September 2021

MLI SERIES ANALYSIS OF ARTICLES 3, 5 & 11 OF THE MLI

Ganesh Rajgopalan
Chartered Accountant

A. ARTICLE 3 – Hybrid mismatch arrangement

Instances of entities treated differently by countries for taxation are commonplace. A partnership is a taxable person under the Indian Income-tax Act, 1961, while in the United Kingdom a partnership has a pass-through status for tax purposes, with its partners being taxed instead. The problems caused by such asymmetric treatment of entities as opaque or transparent for taxation by the Contracting States is well-documented. There have been attempts to regulate the treatment of such entities, notably the 1999 OECD Report on Partnerships and changes made to the Commentary on Article 1 of the OECD Model in 2003. One common problem where Contracting States to a tax treaty treat an entity differently for tax purposes is double non-taxation. Let us take the following example, which illustrates double non-taxation of an entity’s income:

Example 1: T is an entity established in State P. A and B are members of T residing in State R. State P and State S treat the entity as transparent, but State R treats it as a taxable entity. T derives business profits from State S that are not attributable to a permanent establishment in State S.

Figure 1

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