Base Erosion Profit Shifting

Introduction:

With the development of technology and globalization of businesses, Multinational enterprises (MNEs) have started designing their business operations in a way to minimize their global tax cost through making effective use of tax rules and applicable exemptions available under tax treaties. However, on the other hand, International Tax Rules have not been able to keep pace with the developments in the world economy, resulting into double non-taxation and stateless income. As a result, Organization for Economic Co-operation and Development (OECD) started to shape out a plan to mitigate harmful tax practices to ward off negative effects of MNEs tax avoidance strategies on national tax base.

In the background of above consequence, in February, 2013, the OECD published a report on “Addressing Base Erosion and Profit Shifting” iterating the need for analyzing the issue of tax base erosion and profit shifting by global corporations. The OECD followed it up with publishing an Action Plan on Base Erosion and Profit Shifting (BEPS Action Plan) in July 2013. The BEPS action plan identifies fifteen actions to address BEPS in a comprehensive manner and sets a deadline to implement those actions.

The Action Plans were structure around three fundamental pillars, viz:

  1. Reinforcing of ‘substance’ requirements in existing international standards;
  2. Alignment of taxation with location of value creation and economic activity; and
  • Improving transparency and tax certainty.

BEPS refers to 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. Although some of the schemes used are illegal, most are not. This undermines the fairness and integrity of tax systems because businesses that operate across borders can use BEPS to gain a competitive advantage over enterprises that operate at a domestic level.  Moreover, when taxpayers see multinational corporations legally avoiding income tax, it undermines voluntary compliance by all taxpayers.

BEPS is of major significance for developing countries due to their heavy reliance on corporate income tax, particularly from multinational enterprises. Engaging developing countries in the international tax agenda is important to ensure that they receive support to address their specific needs.

Developing countries have been engaged since the beginning of the BEPS Project. Over 80 developing countries and other non-OECD/non-G20 economies discuss the challenges of BEPS through direct participation in the Committee on Fiscal Affairs, regional meetings in partnership with regional tax organisations, and thematic global fora. Many developing countries are now joining the inclusive framework.

The OECD has iterated the following terms to indicate the commitment by various participants countries:

  1. New minimum standards: It implies the application of new rule to be implemented by all states; the new minimum standards are identified to fight harmful tax practices, prevent tax treaty abuse, including treaty shopping, improve transparency with the Country-by-Country reporting, and enhance the effectiveness of dispute resolution.
  2. Revision of standard which already exists: Such revisions should be binding but with the caveat that all BEPS participants have not endorsed the revisions; and
  • Best Practice: A best practice is not a standard but an optional recommendation for the state to follow.

Why BEPS?

  1. Implementing measures protects your tax base, such as the development of provisions to avoid treaty abuse and to introduce Country-by-Country Reporting, for which the BEPS Package provides minimum standards.
  2. Having an equal voice in the development of standard setting and BEPS implementation monitoring.
  3. Access to capacity building support including guidance on developing Action Plans for BEPS implementation.
  4. Being part of a wider community of exchanges of practice and sharing experiences with other countries.

Fundamental changes are needed to effectively prevent double non-taxation, as well as cases of no or low taxation associated with practices that artificially segregate taxable income from the activities that generate it. The expectation is that once BEPS is implemented, the measures restore taxation in a number of instances where income would otherwise go untaxed. Depending on the planning structure used, one or more of the measures developed will have an impact and ensure that income is taxed at least one time and not more than once. Rather than closing individual schemes, the measures go to their roots.

Action Plan 1: Digital Economy

Action 1 addresses the tax challenges of the digital economy and identifies the main difficulties that the digital economy poses for the application of existing international tax rules. This Action Plan outlines options to address these difficulties, taking a holistic approach and considering both direct and indirect taxation.

A virtual PE comes into existence due to tax mismatch arising from nexus created between income generation and physical presence. Digitalisation has a wide range of implications for taxation, impacting tax policy and tax administration at both the domestic and international level, offering new tools and introducing new challenges. Each tax jurisdiction which comes across a digitized enterprise doing trade in its jurisdiction has to confirm if the significant revenues are generated from in country customers. If this is the main cause for substantial economic presence being created, then that country can consider bringing in a suitable law to tackle BEPS issues.

Building on the 2015 BEPS Action Plan 1 Report, the OECD released an Interim Report on ‘Tax Challenges Arising from Digitalisation’ in March, 2018 which includes an in-depth analysis of the changes to the business models and value creation arising from digitalization, and identifies characteristics that are frequently observed in certain highly digitized business models.

The interim report observes that Members of the Inclusive Framework on BEPS have different opinion on the question of whether, and to what extent, the features identified as being frequently observed in certain highly digitalized business models should result in changes to the international tax rules.

 In addition, Interim Report discusses interim measures that some countries have indicated, they would implement, believing that there is a strong imperative to act quickly. In particular, the Interim Report considers an interim measure in the form of a tax on supply of certain e-services within their jurisdiction that would apply to gross consideration paid for supply of such e-services. The Interim Report also looks at how digitalization is affecting other areas of the tax system, including the opportunities that new technologies offer for enhancing taxpayer services and improving compliance, as well as the tax risks.

Taxation issues in E-commerce:

These new business models have created new tax challenges. The typical taxation issues relating to e-commerce are:

  1. The difficulty in characterizing the nature of payment and establishing a nexus or link between a taxable transaction, activity and a taxing jurisdiction,
  2. The difficulty of locating the transaction, activity and identifying the tax payer for income tax purposes.

The OECD has recommended several options to tackle the direct tax challenges which includes:

  • Modifying the existing Permanent Establishment (PE) rule – to provide whether the enterprise enagaged in fully de-materalised digital activities would constitute PE, if it maintained a significant digital presence in another country’s economy.
  • A virtual fixed place of business PE in the concept of PE i.e creation of a PE when the enterprise maintains a website on a server of another enterprise located in a jurisdiction and carries on business through that website.
  • Imposition of a final withholding tax on certain payments for digital goods or services provided by a foreign e-commerce provider or imposition of a equalisation levy on consideration for certain digital transactions received by a NR from resident or from a NR having PE in other contracting state.

Considering the growing business of new digital economy and the rapidly evolving nature of business operations, it becomes necessary to address the challenges w.r.t. taxation of the digital transactions.

Changes in the Indian Tax regime:

  • Insertion of Chapter VIII in the Finance Act, 2016 on the Equalisation levy to address the challenge.
  • Section 9(1)(i) – “Significant economic presence” to constitute “business connection”.

Action Plan 2: Neutralise the effects of hybrid mismatch arrangements

The focus of Action Plan 2 is on developing model treaty provisions and recommendations regarding the design of domestic rules to neutralise the effect (e.g. double non-taxation, double deduction, long-term deferral) of hybrid instruments and entities. This may include:

  1. changes to the OECD Model Tax Convention to ensure that hybrid instruments and entities (as well as dual resident entities) are not used to obtain the benefits of treaties unduly;
  2. domestic law provisions that prevent exemption or non-recognition for payments that are deductible by the payor;
  3. domestic law provisions that deny a deduction for a payment that is not includible in income by the recipient (and is not subject to taxation under controlled foreign company (CFC) or similar rules);
  4. domestic law provisions that deny a deduction for a payment that is also deductible in another jurisdiction; and
  5. where necessary, guidance on co-ordination or tie-breaker rules if more than one country seeks to apply such rules to a transaction or structure.

To understand this Action Plan, we need to first understand what hybrid mismatch is –

Hybrid mismatches are cross-border arrangements that take advantage of differences in the tax treatment of financial instruments, asset transfers and entities to achieve “double non-taxation” or long-term deferral outcomes which may not have been intended by either country. A common example of a hybrid financial instrument would be an instrument that is considered a debt in one country and equity in another so that a payment under the instrument is deductible when it is paid but is treated as a tax-exempt dividend in the country of receipt.

The same is pictorially presented below:

Exploits a difference in the tax treatment of an entity or an instrument

Instrument considered as Debt in one country – Deduction of interest as an expense

Same instrument considered as equity in the other Country where dividend is an exempt income

Under the laws of two or more tax jurisdictions
To achieve double non-taxation

Recommended general amendments are as follows:

  • A rule denying transparency to entities where the non-resident investors resident country treats entity as opaque;
  • A rule denying an exemption or credit for foreign underlying tax for dividends that are deductible by the payer;
  • A rule denying a Foreign Tax Credit for withholding tax where that tax is also credited to some other entity; and
  • Amendments to Controlled Foreign Company (CFC) and similar regimes attributing local shareholders the income of foreign entities that are treated as transparent under their local law

The OECD released a further report on Action Plan 2 in July 2017 which sets out recommendations for branch mismatch rules that would bring the treatment of these structures into line with the treatment of hybrid mismatch arrangements set out in 2015 report.

Branch mismatch arises where the ordinary rules for allocating income and expenditure between the branch and head office results in a portion of net income of the tax payer escaping the charge to taxation in both the branch and residence jurisdiction. The 2017 Report identifies five basic types of branch mismatch arrangements that give rise to one of the three types of mismatches: deduction/no inclusion outcomes, double deduction (DD) outcomes, and indirect deduction / no inclusion outcomes. The recommendations are as follows:

  • A rule limiting the scope of branch exemption;
  • A rule denying deduction for branch payee mismatches by the payer jurisdiction on account of differences in the allocation of payments between the residence and the branch jurisdiction or between two branch jurisdictions; or payment to a branch that is disregarded by the payer jurisdiction;
  • A rule denying deduction for the payment to the extent it gives rise to a branch mismatch resulting from fact that such payment is disregarded under the laws of payee jurisdiction;
  • A rule for denying deduction in investor jurisdiction, failing which denying deduction in the payer jurisdiction for double deduction outcomes;
  • A rule denying deduction by payer jurisdiction of any payment directly or indirectly funds deductible expenditure under a branch mismatch arrangement.

Therefore, the 2017 Report includes specific recommendations for improvements to domestic laws intended to reduce the frequency of branch mismatch as well as targeted branch mismatch rules which adjust the tax consequence in either the residence or branch jurisdiction in order to neutralise the hybrid mismatch without disturbing any of the other tax, commercial or regulatory outcomes.

Action Plan 3: Strengthen Controlled Foreign Company (CFC) Rules

This OECD Report sets out recommendations in the form of building blocks for effective CFC rules. The recommendations are designed to ensure that jurisdictions that choose to implement them, have rules that effectively prevent taxpayers from shifting income into foreign subsidiaries.

The report sets out the following six building blocks for the design of effective CFC rules: (1) definition of a CFC, (2) CFC exemptions and threshold requirements, (3) definition of income, (4) computation of income, (5) attribution of income, and (6) prevention and elimination of double taxation. Because each country prioritizes policy objectives differently, the recommendations provide flexibility to implement CFC rules that combat BEPS in a manner consistent with the policy objectives of the overall tax system and the international legal obligations of the country concerned.

The building blocks are as follows:

  1. Definition of CFC: CFC rules apply to foreign subsidiaries controlled by the shareholders in the parent jurisdiction, exercising legal and economic of about around 50% controlling interest. OECD recommends application of CFC rules to non-corporate entities, if those entities earn income that raises BEPS concerns and such concerns are not addressed.
  2. CFC exemptions and threshold requirements: Companies should be exempted from the CFC rules where they are subject to an effective tax rate that is not below the applicable tax rate in the parent jurisdiction.
  3. Definition of income: CFC rules should have a definition of income that ensures that BEPS concerns are addressed, but countries are free to choose their own definition.
  4. &5. Computation of income and attribution of income: CFC income should be calculated under a notional application of the parent jurisdiction’s tax laws and attribution should be subject to a control threshold and based on proportionate ownership.
  5. Prevention and elimination of double tax: CFC rules should not result in double tax. The specific measures suggested are to provide a credit for foreign tax paid on CFC income, provide relief where dividend is paid out of attributed income or where a taxpayer disposes of their interest in a CFC where there has been attribution.

The stronger CFC rules is needed because the groups create low-taxed non-resident affiliates to which they shift income. Controlled foreign company rules can combat this by enabling jurisdictions to tax income earned by foreign subsidiaries where certain conditions are met. CFC rules can therefore ensure that income that would otherwise go untaxed is subject to tax but current CFC rules may not always capture all the types of income that gives rise to BEPS concerns.

Changes in the Indian Tax regime:

  • In order to encourage repatriation of profits, Section 115BBD provides a concessional tax rate of 15% (gross basis) on dividends received from Specified Foreign Company i.e. a Foreign Company in which the Indian Company holds 26% or more in the nominal value of the equity share capital of the Company.

Action Plan 4: Interest Deduction and other Financial Payments

Action 4 outlines a common approach based on best practices for preventing base erosion through the use of interest expense, for example through the use of related-party and third-party debt to achieve excessive interest deductions or to finance the production of exempt or deferred income.

The mobility and fungibility of money make it possible for multinational groups to achieve favourable tax results by adjusting the amount of debt in a group entity. The 2015 Report established a common approach which directly links an entity’s net interest deductions to its level of economic activity, based on taxable earnings before interest income and expense, depreciation and amortisation (EBITDA). This approach includes three elements: a fixed ratio rule based on a benchmark net interest/EBITDA ratio; a group ratio rule which allows an entity to deduct more interest expense based on the position of its worldwide group; and targeted rules to address specific risks. Further work on two aspects of the common approach was completed in 2016. The first addressed key elements of the design and operation of the group ratio rule, focusing on the calculation of net third party interest expense, the calculation of group-EBITDA and approaches to address the impact of entities with negative EBITDA. The second identifies features of the banking and insurance sectors which can constrain the ability of groups to engage in BEPS involving interest, together with limits on these constraints, and approaches to deal with risks posed by entities in these sectors where they remain.

The approach includes a fixed ratio rule, which allows an entity to deduct net interest expense up to a benchmark net interest/EBITDA ratio, within a corridor of 10%-30%, and an optional group ratio rule which allows an entity to deduct net interest expense up to its group’s net interest/EBITDA ratio, where this is higher than the benchmark fixed ratio. Targeted rules to support general interest limitation rules and address specific risks are also included in the report.

Changes in the Indian Tax regime:

Section 94B of the Income Tax Act, 1961 – Thin Capitalisation

Action Plan 5: Counter Harmful Tax Practices

Action Plan 5 is one of the four BEPS minimum standards which all Inclusive Framework members have committed to implement. The report revamps the work on harmful tax practices with a focus on improving transparency, including compulsory spontaneous exchange on rulings related to preferential regimes, and on requiring substantial activity for preferential regimes, such as IP regimes.

One part of the Action 5 minimum standard is the transparency framework for compulsory spontaneous exchange of information on certain tax rulings which, in the absence of transparency, could give rise to BEPS concerns. Over 120 jurisdictions have joined the Inclusive Framework and take part in the peer review to assess their compliance with the transparency framework.

Specific terms of reference and a methodology have been agreed for the peer reviews to assess a jurisdiction’s implementation of the minimum standard. The review of the transparency framework assesses jurisdictions against the terms of reference which focus on five key elements: i) information gathering process, ii) exchange of information, iii) confidentiality of the information received; iv) statistics on the exchanges on rulings; and v) transparency on certain aspects of intellectual property regimes.

The minimum standard of the Action 5 Report consists of two parts. The two parts are as under:

  1. One part relates to preferential tax regimes, where a peer review is undertaken to identify features of such regimes that can facilitate base erosion and profit shifting, and therefore have the potential to unfairly impact the tax base of other jurisdictions.
  2. The second part includes a commitment to transparency through the compulsory spontaneous exchange of relevant information on taxpayer-specific rulings which, in the absence of such information exchange, could give rise to BEPS concerns.

Changes in the Indian Tax regime:

In India, the Finance Act, 2016 has introduced a concessional taxation regime for royalty income from patents for the purpose of promoting indigenous research and development and making India a global hub for Research & Development.

  • Introduction of Section 115BBF of the Income Tax Act, 1961

Action Plan 6: Preventing Treaty Abuse

“Treaty shopping” generally refers to arrangements through which a person who is not a resident of one of the two States that concluded a tax treaty may attempt to obtain benefits that the treaty grants to residents of these States. These strategies are often implemented by establishing companies in States with desirable tax treaties that are often qualified as “letterboxes” “shell companies” or “conduits” because these companies exist on paper but have no or hardly any substance in reality. It can be addressed through changes to bilateral tax treaties in line with the minimum standard agreed in the context of the BEPS Project.

Treaty abuse has been one of the most contentious areas in the BEPS. The main problem emerging from the issue of treaty abuse is increasing optionality permitted to countries on international tax issues by the tax treaties. With the 2014 report indicated that such issues can be handled, it is doubtful that the degree of optionality now proposed was then in contemplation.

Countries will implement this Action Plan by including in their treaties:

  • a combination of a “limitation-on-benefits” rule (LOB, which is a specific anti-abuse rule) and of a “principal purpose test” rule (PPT, a general anti-abuse rule);
  • the inclusion of the PPT rule, or
  • the inclusion of the LOB rule supplemented by a mechanism that deals with conduit arrangements, such as a restricted PPT rule applicable to conduit financing arrangements in which an entity otherwise entitled to treaty benefits acts as a conduit for payments to third-country investors.

Changes in the Indian Tax regime:

  • LoB clause introduced in the India-Mauritius Tax Treaty
  • LoB clause introduced in the India-Singapore Tax Treaty

Action Plan 7: Prevent the artificial avoidance of permanent establishment status

This report includes changes in the definition of Permanent Establishment (PE) in the OECD Model Tax Convention that will address strategies used to avoid having a physical presence in a Country under tax treaties.

The changes in the definition of Permanent Establishment addresses techniques used to inappropriately avoid the existence of a PE, including via replacement of distributors with commissionnaire arrangements or through strategies where contracts which are substantially negotiated in a State are not formally concluded in that State because they are finalised or authorised abroad, or where the person that habitually exercises an authority to conclude contracts in the name of a foreign enterprise claims to be an “independent agent” even though it is acting exclusively or almost exclusively for closely related enterprises.

The work of this Action Plan took into account the key features of the digital economy in developing changes to the definition of PE. In particular, the changes address artificial arrangements where the sales of goods or services of one company in a multinational group effectively result in the conclusion of contracts, such that the sales should be treated as if they had been made by that company. The work also ensures that where essential business activities of an enterprise are carried on in a country, the enterprise cannot benefit from the list of exceptions usually found in the definition of PE.

The following steps have been advocated:

  • Re-working exceptions to PE definitions,
  • Analyzing arrangements entered through contractual agreements

Changes in the Indian Tax regime:

Discussed after BEPS Action Plan 15.

Action Plan 8 to 10: Assure that transfer pricing outcomes related to intangibles are in line with value creation

Actions 8 – 10 contains transfer pricing guidance to assure that transfer pricing outcomes are in line with value creation in relation to intangibles, including hard-to-value ones, to risks and capital, and to other high-risk transactions. It focuses on transfer pricing issues relating to transactions involving intangibles; contractual arrangements, including the contractual allocation of risks and corresponding profits, which are not supported by the activities actually carried out; the level of return to funding provided by a capital-rich MNE group member, where that return does not correspond to the level of activity undertaken by the funding company; and other high-risk areas. The report also sets out follow-up work to be carried out on the transactional profit split method which will lead to detailed guidance on the ways in which this method can appropriately be applied to further align transfer pricing outcomes with value creation.

The arm’s length principle is used by countries as the cornerstone of transfer pricing rules. It is embedded in treaties and appears as Article 9(1) of the OECD and UN Model Tax Conventions. This work on transfer pricing under the BEPS Action Plan has focused on three key areas. The same areas under:

  1. Transaction involving intangibles: Work under Action 8 looked at transfer pricing issues relating to transactions involving intangibles, since misallocation of the profits generated by valuable intangibles has contributed to base erosion and profit shifting.
  2. Allocation of risk: Work under Action 9 considered the contractual allocation of risks, and the resulting allocation of profits to those risks, which may not correspond with the activities actually carried out. Work under Action 9 also addressed the level of returns to funding provided by a capital-rich MNE group member, where those returns do not correspond to the level of activity undertaken by the funding company.
  3. Other high risks areas: Work under Action 10 focused on other high-risk areas, including the scope for addressing profit allocations resulting from transactions which are not commercially rational for the individual enterprises concerned (re-characterisation), the scope for targeting the use of transfer pricing methods in a way which results in diverting profits from the most economically important activities of the MNE group, and neutralising the use of certain types of payments between members of the MNE group (such as management fees and head office expenses) to erode the tax base in the absence of alignment with value creation.

The work under Actions 8-10 of the BEPS Action Plan will ensure that transfer pricing outcomes better align with value creation of the MNE group. Moreover, the holistic nature of the BEPS Action Plan will ensure that the role of capital-rich, low-functioning entities in BEPS planning will become less relevant. As a consequence, the goals set by the BEPS Action Plan in relation to the development of transfer pricing rules have been achieved without the need to develop special measures outside the arm’s length principle.

Further work will be undertaken on profit splits and financial transactions. Special attention is given in the Report to the needs of developing countries. This new guidance will be supplemented with further work mandated by the G20 Development Working Group, following reports by the OECD on the impact of base erosion and profit shifting in developing countries. Finally, the interaction with Action 14 on dispute resolution will ensure that the transfer pricing measures included in this Report will not result in double taxation.

Action Plan 11: Measuring and Monitoring BEPS

The adverse fiscal and economic impacts of base erosion and profit shifting (BEPS) have been the focus of the OECD/G20 BEPS Project since its inception. While anecdotal evidence has shown that tax planning activities of some multinational enterprises (MNEs) take advantage of the mismatches and gaps in the international tax rules, separating taxable profits from the underlying value-creating activity, the Addressing Base Erosion and Profit Shifting report (OECD, 2013) recognised that the scale of the negative global impacts on economic activity and government revenues have been uncertain.

Although measuring the scale of BEPS proves challenging given the complexity of BEPS and the serious data limitations, today we know that the fiscal effects of BEPS are significant. The few indicators of BEPS activity are as under:

  1. The profit rates of MNE affiliates located in lower-tax countries are higher than their group’s average worldwide profit rate.
  2. The effective tax rates paid by large MNE entities are estimated to be lower than similar enterprises with domestic-only operations,
  3. Foreign direct investment (FDI) is increasingly concentrated
  4. The separation of taxable profits from the location of the value creating activity is particularly clear with respect to intangible assets, and the phenomenon has grown rapidly.
  5. Debt from both related and third-parties is more concentrated in MNE affiliates in higher statutory tax-rate countries.

Action Plan 12: Disclosure of Aggressive Tax Planning Arrangements

The lack of timely, comprehensive and relevant information on aggressive tax planning strategies is one of the main challenges faced by tax authorities worldwide. Early access to such information provides the opportunity to quickly respond to tax risks through informed risk assessment, audits, or changes to legislation or regulations.

Action Plan 12 provides a framework for a mandatory disclosure regime against ‘aggressive tax planning and forms the basis of the BEPS best practice guidance.

Mandatory disclosure regime is a regime that requires promoters and/or taxpayers to disclose upfront to the tax administration the use of schemes presenting certain features or hallmarks. This provides tax administrations with early information on aggressive or abusive tax planning schemes and the users of those schemes enabling earlier counteraction.

The OECD feels that mandatory reporting regimes are important because of the following reasons:

  1. To increase transparency by providing the tax administration with early information regarding potentially aggressive or abusive tax planning schemes AND to identify the promoters and users of those schemes.
  2. The reporting acts as deterrence since the taxpayers may think twice about entering into a scheme if it has to be disclosed.
  3. The Pressure is also placed on the tax avoidance market as promoters and users only have a limited opportunity to implement schemes before they are closed down

Action Plan 13: Re-Examine Transfer Pricing Documentation

This report contains revised standards for transfer pricing documentation and a template for Country-by-Country Reporting of income, taxes paid and certain measures of economic activity.

In response to this requirement, a three-tiered standardised approach to transfer pricing documentation has been developed.

  1. Master File: First, the guidance on transfer pricing documentation requires multinational enterprises (MNEs) to provide tax administrations with high-level information regarding their global business operations and transfer pricing policies in a “master file” that is to be available to all relevant tax administrations.
  2. Local file: Second, it requires that detailed transactional transfer pricing documentation be provided in a “local file” specific to each country, identifying material related party transactions, the amounts involved in those transactions, and the company’s analysis of the transfer pricing determinations they have made with regard to those transactions.
  3. Country-by-Country Report: Third, large MNEs are required to file a Country-by-Country Report that will provide annually and for each tax jurisdiction in which they do business the amount of revenue, profit before income tax and income tax paid and accrued. It also requires MNEs to report their number of employees, stated capital, retained earnings and tangible assets in each tax jurisdiction. Finally, it requires MNEs to identify each entity within the group doing business in a particular tax jurisdiction and to provide an indication of the business activities each entity engages in.

Taken together, these three documents (master file, local file and Country-by-Country Report), the benefits will be as under:

  1. Taxpayers to articulate consistent transfer pricing positions
  2. Tax administrations would get useful information to assess transfer pricing risks,
  3. Tax administrations would be able to make determinations about where audit resources can most effectively be deployed, and, in the event audits are called for, provide information to commence and target audit enquiries.

Changes in Income Tax regime:

  • Transfer Pricing provisions under the Income Tax Act, 1961 – Chapter X of the Income Tax Act, 1961 comprising sections 92 to 92F contains provisions relating to transfer pricing. For the purpose of implementing the international consensus, a specific reporting regime in respect of CbC reporting and also the master file has been incorporated in the Income Tax Act, 1961. The important elements have been incorporated in the Act while the remaining aspect has been dealt with in the Income Tax Rules, 1962.

Section 286 of the Income Tax Act, 1961

Action Plan 14: Making Dispute Resolution Mechanism more effective

Eliminating opportunities for cross-border tax avoidance and evasion and the effective and efficient prevention of double taxation are critical to building an international tax system that supports economic growth and a resilient global economy. Countries agree that the introduction of the measures developed to address base erosion and profit shifting pursuant to the Action Plan on Base Erosion and Profit Shifting should not lead to unnecessary uncertainty for compliant taxpayers and to unintended double taxation. Improving dispute resolution mechanisms is therefore an integral component of the work on BEPS issues.

Through the adoption of this Report, countries have agreed to important changes in their approach to dispute resolution, in particular by having developed a minimum standard with respect to the resolution of treaty-related disputes, committed to its rapid implementation and agreed to ensure its effective implementation through the establishment of a robust peer-based monitoring mechanism that will report regularly through the Committee on Fiscal Affairs to the G20. The minimum standard will:

  • Ensure that treaty obligations related to the mutual agreement procedure are fully implemented in good faith and that MAP cases are resolved in a timely manner;
  • Ensure the implementation of administrative processes that promote the prevention and timely resolution of treaty-related disputes; and
  • Ensure that taxpayers can access the MAP when eligible.

Action Plan 15: Multilateral convention to implement tax treaty related measures to prevent Base Erosion and Profit Shifting

Globalisation has exacerbated the impact of gaps and frictions among different countries’ tax systems. As a result, some features of the current bilateral tax treaty system facilitate base erosion and profit shifting (BEPS) and need to be addressed. Action 15 of the BEPS Action Plan provides for an analysis of the tax and public international law issues related to the development of a multilateral instrument to enable countries that wish to do so to implement measures developed in the course of the work on BEPS and amend bilateral tax treaties.

The goal of Action 15 is to streamline the implementation of the tax treaty-related BEPS measures. This is an innovative approach with no exact precedent in the tax world, but precedents for modifying bilateral treaties with a multilateral instrument exist in various other areas of public international law.

Changes in Indian Taxation Regime:

  • BEPS Action Plan 7 requires modification in the Article 5 of the Double Taxation Avoidance Agreement. Further, with a view to preventing base erosion and profit shifting, the recommendations under BEPS Action Plan 7 have now been included in Article 12 of the Multilateral Convention to implement Tax  Treaty Related Measures (MLI), to which India is also a signatory.
  • Section 9(1)(i) has been amended by Finance Act, 2018 to align the same with the provisions in the DTAA as modified by MLI so as to make the provisions in the treaty effective.

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