Base erosion and profit shifting (BEPS)

Base Erosion and Profit Shifting (BEPS) refers to the tax planning or tax avoidance strategies that international enterprises utilize (MNCs) that exploit gaps and mismatches in the tax rules between different countries to avoid paying tax which we call double non-taxation benefit. Developing countries will have a higher reliance on corporate income tax, which means they suffer disproportionately from BEPS. This is because businesses operate within the international market. Due to digitalization coming into existence, a vital role of government must act together to tackle BEPS and restore the trust in domestic and international tax systems. Approximately 4% to 10% of the world’s corporate income tax revenue is lost to BEPS practices, which cost countries between US$ 100 and 240 billion a year. India is a part of the G20, which functions together within the OECD/G20 Inclusive Framework on BEPS; 141 countries and jurisdictions have collaborated on the implementation of 15 measures which we call 15 action plans to tackle tax avoidance. OECD/G20 improves the coherence of international tax rules and ensures a more transparent tax environment globally. Further, these entities shift their profits to different locations with little or no real activity. Still, the taxes are low compared to locations where the entity operates, resulting in no overall corporate tax or little tax being paid.

Consequences/ Effects of BEPS

There is less government revenue generation with a higher cost to ensure compliance.
A lack of tax revenue results in significant under-funding of public investment in developing countries.
BEPS disables the integrity of the tax system in the country.
It is difficult to compete MNEs by domestic companies as MNEs shift their financial gain to lower-tax countries to evade tax.

Inclusive Framework (IF) on BEPS
The G20 released a package on BEPS in October 2015; the Leaders urged its timely implementation and called for the OECD to develop an additional inclusive framework that involves interested non-G20 countries and jurisdictions.

Due to the OECD’s establishment of the BEPS inclusive framework in January 2016, countries and jurisdictions that are interested in curbing tax avoidance work together. It is estimated that more than 90 countries and jurisdictions have already joined to develop standards for BEPS-related issues and help review and monitor its consistency.
A country or jurisdiction that wishes to join the OECD/G20 must commit to the BEPS package and pay an annual membership fee.

Why join the IF?

After Implementing the IF measures, it will protect the tax base by developing provisions to avoid treaty abuse and introducing country-by-country reporting. The BEPS package provides minimum standards.
It gives an equal voice in developing standard-setting and the BEPS implementation and monitoring.
Helps access capacity-building support, including guidance on developing Action Plans for BEPS implementation.
It helps to become a part of a wider community of exchanges of practice and sharing experiences and knowledge with each country.

There are overall 15 Actions Plans

Action Plan 1: Addressing the taxation in the digital economy.
Action Plan 2: Nullify the consequences of Hybrid Mismatch Arrangements.
Action Plan 3: Build up Controlled Foreign Company Rules.
Action Plan 4: Interest Deduction and other Monetary Payments.
Action Plan 5: Counter Harmful Tax Practices.
Action Plan 6: Preventing Treaty Abuse.
Action Plan 7: Hinder Artificial Avoidance of Permanent Establishment.
Action Plan 8: Addresses Transfer Pricing issues relating to controlled transactions.
Action Plan 9: Contractual allocations of risk are respected only when they are assisted by actual decision-making, thus exercising control over these risks.
Action Plan 10: This activity focuses on other high-risk areas.
Action Plan 11: Measuring and Monitoring BEPS.
Action Plan 12: Disclosure of Tax Planning Arrangements.
Action Plan 13: Re-examine Transfer Pricing Documentation.
Action Plan 14: Making the Dispute resolution plan more effective.
Action Plan 15: Developing a Multilateral Instrument.
Measuring and Monitoring BEPS

How to know that there is an Existence of BEPS?
There are, overall, six indicators that define the existence of BEPS.

When the profit rates of MNE entities located in lower-tax countries are higher than their group’s average profit rate.
When the MNE paid lower taxes than taxes paid by a similar entity located in a domestic country.
Foreign Direct Investment (FDI) is progressively concentrated.
In the case of Intangible Assets, there is a clear separation of taxable profits in the value-creating activity location.
Royalties received by entities located in the lower tax countries account for 3% of total royalties.
The interest to income ratio of MNE affiliates in higher tax rate entities is three times higher than their MNEs worldwide third-party interest to income ratio.

At AJSH, we assist our clients in setting up their business in India and ensuring they comply with all statutory requirements like accounting, bookkeeping, tax filings & assessments, payroll, auditing, trademark registration, business structuring etc., in a timely manner. If you have any questions or wish to know more about base erosion and profit shifting, kindly contact us.