BEPS and India’s Actions
By CA Prakash Hegde and CA Raghavendra N.
What is BEPS ?
Base Erosion and Profit Shifting (‘BEPS’) refers to tax planning strategies adopted by Multi-National Companies (‘MNCs’) that exploit gaps and mismatches in tax rules, to make profit ‘disappear’ for tax purpose or shift profits to jurisdictions, where there is less or no real activity and taxes are low resulting in little or no taxes being paid.
What is BEPS Action Plan ?
Despite many measures taken by the Governments across the world, including transfer-pricing and others, various concerns were raised that MNCs were avoiding the payment of their fair share of taxes and were shifting profits to low tax jurisdictions. In this backdrop, the G20 nations initiated the BEPS Action Plan project to ensure profits are taxed, where the economic activities are performed and value was created. The task of developing the Action Plan to tackle BEPS in a comprehensive manner was given to the Organisation for Economic Co-operation and Development (OECD).
The OECD commenced work on BEPS Action Plan to address the concerns of the existing tax principles failing to keep pace with the modern business operating models. In September 2014, the OECD published seven papers as its first tranche of deliverables and later, eight papers forming the second tranche of its deliverables. In October 2015, the OECD issued the final 15 reports on BEPS focus areas and the same has been endorsed by the G-20 Finance Ministers at their meeting.
The 15 Action Plans of OECD in addressing BEPS are:
- Digital Economy
- Hybrid Mismatch Arrangements
- Controlled Foreign Companies (CFC) regimes
- Financial payments
- Harmful tax practices
- Treaty abuse
- Permanent Establishment (PE) status
- Transfer pricing and intangibles
- Transfer pricing and risks/capital
- Transfer pricing and other high risk transactions
- Data and methodologies
- Disclosure of aggressive tax planning
- Transfer pricing documentation
- Dispute resolution mechanisms and
- A multilateral instrument.
BEPS and India’s Actions
India, being a member of the G20 nations, has actively participated in the OECD BEPS Action Plan project and is bound by the final announcements. The BEPS action plans are extremely relevant to India and will impact, not only outbound investments, but also inbound structures, financing arrangements of MNCs, especially the action plans dealing with digital economy, transfer pricing documentation and country-by-country reporting, treaty abuse, etc.
India has already introduced some of the measures, out of the above 15 Action Plans. The important ones are:
- Equalization Levy for specified digital transactions – introduced with effect from Financial Year (‘F’Y’) 2016-17 (Action Plan 1);
- Place of Effective Management (‘POEM’) – with effect from FY 2016-17 (similar to Action Plan 3);
- Thin Capitalisation – introduced with effect from FY 2017-18 (Action Plan 4);
- Patent Box Regime – introduced with effect from 2016-17 (Similar to Action Plan 5);
- Revisions in tax treaties – specifically with Mauritius and Singapore (Action Plan 6);
- Country-by-Country Reporting (CbC) – introduced with effect from FY 2016-17 (Action Plan 13);
- General Anti Avoidance Rules (GAAR) – with effect from FY 2017-18; and
- Buy-back tax – with effect from FY 2013-14.
BEPS Action Plan measures are significant and represent the need for substantial amendments / overhaul required in the international tax rules to adhere to the rapid changing business operating models. It is indeed expected that the BEPS measures would bring about changes in the mindset of MNCs and thereby help in profits being reported and taxed in the right jurisdiction, where the economic activities generate such income. Though India has accepted the BEPS Action Plan as a G20 member, it is still not bound by the OECD decisions, as it is an observer. But, it is interesting to note that, India has already implemented many of the measures under the Action Plan, without much delay to combat BEPS.
 Organisation for Economic Co-operation and Development