BEPS – Changing Dynamics of International Tax

A: Introduction

Primarily, many country enter into Double Taxation Avoidance Agreements (DTAA) with other countries to boost economic relations with that country thereby giving income exemptions or tax credit on doubly tax income of the residents of their respective country. Of late with advancement of trade, commerce and technology, these DTAAs are being used as instruments to avoid or reduce tax in wide spread manner. Even the Multinational Entities (MNEs) take shelter of double non-taxation of a transaction with the help of treaty shopping or treaty abuse i.e. by using treaty of third country without any substances what so ever. This is also known as Base Erosion and Profit Shifting (BEPS).

In this pretext, Governments of the many countries come together to find solutions of double non-taxation, avoidance or reduction of taxation i.e. BEPS by forming a task force at OECD/G20 (Organisation for Economic Co-operation & Developments) With the following objectives (i) identifies actions needed to address BEPS, (ii) sets deadlines to implement these actions and (iii) identifies the resources needed and the methodology to implement these actions.

B: BEPS and its Purpose

Base erosion and profit shifting (BEPS) refers to tax planning strategies used by multinational enterprises (MNEs) that exploit gaps and mismatches in tax rules to avoid paying tax. BEPS practices cost countries USD 100-240 billion in lost revenue annually. 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 and can effectively participate in the process of standard-setting on international tax. Working together within OECD/G20 Inclusive Framework on BEPS, over 135 countries and jurisdictions are collaborating on the implementation of 15 measures or Action Plans to tackle tax avoidance, improve the coherence of international tax rules and ensure a more transparent tax environment which are as under:

1. Tax Challenges Arising from Digitalisation to address tax challenges raised by digitalisation of the economy to develop a consensus based solutions by end of 2020.
2. Neutralising the effects of hybrid mismatch arrangements with the object to prevent hybrid mismatch arrangements for being used for BEPS while minimise impact on cross-border trade and investments.
3. Controlled Foreign Company to reduce the incentives of taxpayers to shift income from market country into foreign subsidiaries in a low tax jurisdictions.
4. Limitation on Interest Deductions to establish rule that link entities net interest deductions to its level of economic activity within the jurisdiction.
5. Harmful Tax Practices (Minimum Standard) to counter harmful tax practice with a focus on improving transparency.
6. Prevention of tax treaty abuse (Minimum Standard) to develop model tax treaty provisions and recommendations to prevent treaty abuse.
7. Permanent establishment status to prevent artificial avoidance of permanent establishment status in tax treaties through commissionaire structure or more.
8. Transfer Pricing BEPS Actions 8-10 address transfer pricing guidance to ensure that transfer pricing outcomes are better aligned with value creation of the MNE group. In this regard, Actions 8-10 clarify and strengthen the existing standards, including the guidance on the application of the arm’s length principle and an approach for appropriate pricing of hard-to-value-intangibles within the arm’s length principle
9. BEPS data analysis Action-11 to collect or to analysis data on economic or fiscal effects of tax avoidance behaviours and on the impact of measures proposed under the BEPS project.
10. Mandatory disclosures rules Action-12: requiring taxpayers and advisors to disclose aggressive tax planning arrangements to tax authorities.
11. Country by Country Reporting Action-13 (Minimum Standard): Improving tax transparency with country by country reporting.
12. Mutual Agreement Procedures Action-14 (Minimum Standard): Making disputing resolutions between jurisdictions more timely, effective and efficient.
13. Multilateral Instruments Action-15: Implementing tax treaty related BEPS recommendations to address vulnerability in existing tax treaties.

C: Way Forward

BEPS seeks to achieve two broad objectives; i) Taxation on digital economy which is still at discussion stage at OECD/G20 as mainly hurting tax interest of US governments; ii) Tax issues arising out of base erosion and profit shifting by using harmful tax practices and treaty shopping/abuse by MNEs, the actions plan of which already finalised presently at the stage of implementation at various level by amending bilateral tax treaties through bilateral negotiations or multilateral instruments (MLIs) by incorporating at least minimum standard in their tax treaties.

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