Base Erosion and Profit Shifting

BASE EROSION AND PROFIT SHIFTING (BEPS)Demystifying BEPS in the Indian Context

OUTLINE - BEPS

OECD and G20 Double “Non” Taxation

OECD/G20 Base Erosion

and Profit Shifting Project

Indian Strategy for

BEPS Alignment

OECD AND G20

OECD – ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT

G20 countries realized the need of preventing BEPS and approached OECD to address the issue related to BEPS

G20 Countries approached OECD to come up with model convention to curb double non taxation

In 2013 OECD released an Action Plan which was presented to the meeting of G20 Finance Ministers in Moscow

The purpose of the Action Plan is “to prevent double non-taxation, as well as cases of no or low taxation associated with practices that artificially segregate taxable income from activities that generate it.”

DOUBLE “NON” TAXATIONWhat is BEPS?

BASE EROSION AND PROFIT SHIFTING

▪ Base Erosion = Shifting of the Base (Residential Status)▪ Resident Non Resident▪ Pay Tax only on Local Income of respective taxable territory

▪ Profit Shifting = Sourcing of Profits to another related entity outside taxable jurisdiction▪ Generally in a tax haven country▪ Andorra, Bahamas, Bermuda, British Virgin Islands, Cayman Islands,

Isle of Man, Mauritius, Monaco, Panama, Switzerland

▪ Exploiting loopholes of tax system in Home Country and Host Country▪ Aggressive Tax Evasion

EXAMPLE

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A

B

C

• A is a subsidiary of Holding Company B• A has currently transferred profits to C• A should have transferred profits to B. A tells that it is a PE of C or it is an agent of C• C is in a tax haven country.• No Tax to be paid either in Country A or C or B.

Base Erosion

Profit Shifting

CAUSES OF BEPS

Existence of loopholes, gaps or mismatches in the interaction of

domestic tax laws of countriesIneffectiveness or lack of anti-abuse measures in some tax jurisdictions

SHIFTING OF INCOME/PROFITS

Hybrid Mismatches•Non Taxation•Double Deduction

Special Purpose Entities•Dummy Companies

Transfer Pricing•Cost•Technology•Intangibles

TAX PAYERS ARE SHIFTING THEIR INCOME TO ANOTHER COUNTRY TO EVADE TAX

ACTIONS - ISSUES

Action 1 Taxing the Digital Economy

Action 2 Hybrid Mismatch

Action 3 CFC Rules

Action 4 Limiting Interest Deductions

Action 5 Curbing harmful tax practices

Action 6 Preventing Treaty Abuse/Shopping

Action 7 Artificial Avoidance of PE

Action 8, 9, 10 Transfer Pricing Provisions

Action 11 Monitoring BEPS

Action 12 Enhanced Disclosure

Action 13 Treaty Documentation

Action 14 Dispute Resolution

Action 15 Multilateral Instrument

OECD/G20 BASE EROSION AND PROFIT SHIFTING PROJECT2015 Final Reports on Various Action Items of OECD

Challenges/Problem Recommendation

ACTION 1 – TAXING DIGITAL ECONOMY


ACTION 1 – TAXING DIGITAL ECONOMY

Changes to definition of Permanent Establishment

Imposing withholding tax at source on

digital transactions

Consumption tax options – Review threshold

exemptions, simplified registrations, etc.

Coordination with work on other Action Plans

Significant digital presence


ACTION 2 – HYBRID MISMATCH – UNDERSTANDING THE HYBRID FINANCIAL INSTRUMENT

• Payment made by associated enterprise treated as Equity Investment in Country A and Debt Receipt in Country B.• “Dividend” received is

exempt• “Interest” paid is an

expense


ACTION 2 – HYBRID MISMATCH

Exploitation of loopholes of tax

laws/treaties of two or more countries

Double Deductions or Income out of scope from ambit

of tax laws

OBJECTIVE: RECOMMENDATION TO CHANGES IN THE DOMESTIC TAX LAWS IN ORDER TO PLUG IN THE LOOPHOLES PRESENT IN THEIR EXISTING TAX SYSTEMS.


ACTION 2 – HYBRID MISMATCH

Tax Payments covered by hybrid financial instruments• Equity

Instrument (Dividend) along with

• Debt Instrument (Interest)

Prevent exemption or non-recognition of payments in both countries• Tax Dividends

of such Hybrid Instruments

• Deny deduction for Interest Payments or any other related deductions

Agreement between two countries is in the form

of tax treaties (DTAA)

Primary Rule and

Defensive Rule


ACTION 5 – CURBING HARMFUL TAX PRACTICES (INTANGIBLES)

Country A• India• Pays Royalty Expenses to Country C

in account for Royalty• Claims as Expense

Country C• Cayman Islands• Doesn’t Pay tax on Royalty

Received


ACTION 5 – CURBING HARMFUL TAX PRACTICES (INTANGIBLES)

▪ Trend of across the board corporate tax rate reductions on particular types of income ▪ Income From Financial activities▪ Intangibles

▪ Determination of Revenue for Intangibles –▪ Substantial Activity Requirement (Nexus Ratio)

▪ India has opted a different approach for taxing intangibles

▪ Intangibles ▪ Patents, Copyrighted Software, other assets having nature of a patent


ACTION 7 – ARTIFICIAL AVOIDANCE PERMANENT ESTABLISHMENT

Country A• USA• Controls Country B

Country B• India• Earns Profit on behalf of A• Transfers all balances to Country A


ACTION 7 – ARTIFICIAL AVOIDANCE PERMANENT ESTABLISHMENT

▪ Entities mandatorily covered as Permanent Establishment▪ Delivery Branch

▪ Purchasing offices

▪ Offices for collection of information


• Artificial Avoidance of Permanent Establishment• Commissionaire Agreements

• Transferring all assets, liabilities, profits, balances to the holding company

• SALE IS PURPORTED TO HAVE BEEN MADE OUTSIDE THE COUNTRY

• Specific Exemptions• Artificial Fragmentation of operations among group entities• Splitting of Contracts

Genuine Case?Exemption for

Preparatory and Auxiliary Services

Units only.

ACTION 8, 9 AND 10 – TRANSFER PRICING

▪ Action Plans focuses on developing transfer pricing rules to provide protection against common types of base eroding payments such as management fees and head office expenses.

▪ Regular Approach or Simplified Approach Option

▪ Determination of Arm’s Length Price charges for low value adding intra-group services▪ An entity that elects to apply the simplified method is required to identify, on an annual

basis, a pool of costs associated with categories of low value-adding services which are provided to multiple members of its group.

▪ The costs so identified need to be allocated among members by selecting an allocation key, dependent on the nature of the services consistently throughout the year.

▪ Actual business transactions undertaken by associated enterprises are identified and transfer pricing is not based on contractual arrangements that do not reflect the actual economic reality


ACTION 14 – DISPUTE RESOLUTION MECHANISMS▪ Minimum Standard will have the following:

Treaty obligations related to the mutual agreement procedure are fully implemented in good faith and that Mutual Agreement Procedure (MAP) cases are resolved in a timely manner

Implementation of administrative processes that promote the prevention and timely resolution of treaty-related disputes and

Taxpayers can access the MAP when eligible


ALIGNMENT STRATEGY OF BEPS IN INDIAAdaptation of BEPS in the Indian TaxLaws

BEPS MEASURES IN INDIA

Equalization Levy – BEPS Action 1

Section 6 – Place of Effective

Management

Virtual Permanent

Establishment

Patent Box Incentive Regime – BEPS Action 5

CbC Report - BEPS Action 13

EQUILISATION LEVY – BEPS▪ Chapter-VIII of the Finance Bill, 2016

▪ Equalization levy means the tax leviable on consideration received or receivable for any specified service under the provisions of this chapter.

▪ Section 163 of the Finance Bill, 2016 provides that every resident carrying on business or profession or a non-resident having PE in India shall deduct equalization levy from the amount paid or payable to a non-resident in respect of the specified service at the rate of 6% where the consideration for the specified service exceeds Rs.1 lakh

PATENTS – BEPS

▪ Section 115BBF - Income by way of Royalty in respect of patent developed and registered in India attracts income tax on income by way of Royalty @ 10%. ▪ No expenditure or allowance in respect of

such Royalty income shall be allowed under the Act. ▪ Royalty/Copyright/Patent defined.

CBC REPORT – ACTION PLAN 13▪ Introduced by Finance Act, 2016; effective from FY 16-

17.

▪ MNE’s having consolidated annual revenue greater than EURO 750 million.

▪ Summary data and economic activity in each country.

▪ Prepared by ultimate parent entity for consolidation purposes.

▪ Submitted to the tax authorities of the ultimate parent entity.

▪ Shared with other tax authorities through official channels.

SECTION 6 – RESIDENTIAL STATUS

VIRTUAL PERMANENT ESTABLISHMENT

▪No physical establishment in the Host Country.▪ Website may constitute a Virtual Permanent

Establishment▪ Delhi Tribunal in the cases of Galileo International

and Amadeus Global Travel vs DCIT

THANK YOU AND QUESTIONS

Anusha Dharmaraj

Dalen D’Souza

Janardhan Gouda

Jyothi Vidyashree

Roopika Shetty Shinoj Isac

Shravan Kumar Sneha Rao Bharath

Rao

Base Erosion and Profit Shifting

Business

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