Base erosion and profit shifting refers to the practice of businesses moving their earnings to other tax jurisdictions where the tax rates are lower.
BEPS is a method of tax evasion employed by several multinational firms to artificially move earnings to low- or no-tax jurisdictions.
The integrity and credibility of tax systems are impacted because multinational corporations can use BEPS to gain a competitive advantage over domestic firms. It has weakened India’s tax base in the process.
For example, it involves the transfer of earnings from nations with high tax burdens (such the United States and European nations) to nations with low (or no) tax burdens (so-called tax havens), like Bahamas & Cayman Islands.
To address this, the OECD and G20 nations created the BEPS Action Plan in 2013.
Steps taken by Indian Government:
- India is a signatory to the Inter-Government Agreement (IGA) on Foreign Account Tax Compliance Act (FATCA) with the United States.
- In 2015 India signed a Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information.
- Introduction of an equalization levy in budget 2016 over payments exceeding over Rs 1 lakh to online ad services from non-resident entities.
- Country-by-Country reporting requirements were introduced by India through the Indian Income Tax Act, 1961 through Finance Act 2016.
- India is a signatory to the agreement for the exchange of country-by-country reports with the US to interchange reports filed by the multinational enterprises in respective countries.
- Thin capitalization refers to a condition where a company is financed with a high level of debt compared to the equity (highly leveraged). This rule ensures that the companies finances reflect their economic strategy rather than tax avoidance objectives.
The Multilateral Convention to Implement Tax Treaty Related methods to BEPS was signed by India. It has following benefits for India:
- The Multilateral Convention will make it possible to quickly amend India’s current tax treaties to implement the BEPS results.
- It is also in India’s best interests to see that the BEPS anti-abuse results are adopted by all its treaty partners.
- The Convention ensures that profits be taxed where significant economic activities generating the earnings are carried out and where value is generated.
- This will enable the reduction of revenue loss due to treaty abuse, base erosion, and profit shifting tactics.
