The Union cabinet on 16 May accorded its approval for a multilateral convention to swiftly modify all covered bilateral tax treaties with other countries to prevent base erosion and profit sharing (BEPS).

"The Union cabinet chaired by Prime Minister Narendra Modi on 16 May gave its approval for the Multilateral Convention to implement tax treaty-related measures to prevent base erosion and profit shifting," the Finance Ministry said here in a statement.

"The multilateral convention will plug loopholes of base erosion and profit sharing. People try to artificially show shifting of profit to countries where tax is low, economic activity is low. This loophole will be plugged now," union Power Minister Piyush Goyal told reporters, briefing them about the cabinet decisions.

The convention is an outcome of the Organisation for Economic Cooperation and Development (OECD)/G20 Base Erosion and Profit Shifting (BEPS) project.

The convention will tackle base erosion and profit shifting through tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid, the statement said.

The Final BEPS Project identified 15 actions to address BEPS in a comprehensive manner. Implementation of the Final BEPS Package requires changes to more than 3,000 bilateral tax treaties which will be burdensome and time consuming. 

In view of this, the convention was conceived as a multilateral instrument which would swiftly modify all covered bilateral tax treaties to implement BEPS measures.

For this purpose, formation of an ad-hoc group for the development of such multilateral instrument was endorsed by the G20 Finance Ministers and Central Bank Governors in February 2015.

The convention implements two minimum standards related to prevention of treaty abuse and dispute resolution through mutual agreement procedure. The convention will not function in the same way as an amending protocol to a single existing treaty, which would directly amend the text of the covered tax agreements. 

"Instead, it will be applied alongside existing tax treaties, modifying their application in order to implement the BEPS measures. The convention ensures consistency and certainty in the implementation of the BEPS Project in a multilateral context. The Convention also provides flexibility to exclude a specific tax treaty and to opt out of provisions or parts of provisions through making of reservations," the statement said.