Article BEPS 4045 - PDF

Journal of Advance Management Research, ISSN: 2393-9664
Vol.05 Issue-04, (October 2017), Impact Factor: 4.598

INCOME TAX BASE EROSION AND PROFIT SHIFTING: AN OECD & INDIAN APPROACH
Dr R B Krishna
Advocate, Karnataka High Court and Former Member of Income Tax Appellate Tribunal, India
Anand Kumar Jaiswal

PhD Research Scholar, Jain University, Bangalore, India
ABSTRACT
Sophisticated tax planning practices by mutinational companies shifts the taxable profits to other
countries, especially tax haven countries where either no tax or negligible tax is payable. This is done
within the existing legal framework of international law by taking advantage of legal loopholes in the
income tax rules of different countries. The underlying principle of the OECD/ G20 BEPS Project is that tax
should be paid in the country in which the economic substance and value-addition functions of a
transaction are carried out and the tax benefits should not be given to dummy/shell entities set up
primarily to take unfair advantage of tax treaties and mismatch in tax rules of different countries. The
OECD/G20 BEPS Project created a single set of consensus based international tax rules to protect tax
bases while offering increased certainty and predictability to taxpayers. The BEPS Project has 15 Action
Plans covering the taxability of digital economy, hybrid entities, prevention of treaty abuse, artificial
avoidance of Permanent Establishment (PE), linking transfer pricing requirements to value creation,
dispute resolution mechanisms, etc. 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. As a result, India has em-
braced many of the project’s recommendations and made several important changes in its tax regime. It
seems post panama and paradise paper leak international tax standards regarding domestic law and
bilateral arrangements have not kept pace with developments in the global environment.
KEYWORDS: BEPS, OECD, Income Tax, Base Erosion, Profit Shifting, Tax Evasion, Tax Planning, Tax
Avoidance.
Double-Blind Peer Reviewed Refereed International Journal - Included in the International Serial Directories
Journal of Advance Management Research, ISSN: 2393-9664 (JAMR)
http://www.jamrpublication.com email id- jamrpublication@gmail.com Page 412

1. INTRODUCTION
In the last few years, various media reports1 have revealed that the effective income tax rate of some
leading Multinational Corporations (MNCs) are lower than one percent of their global revenues. These
reports ignited public protest for action against such MNCs for having high profit but paying very minimal
taxes. It also made the common man wonder how these profitable MNCs reduced their effective tax as
compared to other normal taxpayers. The answer to this question was the very sophisticated tax planning
practices of MNCs. Thus, shifting taxable profits to other countries, especially tax haven countries where
either no tax or negligible tax is payable. This was done within the existing legal framework of
international law by taking advantage of legal loopholes in the income tax rules of different countries.
Revenue losses from BEPS have conservatively estimated2 at between USD 100 billion and 240 billion
annually. It is equivalent to between 4% and 10% of global revenues from corporate income tax, given
developing countries’ greater reliance on such revenues, estimates of the impact on these countries, as a
percentage of GDP, is even higher.
2. WHAT IS OECD’s BEPS PROJECT
To curb practices of profit shifting and base erosion, the Organization for Economic Cooperation and
Development (OECD)3 along with G20 countries formulated an Action Project which was called Base
Erosion and Profit Shifting (BEPS) Project. BEPS project aimed at providing a mechanism to plug such
loopholes/gaps/mismatches in international tax laws, thereby providing every country with an
opportunity to earn their fair share of tax revenues.
In this backdrop, the OECD / G20 nations formulated the policy that where the economic activities are
performed, and value is created there only tax should be levyed. It is to ensure that the respective States
get their legitimate part of the tax.
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
meeting4 on 8th October 2015 in Lima, Peru.
1
a. http://www.bbc.com/news/magazine-20560359
b. http://fortune.com/2016/03/11/apple-google-taxes-eu/
c. http://www.independent.co.uk/news/business/news/google-apple-and-starbucks-face-laughable-fines-for-tax-dodging-a6761981.html
d. https://www.reuters.com/article/us-eu-tax-avoidance/factbox-apple-amazon-google-and-tax-avoidance-schemes-idUSBRE94L0GW20130522
e. https://www.theguardian.com/technology/2016/sep/02/multinationals-amazon-starbucks-austria-says
f. http://www.dailymail.co.uk/news/article-3765367/Who-s-firing-line-Google-Amazon-Starbucks-firms-facing-scrutiny-multi-billion-pound-
Apple-tax-ruling.html
g. http://fortune.com/2016/03/11/apple-google-taxes-eu/
2
http://www.oecd.org/ctp/policy-brief-beps-2015.pdf
3
The Organization for Economic Co-operation and Development (OECD) is an intergovernmental economic organisation with 35 member
countries, founded in 1960 to stimulate economic progress and world trade. It is a forum of countries describing themselves as committed
to democracy and the market economy, providing a platform to compare policy experiences, seeking answers to common problems, identify
good practices and coordinate domestic and international policies of its members. Most OECD members are high-income economies with a very
high Human Development Index (HDI) and are regarded as developed countries.
4
http://www.oecd.org/ctp/oecd-presents-outputs-of-oecd-g20-beps-project-for-discussion-at-g20-finance-ministers-meeting.htm

The underlying principle of the BEPS Project is that tax should be paid in the country in which the
economic substance and value-addition functions of a transaction are carried out and the tax benefits
should not be given to dummy/shell entities set up primarily to take unfair advantage of tax treaties and
mismatch in tax rules of different countries.
The OECD/G20 BEPS Project created a single set of consensus based international tax rules5 to protect tax
bases while offering increased certainty and predictability to taxpayers.
3. DETAILS OF OECD’s BEPS PROJECT
The BEPS Project involves input from the 35 member countries of the OECD, all G20 members, and more
than 40 developing countries. India is part of G20 nations hence participated in all BEPS deliberations.
The OECD’s BEPS Action Plan addresses the following key issues:
i. Imbalance between the source and residence taxation;
ii. Improper alignment of rights to tax with real economic activity;
iii. Existing tax treaty provisions amongst the countries where they present difficulties;
iv. Ungraded compliance process within the few developing countries; and
v. Non-cooperation amongst the countries with regard to the exchange of information
The BEPS Project has 15 Action Plans covering the taxability of digital economy, hybrid entities,
prevention of treaty abuse, artificial avoidance of Permanent Establishment (PE), linking transfer pricing
requirements to value creation, dispute resolution mechanisms, etc.
The 15 Action Plans of OECD in addressing BEPS are:
1. Digital Economy
2. Hybrid Mismatch Arrangements
3. Controlled Foreign Companies (CFC) regimes
4. Financial payments
5. Harmful tax practices
6. Treaty abuse
7. Permanent Establishment (PE) status
8. Transfer pricing and intangibles
9. Transfer pricing and risks/capital
10. Transfer pricing and other high-risk transactions
11. Data and methodologies
12. Disclosure of aggressive tax planning
13. Transfer pricing documentation
14. Dispute resolution mechanisms and
15. A multilateral instrument.
5
Explanatory Statement of 2015 Final Reports OECD/G20 Base Erosion and Profit Shifting Project. Available at http://www.oecd.org/ctp/beps-
explanatory-statement-2015.pdf

GIVEN BELOW IS THE SUMMARY OF THE AFORESAID ACTION PLANS AS BROUGHT OUT BY OECD6
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. The Report outlines options
to address these difficulties, taking a holistic approach and considering both direct and indirect taxation.
Action 2 develops model treaty provisions and recommendations regarding the design of domestic rules
to neutralise the effects of hybrid instruments and entities (e.g. double non-taxation, double deduction,
long-term deferral).
Action 3 sets out recommendations to strengthen the rules for the taxation of controlled foreign
corporations (CFC).
Action 4 outlines a standard 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.
Action 5 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.
Action 6 develops model treaty provisions and recommendations regarding the design of domestic rules
to prevent treaty abuse
Action 7 contains changes to the definition of permanent establishment to prevent its artificial
circumvention, e.g. via the use of commissionaire structures and the likes.
Actions 8 – 10 contain 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.
Action 11 establishes methodologies to collect and analyse data on BEPS and the actions to address it,
develops recommendations regarding indicators of the scale and economic impact of BEPS and ensure
that tools are available to monitor and evaluates the effectiveness and economic impact of the actions
taken to address BEPS on an ongoing basis.
Action 12 contains recommendations regarding the design of mandatory disclosure rules for aggressive
tax planning schemes, taking into consideration the administrative costs for tax administrations and
business and drawing on experiences of the increasing number of countries that have such rules.
Action 13 contains revised guidance on transfer pricing documentation, including the template for
country-by-country reporting, to enhance transparency while taking into consideration compliance costs.
6
http://www.oecd.org/ctp/beps-actions.htm

Action 14 develops solutions to address obstacles that prevent countries from solving treaty-related
disputes under MAP, via a minimum standard in this area as well as some best practices. It also includes
arbitration as an option for willing countries.
Action 15 provides an analysis of the legal issues related to the development of a multilateral instrument
to enable countries to streamline the implementation of the BEPS treaty measures. On 7 June 2017, over
70 Ministers and other high-level representatives participated in the signing ceremony of the Multilateral
Instrument. Implementing this would require amending more than 3,000 bilateral tax treaties. Therefore,
to save the participating countries the need to approach each of its treaty partners for the amendment of
their bilateral tax treaty, Action Plan 15 of the BEPS Project provides for the signing of a Multi-Lateral
Instrument (MLI) to modify various tax treaties simultaneously.
4. CHALLENGES OF OECD’s BEPS PROJECT
The BEPS process is a first step towards creating a fairer and more efficient international tax system for
OECD and G20 countries. However, further reforms to both national and international tax rules will be
needed beyond the BEPS process to ensure that tax dodging is appropriately addressed, especially for
poorer countries. It is therefore crucial for governments both inside and outside the G20 to start thinking
about what comes after the BEPS process. If the international tax system is right to be fixed to ensure
developing countries can collect corporate tax revenues efficiently, harmful tax practices and tax regimes
will need to be addressed in a meaningful, public and accountable way.
In some cases, the solutions proposed by the BEPS process are too complicated and resource intensive to
benefit developing countries given the capacity and resources they have at their disposal. The unilateral
policy changes being made by some countries risk undermining the coherent approach to reform which
the BEPS project is seeking to achieve.
5. BEPS AND INDIA
India has been one of the front-runners in the BEPS initiative. It is said that the Indian tax authorities'
position on certain tax matters, for which they were criticised in the past (for being narrow-minded and
revenue-focused), now find a place under the BEPS Action Plans. Since the BEPS Project aims to link tax
with value creation, developing countries stand to gain from it.
Although OECD comprises of advanced economies, it invited Brazil and India to participate in the BEPS
steering group. Even a decade back India looked at OECD as a wealthy country club, and it required
considerable effort to get India to participate in selected OECD deliberations. Subsequently, India's
posture on international taxation was strongly and publicly criticised by tax authorities of advanced
economies, compelling India to modify its position. In the end, India's role in BEPS has been
commendable, and it has made useful contributions to the 15 BEPS reports that were released by the
OECD in Peru at a G20 Summit last month.
India has steadfastly argued from day one that tax revenue must justly accrue in source jurisdictions
where value added is created in the international supply chain of a commodity or service. Earlier
developed economies had ignored India’s stance by stating that revenue should accrue where risk taking
and management decisions are made and where capital resides. Subsequently, with the collapse in
developed economy revenue in 2008 due to the global crisis, they began to realise that applying the
source principle as India did would benefit them.

Further, upon examination of the array of BEPS recommendations, one may assess that there are good
possibilities that they will be of benefit to India and other emerging economies. To achieve the
transparency, BEPS introduced automatic exchange of tax information among countries. This exchange of
information was always pushed by India while developed economies have been historically silent about it.
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 incredibly relevant to India and will
impact, not only outbound investments but also inbound structures, financing arrangements of MNCs7,
especially the action plans dealing with the digital economy, transfer pricing documentation and country-
by-country reporting, treaty abuse, etc.
The government of India was an early and enthusiastic particIpant in the project, and identified with
many of them issued that it sought to tackle. As a result, India has embraced many of the project’s recom-
mendations and made several important changes in its tax regime. India has already introduced some of
the measures, out of the above 15 Action Plans. The important ones are:
a. Equalization Levy for specified digital transactions – introduced with effect from Financial Year (‘FY’)
2016-17 (Action Plan 1); New 6% Equalization Levy on Digital Transactions. Levied @ 6% service
provided by Non-resident
b. Place of Effective Management (‘POEM’) – with effect from FY 2016-17 (similar to Action Plan 3);
c. Thin Capitalization – introduced with effect from FY 2017-18 (Action Plan 4); The Finance Act 2017
provided special provisions to restrict deduction of interest paid by an Indian company to its
associated enterprises where the interest pay-out exceeds INR 10 million in a year. The interest
deduction in such cases will be restricted to 30% of the EBITDA8 of the borrower.
d. Patent Box Regime – introduced with effect from 2016-17 (Similar to Action Plan 5); Concessional tax
regime for income from patents @ 10%.
e. Revisions in tax treaties – (Action Plan 6); Even before the MLI9 was signed, India has already
amended its tax treaties with Mauritius, Cyprus and Singapore to deal with the artificial avoidance of
tax liabilities in India.
f. Country-by-Country Reporting (CbC) – introduced with effect from FY 2016-17 (Action Plan 13);
Introduction of Country-by-Country (“CbC”) reporting requirements and Master File requirements
under the transfer pricing provisions
g. General Anti Avoidance Rules (GAAR) – with effect from FY 2017-18; Applicability of General Anti
Avoidance Rules (“GAAR”). Provisions of GAAR would applicable from 1st April 2017and
h. Shares Buy-back tax for private companies – with effect from FY 2013-14.
7
Multinational Corporation having business presence across countries.
8
EBITDA stands for earnings before interest, taxes, depreciation and amortization
9
MLI - Multilateral Instrument: On 7 June 2017, over 70 Ministers and other high-level representatives participated in the signing ceremony of
the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting ("Multilateral Instrument" or
"MLI"). Signatories include jurisdictions from all continents and all levels of development. A number of jurisdictions have also expressed their
intention to sign the MLI as soon as possible and other jurisdictions are also actively working towards signature.

6. CONCLUSION
In 2016 the Panama Papers was leaked with 11.5 million files from the database of the world’s fourth-
biggest offshore law firm, Mossack Fonseca. The documents show the myriad ways in which the rich had
exploited secretive offshore tax jurisdiction. Further, in November 2017, the Paradise Papers10 were also
leaked. These papers were a massive batch of leaked documents mostly from offshore law firm Appleby,
along with corporate registries in 19 tax jurisdictions, which reveal the financial dealings of politicians,
celebrities, corporate giants and business leader. The papers also throw light on the law firms, financial
institutions and accountants working in the sector and on the jurisdictions, which adopt offshore tax rules
to attract money. The global international tax framework reflected in countries’ domestic law and
bilateral tax treaties assumes that multinational companies will be taxable either in the country where
the income is earned (the source state) or the country where the multinational is headquartered (the
residence state) – depending on the nature of the cross-border activity undertaken by the multinational
enterprise11. However, international tax standards, both regarding domestic law and bilateral
arrangements, have not kept pace with developments in the global environment.
10
http://www.bbc.com/news/world-41880153
11
http://www.un.org/esa/ffd/tax/Beps/index.htm

7. REFERENCES
a. http://www.oecd.org/tax/beps-about.htm
b. "Base Erosion and Profit Shifting" http://www.oecd.org/ctp/beps/
c. OECD (2013) https://www.oecd.org/ctp/TheOECDworkonBEPS.pdf
d. Johansson, Bieltvedt Skeie, Sorbe and Menon (2016) https://www.oecd.org/eco/Tax-planning-by-
multinational-firms-firm-level-evidence-from-a-cross-country-database.pdf
e. St Petersburg Tax Annex OECD (2013) http://www.mofa.go.jp/files/000013928.pdf
f. OECD (2015) http://www.oecd.org/ctp/beps-2015-final-reports.htm
g. OECD (2017) http://www.oecd.org/tax/beps/inclusive-framework-on-beps-composition.pdf
h. https://www.un.org/esa/ffd/tax/Beps/CommentsEJNandOxfamSA_BEPS.pdf
i. Shome, Parthasarathi (17 November 2015). "MNEs' tax avoidance & overdealt response: Has the
OECD's BEPS proposals asked too much from MNEs to counter global tax avoidance?".
j. Khadem, Nassim, "Multinational tax details to be kept secret", Sydney Morning Herald, November 14,
2014
k. Zucman, Gabriel (2014): "Taxing across Borders: Tracking Personal Wealth and Corporate
Profits", Journal of Economic Perspectives, Vol. 28, No. 4. (2014), pp. 121-48,
doi:10.1257/jep.28.4.121,
l. Inman, Phillip (16 November 2015). "MEPs accuse US multinationals of diverting profits to low tax
havens".
m. Cobham, Alex (24 August 2016). "The US Treasury just declared tax war on Europe".
n. http://www.ey.com/in/en/services/tax/ey-india-beps-focus
o. http://www.thehindubusinessline.com/economy/beps-india-signs-historical-multilateral-
instrument/article9722568.ece
p. https://www.protact.in/application/public/uploads/cms/269/1061/BEPS_ACTION_PLANS___IMPACT
_ON_INDIA.pdf
q. https://www.pwc.com.au/tax/taxtalk/assets/alerts/beps-global-and-indian-perspective-feb16.pdf
r. Rao, R. Kavita, D.P. Sengupta (2014): ‘Action Plan on Base Erosion and Profit Shifting: An Indian
Perspective’, Working Paper no. 133, NIPFP, New Delhi.
s. Cobham, Alex (24 August 2016). "The US Treasury just declared tax war on Europe". Available at
http://www.taxjustice.net/2016/08/24/us-treasury-tax-war-europe/
t. US Treasury White Paper on European Commission’s State Aid Investigations into Transfer Pricing
Rulings. Available at https://www.treasury.gov/resource-center/tax-
policy/treaties/Documents/White-Paper-State-Aid.pdf

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Journal of Advance Management Research, ISSN: 2393-9664

Vol.05 Issue-04, (October 2017), Impact Factor: 4.598

Anand Kumar Jaiswal

Vol.05 Issue-04, (October 2017), Impact Factor: 4.598

2. WHAT IS OECD’s BEPS PROJECT

Vol.05 Issue-04, (October 2017), Impact Factor: 4.598

3. DETAILS OF OECD’s BEPS PROJECT

Vol.05 Issue-04, (October 2017), Impact Factor: 4.598

Vol.05 Issue-04, (October 2017), Impact Factor: 4.598

4. CHALLENGES OF OECD’s BEPS PROJECT

5. BEPS AND INDIA

Vol.05 Issue-04, (October 2017), Impact Factor: 4.598

Vol.05 Issue-04, (October 2017), Impact Factor: 4.598

Vol.05 Issue-04, (October 2017), Impact Factor: 4.598

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