Applying MLI in International Tax Dispute Resolution

🌎 Yesterday, Brazil signed a protocol to the tax treaty with the Slovak Republic (which was originally a treaty signed in 1986 with Czechoslovakia). Unlike most of the protocols signed by Brazil in recent years, this is a major overhaul of the 1986 agreement - it essentially incorporates several MLI provisions into its text (Slovakia signed the MLI in June of 2017). The protocol is available here (https://bit.ly/49uvGGf). Here are some of its highlights: ✅ In terms of BEPS minimum standards, the protocol incorporates the preamble of the 2017 Model into this treaty. It modifies the MAP clause in Art. 25 and it adds to the treaty an Art. 26-A titled "Entitlement to Benefits". This clause features the LOB and the PPT of the 2017 Model with a third-State PE provision in (7) that references the minimum rate of 15% (aligned with P2 and also with a recent protocol signed by Brazil with China - https://bit.ly/3D6j8J4). ♻️ The protocol modifies the tie-breaker rule in Art. 4(3) (deferring to MAP oriented by POEM instead of just POEM) and brings substantial changes to Art. 5 of the treaty - all of the BEPS Action 7 proposals plus the insurance clause found only in Art. 5(6) of the 2021 UN Model. ⚙️ The protocol removes from the treaty the 25% WHT matching credit provision of Art. 23(4) (for interest and royalties) and the provision about the non-taxation of undistributed profits in Art. 23(5). 💡 The protocol adds new provisions to the original protocol to the tax treaty, including item 7 (which says that the Social Contribution on Net Profits is a covered tax), item 8 (which says that the Brazilian interest on net equity is a form of "interest" under Art. 11 of the treaty), item 9 (which says that tax disputes referring to the treaty shall be governed only by the treaty) and item 10 (which says that the treaty does not prevent States from applying their own domestic anti-abuse rules - insofar as this implies domestic GAARs, it is a violation of the commitment of Inclusive Framework members under BEPS Action 6, as I pointed out here: https://bit.ly/42iBqz9). 🧿 Though Brazil has signed some recent treaties featuring the UN's Fees for Technical Services clause (Art. 12A of the UN Model), this protocol simply maintains item 3 of the protocol to the original treaty, which states that Art. 12 (Royalties) shall apply to "income derived from the rendering of technical assistance and technical services." If you are interested in learning more about the discussions surrounding the qualification of "fees for technical services" as royalties in Brazil, check out a recent article published on LinkedIn by Gabriel Bez-Batti (in Portuguese: https://bit.ly/4g5Pa6v). ✴️ Finally, the protocol adds the BEPS Action 2 proposal enshrined in Art. 1(2) of the OECD Model (and - upon ratification - also this treaty) and the BEPS Action 6 non-minimum standard known as the "saving clause" in Art. 1(3).

ITAT Mumbai: MLI provisions not enforceable without separate notification In a significant ruling, the Mumbai ITAT (Sky High Appeal XLIII Leasing Co. Ltd. v. ACIT [TS-1085-ITAT-2025(Mum)]) held that provisions of the Multilateral Instrument (MLI) cannot be applied to deny treaty benefits under the India–Ireland DTAA unless a specific notification under Section 90(1) incorporates those provisions into Indian law. Relying on the Supreme Court’s decision in Nestlé SA, the Tribunal held: - Mere notification of the MLI does not automatically amend an existing DTAA. - Synthesized texts have no legal force. They are only explanatory. - Any treaty modification altering rights or obligations must be expressly notified to be enforceable. On facts, the ITAT rejected Revenue’s attempt to invoke the Principal Purpose Test (arising out of MLI) and confirmed that the assessee was entitled to DTAA benefits.

📢 MLI ≠ Automatic Override: Mumbai ITAT Draws a Firm Line on Treaty Interpretation In a recent ruling, the Mumbai ITAT has held that Articles 6 & 7 of the Multilateral Instrument (MLI)—including the Principal Purpose Test (PPT)—do not automatically apply to the India–Ireland DTAA without a specific notification under Section 90(1) of the Income-tax Act. Why This Matters: This decision is a watershed moment for international tax jurisprudence in India. It reaffirms the principle laid down by the Supreme Court in Nestlé SA (2023): treaty modifications via MLI must be consciously and explicitly notified to be enforceable under domestic law. Key Takeaways: > MLI is not self-executing: Even if India and Ireland have ratified the MLI and designated their DTAA as a Covered Tax Agreement, the PPT provisions cannot be applied unless separately notified. >Synthesised texts ≠ legal instruments: The Tribunal clarified that these are merely interpretive aids and do not carry legal force. >Commercial substance prevails: The ruling underscores that genuine business structures—especially those aligned with global industry norms—should not be second-guessed under PPT without compelling evidence. 📌 Next Steps for Taxpayers & Advisors: >Reassess treaty positions where MLI-based challenges have been raised. >Monitor for future notifications under Section 90(1) that may incorporate MLI provisions into specific DTAAs. >Strengthen documentation around commercial rationale and substance to pre-empt PPT scrutiny, specially in cases of cross-border structuring. >This ruling could shape how India operationalizes MLI commitments going forward Your Thoughts? Will this ruling prompt a shift in how MLI is applied across other DTAAs? Are we heading toward a more notification-driven treaty regime? Let’s discuss!! #MLI #BEPS #InternationalTax #TaxTreaty #PPT #NestleSA #CrossBorderTaxation #TreatyOverride #TaxUpdate #CrossBorderStructures

Impact of Principal Purpose Test on SPVs for Aircraft Leasing through Ireland? A unique feature of the 2002 Indo-Ireland tax treaty is that the definition of royalties concerning payments of any kind received as a consideration for “the use of or the right to use industrial, commercial or scientific equipment” specifically excludes aircraft lease rentals as reflected by the additional words “other than an aircraft”.  This is a solitary Indian tax treaty with such an exclusion. BTW, Ireland has similar provisions in treaties with some Asian, African, and Middle Eastern countries and emerging economies- though not in treaties with Western economies. Coincidentally, when the Indo-Irish tax treaty came into force in 2002, the old Indo-Austrian tax treaty, which was then the only tax treaty that did not have any provision for taxation of equipment rental- including aircraft rental, ceased to be effective on being substituted by a new Indo-Austrian tax treaty notified in Sept 21. In the mid-90s, when the entry of private operators began in the Indian aviation market,  coincidentally enough, perhaps there were hardly any aircraft leasing transactions that Indian operators had with Irish companies, and even Austrian entities were leasing aircraft, even if through back-to-back arrangements, to Indian entities.  These transactions were also routed through the parent entities in the US and elsewhere, but perhaps hardly ever through the Irish entities. That was past. Life has taken a full circle. The question that had arisen in a recent case before the ITAT was the treaty entitlement of an Irish SPV, said to have been formed by a Cayman Island company for aircraft leasing, including to India, and whether it could be hit by the ‘Principal Purpose Test’ in MLI Art 7. The ITAT, in the Sky High Leasing case [TS-1085-ITAT-2025(Mum)], holds in negative and in favour of the taxpayer. The ITAT  found support from SC judgments in Azadi Bachao and Vodafone Int'l Holdings for TRC being somewhat conclusive proof of residency, even though those decisions were strictly on the Indo-Mauritius tax treaty and on the binding nature of CBDT circulars rather than on treaty principles in general. Significantly, post-MLI, substance and commercial rationale—not mere form or TRC—ultimately secure treaty benefit. The ITAT observes, and very interestingly so, that “the true inquiry is whether one of the principal purposes of entering into relevant arrangement or transaction was to obtain the treaty benefit, divorced from genuine commercial consideration", and analyses the issues at length. While one may have issues with, or rather apprehensions about the possible fallout of, certain observations in, and even certain conclusions of, the judgment, it surely makes compelling reading. This judgment has many significant dimensions, and I look forward to analysing the same in the coming week. One LinkedIn post cannot be sufficient even to set out all these nuances.