough.
Do not quote section numbers unless you are sure. State the rule clearly in plain words instead.
For MCQs, test whether the option says the MLI applies automatically. That option is usually wrong.

Practice questions from Fundamentals of BEPS

Multilateral Instrument and India's Adoption of BEPS: frequently asked questions

What is BEPS Action 15?

Action 15 asked for a multilateral instrument to amend bilateral tax treaties quickly. The result is the MLI. It lets many countries update their treaties in one step instead of renegotiating each one.

How does the MLI modify covered tax agreements?

It applies alongside the treaty and changes its operation. A treaty is modified only if both countries listed it. How each article applies depends on the parties' choices and the MLI's compatibility rule for that article. Minimum-standard provisions apply to every covered agreement. Otherwise the original text continues.

What are the minimum standards under the MLI?

There are two. The first is prevention of treaty abuse, which includes the preamble on no double non-taxation or treaty shopping and a PPT or LOB option. The second is improved dispute resolution through MAP, reviewed by peer review. Countries must meet both, but they can choose the method for treaty abuse. The treaty abuse standard can be met by the PPT alone, by the PPT plus a Limitation on Benefits rule, or by a detailed LOB rule supplemented by a mechanism to deal with conduit arrangements.

How has India implemented BEPS in domestic law?

India has acted through transfer pricing documentation and Country-by-Country Reporting and interest limitation rules. It introduced an equalisation levy following Action 1, but the 6% levy on online advertising was abolished from 1 April 2025 and the 2% levy on e-commerce supply was withdrawn from 1 August 2024. It has also signed the MLI to change its treaties. GAAR is a domestic anti-avoidance rule that predates BEPS and complements these treaty anti-abuse measures.