Direct Tax Laws & International Taxation · Latest Developments in International Taxation

Multilateral Instrument and Treaty Developments

Updated 5 October 2026 · Fact-checked

The Multilateral Instrument (MLI) is a single convention that updates many bilateral tax treaties at once to implement BEPS measures. Its key rule is the principal purpose test: treaty benefit is denied if obtaining it was one of the principal purposes of an arrangement. To solve questions, find the covered agreement, check both countries' choices, then apply the test to the facts.

Understand Multilateral Instrument and Treaty Developments

Before the MLI, changing a tax treaty meant renegotiating it country by country. With thousands of treaties, that was too slow to implement the OECD/G20 BEPS project. The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS, called the MLI, solves this. Countries sign one text, and it changes their existing treaties together. India signed in June 2017, deposited its instrument of ratification in June 2019, and the MLI entered into force for India on 1 October 2019. For India, the MLI provisions generally took effect from 1 April 2020 (financial year 2020-21). For taxes withheld at source, this means tax withheld on or after that date. For other taxes, it means periods starting on or after that date. The exact date depends on each treaty and on the other country's notifications.

The MLI does not replace your treaty. It sits alongside it. A treaty is changed only if it is a Covered Tax Agreement (CTA), meaning both countries have listed it in their MLI notifications. Each country picks which articles it adopts and records reservations. A provision modifies a treaty only where both countries have adopted it, or where their choices are compatible as the article itself provides. For example, under Article 7 the principal purpose test (PPT) applies as the minimum standard even if the two countries pick different supplementary options, such as one choosing the PPT alone and the other choosing the PPT with a simplified limitation on benefits. So you always need both countries' positions, not just India's. Practitioners use a synthesised text to read the treaty and the MLI together. The synthesised text is a convenience, not the legal text.

The MLI has minimum standards, which every signatory must meet. They are: the treaty preamble stating the treaty is not meant to create double non-taxation or treaty shopping (Article 6), prevention of treaty abuse (Article 7), and improved dispute resolution through the mutual agreement procedure (Article 16). Other articles are optional. They cover hybrid mismatches, dual-resident entities, permanent establishment (PE) rules such as commissionaire arrangements and specific activity exemptions, and arbitration.

The key anti-abuse tool is the principal purpose test (PPT). Treaty benefit is denied for an item of income if, having regard to all relevant facts and circumstances, it is reasonable to conclude that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in the benefit. The exception is where granting the benefit would be in accordance with the object and purpose of the treaty provisions. The test is not met merely because tax was a factor. It looks at commercial substance, timing, and who actually earns the income. Treaty developments in India also include bilateral protocols that add the PPT or change source rules. Always check the current position in your study material for any named country.

Key rules to remember

What the MLI does: MLI + Covered Tax Agreement = modified treaty (only where both countries' choices match); No change applies to a treaty if it is not listed by both parties, or if one party reserved the article.
Minimum standards: Article 6 (preamble) + Article 7 (treaty abuse) + Article 16 (MAP); Every signatory must meet these. Optional articles are chosen individually.
Principal purpose test: Benefit denied if: arrangement exists + obtaining the benefit was one of the principal purposes + granting it is not in line with the treaty's object and purpose; The test is objective and fact-based. 'One of' the principal purposes is enough. It need not be the sole or main purpose.
Denial and the object-and-purpose exception: Benefit is denied if one of the principal purposes test is met, unless it is established that granting the benefit accords with the object and purpose of the treaty. Assess the facts first, then conclude.; Do not state that denial is automatic. State the facts first, then conclude.
Relationship with domestic law: Treaty relief is claimed under the domestic treaty-relief provision (section 90 and 90A of the Income-tax Act, 1961, or the corresponding provision of the Income-tax Act, 2025 where ICAI's applicability notice covers it), subject to GAAR and the PPT; Follow the Act and section numbering that ICAI prescribes for your attempt. Cite section 90/90A of the 1961 Act where it applies, and cite the corresponding provision of the 2025 Act only where ICAI's applicability notice covers it. MLI and domestic anti-avoidance rules can both apply. They are separate tests.

How to solve Multilateral Instrument and Treaty Developments questions

Use this method for any question on the MLI, the PPT or treaty updates.

1Identify the treaty country and the income or issue (royalty, dividend, PE, residence).
2Check whether the treaty is a Covered Tax Agreement, meaning both India and the other country have listed it.
3Identify which MLI article is relevant, for example Article 7 for the PPT or the PE articles for commissionaire arrangements.
4Check whether both countries adopted that article without reservation. If either reserved, state that the treaty is unchanged on that point.
5Apply the article to the facts. For the PPT, list facts on commercial purpose, substance, timing and who bears the economic benefit.
6Conclude: benefit denied, or granted because it accords with the treaty's object and purpose. Note any separate GAAR or domestic issue.
7Write in provision-facts-conclusion form and state your assumptions on facts or country positions.

Quickest way: Three-gate check for MLI questions

When to use it: Use when you have little time and the question asks whether an MLI change affects a treaty benefit.

Gate 1: Is the treaty a Covered Tax Agreement? If not, stop.
Gate 2: Did both countries adopt the relevant article? If not, stop and say no change.
Gate 3: Apply the article. For the PPT, ask whether getting the treaty benefit was one of the principal purposes and, if so, whether it still fits the treaty's object and purpose.
Write one line each for the three gates, then the conclusion.

Common mistakes in Multilateral Instrument and Treaty Developments

Saying the MLI replaces or amends every Indian treaty automatically.
Students remember that the MLI covers many treaties and forget the matching requirement.
Fix: State that only Covered Tax Agreements are modified, and only where both countries' notified choices match.
Treating the PPT as requiring tax saving to be the sole purpose of the arrangement.
Students mix it up with the main-purpose wording of some domestic rules.
Fix: Write that the test is met if obtaining the benefit was one of the principal purposes, subject to the object-and-purpose exception.
Denying treaty benefit just because a tax saving exists.
Students assume any tax saving is abusive.
Fix: Examine commercial reasons and substance. A bona fide business structure with real operations may still qualify.
Confusing the MLI with GAAR or with the domestic treaty-relief provision.
All three deal with anti-avoidance and treaties, so they blur together.
Fix: Keep them separate: the MLI changes the treaty text, GAAR is a domestic rule, and the treaty-relief provision (section 90 of the 1961 Act, or the corresponding provision of the 2025 Act where ICAI's applicability notice covers it) is the domestic relief framework. Mention that more than one can apply.
Listing optional articles as minimum standards.
Students memorise article numbers without categories.
Fix: Remember the three minimum standards only: the preamble (Article 6), treaty abuse (Article 7) and MAP (Article 16).
Quoting a specific treaty rate or an India position from memory without checking.
Students try to recall country details.
Fix: Rely on facts and rates given in the question. If the position is not given, state the general rule and your assumption.

Worked examples

Example 1

Alpha Ltd, a company in Country X, was set up two months before it received a royalty of ₹50,00,000 from an Indian company. Alpha has no employees or office. Its parent, a resident of Country Z with no treaty with India, directs all its affairs. The India-X treaty is a Covered Tax Agreement and both countries adopted the PPT. Assume the India-X treaty rate on royalty is 10% and the domestic rate is 20%. Ignore surcharge and cess for simplicity. Can Alpha claim the 10% rate?

Show the solution

Provision: Under the PPT in the MLI, treaty benefit is denied if obtaining it was one of the principal purposes of an arrangement, unless granting it fits the object and purpose of the treaty.
Facts: Alpha was formed shortly before the royalty. It has no staff or office. Its parent in a non-treaty country makes all decisions. The only visible reason for the structure is access to the India-X treaty.
Application: It is reasonable to conclude that obtaining the treaty rate was one of the principal purposes. The treaty's object is unlikely to be to give benefits to residents of a third country that has no treaty with India.
Computation if denied (surcharge and cess ignored): tax at the domestic rate of 20% = ₹50,00,000 × 20% = ₹10,00,000. If allowed it would be 10% = ₹5,00,000.
Conclusion: On these facts the benefit is likely to be denied, and the difference on the assumed rates is ₹10,00,000 − ₹5,00,000 = ₹5,00,000. Alpha could try to rebut this by showing real commercial substance, which the facts do not show.

Answer: On these facts, Alpha is likely to be denied the 10% rate because the PPT appears to apply. At the assumed domestic rate of 20%, tax would be ₹10,00,000 instead of ₹5,00,000, ignoring surcharge and cess. The conclusion could change if Alpha shows real commercial substance.

Example 2

India's notification covers a treaty with Country Y. India has adopted an MLI article on commissionaire arrangements creating a PE. Country Y has reserved the right not to apply that article. Does the MLI change the PE rule in the India-Y treaty?

Show the solution

Provision: The MLI modifies a Covered Tax Agreement for an article only where both parties have adopted it. A reservation by either party stops the change.
Facts: India adopted the article. Country Y reserved on it.
Application: The choices do not match, so there is no agreed modification of the PE rule on commissionaire arrangements.
Consequence: The original PE article of the India-Y treaty continues to apply on this point. Other MLI articles that both countries adopted, such as the PPT, can still apply.
Conclusion: The commissionaire PE change does not apply to the India-Y treaty, while other matched articles may.

Answer: No. The MLI does not change the commissionaire PE rule in the India-Y treaty because Country Y reserved on it. The original treaty text continues for that point.

Exam tips

Write the three gates (covered agreement, matching choices, application) in your answer. Examiners reward the structure.
In PPT cases, list the facts for and against commercial substance before concluding. A conclusion without facts loses marks.
Memorise the three minimum standards and one example of an optional article. Short-answer questions often ask for these.
Check whether the question gives country positions or rates. If it does, use them. If not, state your assumption clearly.
Link the answer to GAAR and the domestic treaty-relief provision when the facts involve treaty relief, but keep each rule separate. Use the Act and section numbering ICAI prescribes for your attempt: section 90/90A of the 1961 Act where it applies, or the corresponding provision of the 2025 Act only where ICAI's applicability notice covers it.

Practice questions from Latest Developments in International Taxation

Multilateral Instrument and Treaty Developments: frequently asked questions

What is the MLI in simple words?

It is one international convention that changes many existing tax treaties at the same time, so countries do not have to renegotiate each treaty. It implements BEPS measures such as anti-abuse rules and better dispute resolution. It applies only to treaties both countries have listed.

What is the principal purpose test?

It denies treaty benefit if obtaining that benefit was one of the principal purposes of an arrangement. The benefit may still be given if it is in line with the treaty's object and purpose. The decision depends on facts such as commercial reasons and substance.

How does the MLI modify tax treaties if the text of the treaty does not change?

The MLI applies alongside the treaty and modifies how it applies where both countries have adopted the relevant article, or where their choices are compatible as the article provides. The original treaty text stays as it is. Synthesised texts help you read both together, but they are not the legal text.

Do I need to remember India's choices for every article?

You should know the main ideas and the three minimum standards, not every country-wise choice. In the exam, the question usually gives the facts or positions needed. If it does not, state the general rule and your assumption.