India and Sri Lanka amended their DTAA by introducing the Principal Purpose Test (PPT) under the OECD BEPS framework to curb treaty shopping and prevent tax treaty abuse.
NEWS: India and Sri Lanka have amended their Double Taxation Avoidance Agreement (DTAA) by incorporating the Principal Purpose Test (PPT) to prevent tax treaty abuse.
ABOUT
- DTAA is an agreement between two countries to ensure that the same income is not taxed twice.
- The amendment aligns the treaty with the OECD Base Erosion and Profit Shifting (BEPS) framework.
KEY HIGHLIGHTS
- Introduces the Principal Purpose Test (PPT), an anti-abuse rule that denies treaty benefits if an arrangement is primarily intended to obtain tax advantages rather than conduct genuine business.
- Implements changes recommended under the OECD Multilateral Instrument (MLI).
- Since Sri Lanka is not covered through India's automatic MLI updates, the treaty was amended through a bilateral protocol.
- The amended protocol came into force on 19 June 2026 and will apply in India to income earned from 1 April 2027.
IMPORTANT TERMS
- Principal Purpose Test (PPT): Prevents misuse of tax treaties by denying benefits to arrangements mainly created for tax avoidance.
- Treaty Shopping: Routing investments through a third country solely to claim favourable treaty benefits.
- BEPS (Base Erosion and Profit Shifting): Tax avoidance strategies used by multinational companies to shift profits to low-tax jurisdictions.
- Multilateral Instrument (MLI): An OECD mechanism to rapidly amend bilateral tax treaties and implement BEPS measures.