New Delhi: India has opposed an international proposal to make arbitration binding and mandatory under the mutual agreement procedure (MAP) to resolve disputes in tax treaties, saying it will impinge on its sovereign rights.

Last week, the Organisation for Economic Co-operation and Development (OECD) had released its recommendations to effectively tackle so-called base erosion and profit shifting (BEPS) to ensure that multinational companies do not evade taxes in the countries they are operating in. The suggestions aim to create international tax rules to end the practice of companies artificially shifting profits to low-tax jurisdictions, a practice that hurts countries such as India that are considered to be a lucrative market.

“While we support the BEPS project, it is necessary to underline that the concerns of developing countries regarding BEPS may be different from those of developed countries," said Nirmala Sitharaman, minister of state for finance, at the Group of Twenty (G-20) finance ministers’ meeting in Cairns, Australia, on Sunday. These concerns should be taken into account while developing a consensus on the issue, she said.

Some companies operating in India, such as Nokia, have been looking to invoke MAP to sort out disputes with the Indian tax authorities.

One of the major concerns of the developing countries is the approach adopted for making dispute resolution mechanisms more effective, Sitharaman said.

The BEPS proposal includes the introduction of mandatory and binding arbitration in the MAP of tax treaties.

“This not only impinges on the sovereign rights of developing countries in taxation, but will also limit the ability of the developing countries to apply their domestic laws for taxing non-residents and foreign companies," she said.

BEPS has been a cause of concern for developing and emerging economies for long as it erodes their tax base, depriving them of much-needed resources for developmental activities, she pointed out.

Sitharaman welcomed the new global standard on the automatic exchange of information, which will enable automatic exchange of information between all countries about taxpayers hiding their money in offshore financial centres and tax havens through multi-layered entities with non-transparent ownership.

“This would be the key to prevent international tax evasion and avoidance and would be instrumental in getting information about unaccounted money stashed abroad and ultimately bringing it back," she said, pointing out that one of the first steps taken by the Narendra Modi government was to constitute a special investigation team to bring back black money.

The new global standards on automatic exchange of information should be implemented with a common timeline with coverage of as many countries as possible, she said. India has also asked countries to make necessary legislative changes in their domestic laws so as to enable them to provide the same level of information to other countries as they would be receiving from those countries.

India is hopeful that it will be able to access seamless information about its taxpayers from countries including Switzerland and Cyprus once the agreement comes into force.

“At present, under MAP, outcome depends on both countries agreeing to the outcome of the arbitration. What is being proposed is to make this binding to both parties irrespective if one side disagrees, which India is opposing," said Sudhir Kapadia, partner and national tax leader at EY.

“While India wants to retain the right to disagree, the flip side is that the finality under MAP may not be reached and cases may not get settled," he said.

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