Presentation - An Overview of 15 OCED G20 BEPS Action Plans and Analysis of How They Will Be Relevant to Indian Tax Law

1. ICAI–International
TaxConference
Overview of BEPS and 15 Action Plans
15 April 2016

2. Howitallbegan?
Anger as Starbucks boss says: We may not pay UK tax for up
to three years
•Chief Executive Mark Fox said chain aimed to be profitable by 2017
•Mr. Fox insisted there was 'nothing abnormal' about the way firm was run
•Starbucks slated in 2012 after paying just £8.6m in tax on £3bn of sales
•Coffee chain remains under investigation by the European Commission
•It volunteered to pay £20 million tax payment in 2012 after complaints
Do taxpayers have a “moral duty” to pay their “fair share” of taxes?

3. OECDBEPS–Inanutshell
The
coherence of
corporate
tax at the
international
level
Transparency, coupled
with certainty and
predictability
Realignment
of taxation
and substance
15 Actions organized around
three main pillars
On 19 July 2013 OECD released an Action Plan on Base Erosion
and Profit Shifting (BEPS) which was presented to the meeting
of G20 Finance Ministers in Moscow
Purpose of the Action Plan - “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.”
“No or low taxation is not per se a cause for concern, but it
becomes so when it is associated with practices that artificially
segregate taxable income from the activities that generate it.”
Action Plan covered 15 Specific Actions to be achieved within a
two year time frame (i.e. by the end of 2015).
On 5 October 2015, OECD released its final set of
recommendations on all the 15 Action Points.

4. WhyshouldbusinessescareaboutBEPS?
Political &
Public
attention
Changes in
tax legislation
Tax enforcement
environment
• Multinationals need to be
aware of these
developments and manage
the risk of change in law
• Companies’ reputation at
stake
• Tax Administrations closely
scrutinize global structures to
identify possible abuses

5. Corporate/International
tax–Actions1to7and11,
12,14and15

6. ActionPlan1–DigitalEconomy
Action 1: Addressing the tax challenges
of the Digital Economy (‘DE’)
• No special tax regime has been prescribed.
BEPS measures under other Action Plans
seek to address these challenges.
• Destination based tax for GST / VAT
Indian perspective
• Litigation over the characterisation of
payments relating to new digital products
and services – Royalties / FTS, PE on account
of accessibility of websites / presence of
equipment / agents, etc.

7. ActionPlan1–Budget2016proposal
• In order to tax e-commerce transactions of non-residents, an “Equalisation Levy” in line
with the recommendation of the OECD BEPS Action Plan 1 is proposed to be applied
• Equalisation Levy would be 6% of the amount of consideration for “specified services”
provided by a non-resident
− “Specified services” defined to mean online advertisement, any provision for digital
advertising space or any other facility or service for the purpose of online advertisement
and includes any other notified services
− Equalisation Levy is required to be deducted by the resident service recipient / non-
resident payer having a PE in India;
− Income earned by non-resident recipient will be tax exempt under the Income-tax Act;
• Provisions of Equalisation Levy would not apply if:
− Non-resident recipient has a PE in India and the specified services are effectively
connected with such a PE; OR
− The aggregate amount of consideration received / receivable from each payer in a year
does not exceed INR 100,000
• Prima-facie, it appears that Treaty benefits may not be available vis-à-vis such Equalisation
Levy

8. ActionPlan2–HybridMismatch-Background
• Hybrid arrangements – Involve use of cross-border differences in characterisation of entities
and instruments to produce mismatched tax outcomes
• Rule based approach to avoid undesired tax outcome
− Primary rule: Deny taxpayers the deduction for a payment, if it is not taxable in the hands
of the recipient or if it is also deductible in the recipient's jurisdiction
− Secondary or defensive rule: Recipient's jurisdiction can include the deductible amount in
the recipient’s taxable income or deny the duplicate deduction
Identify arrangements likely to be hit under BEPS and take remedial measures
BEPS recommendations (once implemented) are likely to impact cross-border
arrangements / instruments where tax characterizations vary in both countries
In an Indian context, such risks may typically revolve around situations where :
• Debt Instruments issued by Indian Cos (e.g. CCDs) may be considered as equity in the
debenture holder’s jurisdiction
• Indian partnerships / LLPs are considered pass-through in overseas jurisdictions
• Dual-resident companies

9. ActionPlan3–ControlledForeignCompany-CFC
CFC income to
be computed
as per rules of
parent
jurisdiction
Determination of level of
influence so as to
constitute CFC and
recommendations for
bringing non-corporate
entities in CFC net
CFC
income to
be
defined
CFC income to
be calculated
by reference to
proportionate
ownership
Credit of
foreign taxes
paid to be
allowed
CFC rules to apply
only if effective
tax rate lower
than in parent
jurisdiction
Six building
blocks for
Effective CFC
rules
• Aimed at taxing passive
profits which are
accumulated in low tax
jurisdictions
CFC rules aimed at preventing taxpayers from shifting income to foreign subsidiaries
• No CFC rules prescribed
under the Indian domestic
tax laws
• DTC, which lapsed,
envisaged CFC rules
• Some echo of the CFC rules
found in POEM Draft Rules
• Implementation of the CFC
regime could have a
significant impact on
outbound investments by
Indian companies

10. Action4–LimitingInterestDeductions
Limiting base erosion involving interest deductions and other financial payments
Approach – Rule Based
• Fixed Ratio: Limits an entity's net deductions for interest / equivalents to a percentage of pre-tax
EBITDA
• Group Ratio: Permits an entity with a net interest expense above the country's fixed ratio to deduct
interest upto its Group Level Ratio
• Equity Escape: Entity level comparison of Equity and Assets to those held by Group
• Additional clauses: De minimis threshold, public benefit exemption, carry forward or carry back of
disallowed interest expense and / or unused interest capacity
• Fixed Ratio restricts allowability of interest to a certain percentage of EBIDTA. Range of 10% to 30%
recommended
• Other rules can be considered to grant relief wherever required.
• Report does not define interest that is applied by all countries for all tax purposes but provides
guidelines
• Foreign exchange gains and losses on instruments to hedge or take on a currency exposure connected
with the raising of finance generally not to be considered equivalent to interest.
• Net Interest (i.e. interest expense – interest income) to be considered

11. Action4–LimitingInterestDeduction
• Work to identify best practice rules to deal with potential BEPS risk of
banking and insurance companies
• Particular areas of best practice approach - Guidance on operation of
Group Ratio Rule
• Transfer Pricing aspects of financial transactions
Unfinished
Agenda
• Cross Border interest payments regulated under foreign exchange
provisions which inter alia prescribe all-in-cost ceilings
• Disallowance of interest as a deduction in cases where the underlying
principal has been used to fund generation of exempt income
• Withholding tax implications on interest payments to the beneficial
owner of such interest
• Transfer pricing implications on intra group borrowings in India and
outside India
India
Perspective

12. Action5–CounteringHarmfulTaxPractices
Focus on transparency and substance
Modified nexus approach
• Benefit of an intellectual property (‘IP’) regime only to the extent that the taxpayer contributes towards
the development of IP i.e. ratio of qualifying research and development (R&D) expenditures to total /
overall R&D expenditure
Notes
• Certain regimes have been found to be partly / wholly inconsistent with the nexus approach
• Report recommends review of possible amendments to the regimes
India Perspective
• Currently, there are no thin capitalization rules in India
• Restrictions under the Indian foreign exchange laws for overseas borrowings currently govern the limits
for capitalization / borrowing and provide regulatory capping of interest of such borrowing
Belgium China Colombia France Hungary
Turkey Israel Luxembourg Netherlands
Portugal Spain Switzerland UK
OECD Final Action Plan has
acknowledged that Indian
tax regime for expenditure
deduction are not harmful
in nature as deductions are
subject to carrying out
specified businesses and on
approval of government

13. Action5–CounteringHarmfulTaxPractices
• Need for examining the existing IP structures located in preferential
regimes to evaluate whether they are in line with the proposed
recommendations
• Evaluation of subcontracting arrangements for developing IP to Indian
Group to take benefit of preferential regimes
• Impact of GAAR
India
Perspective

14. ActionPlan6–Treatyabuse
Treaties to clarify
Contracting States
intend to avoid tax
evasion or
avoidance
Inclusion of general anti-
abuse rule (PPT) in the tax
treaties
Inclusion of LOB
Rule in tax treaties
Three pronged approach recommended to
deal with treaty shopping
Minimum standards:
• A clear statement in the treaty that intention is
also to avoid tax evasion;
• Combination of LOB and PPT rule; or
• PPT rule alone; or
• LOB rule supplemented by domestic anti-conduit
financing rules
Other recommendations:
• To tackle other forms of treaty abuse, for instance
– Article 10 : Dividend transfer transactions
– Article 13(4) : Gains from transfer of immovable
property
– Article 4(3) : Tie-breaker rule for dual residents
• Changes recommended to domestic law
– Inclusion of SAAR / GAAR
• Recommendations to avoid potential conflict
between tax treaties and domestic law
• Tax treaties not to restrict State’s right to tax its
own residents

15. ActionPlan6–KeyparasofLOB
Active conduct of business test:
• Treaty benefits available if -
‒ the resident it is engaged in the active
conduct of business (other than the
business of making or managing
investments for own account) in the country
of residence; and
‒ the income is derived in connection with or
is incidental to that business
• Additional condition to be satisfied if income
is derived from the business activity
conducted in the other country or from an AE
in other country
– business activity carried on in the country of
residence to be substantial in relation to the
business activity carried on in the source
country
Principal Purposes Test (PPT) rule:
• Treaty benefits not available if it is reasonable to
conclude that one of the principal purposes of
transactions or arrangements is to secure
benefit under the tax treaty
– Exception- if it is established that granting
benefit would be in accordance with the
object and purpose of the treaty
• Scope wide enough to include direct as well as
indirect benefit
• Supplements and does not restrict the scope or
application of the other provisions of LOB
– A benefit that is denied under other
provisions of LOB cannot be claimed under
PPT
– Conversely, person entitled to benefits under
other provisions of LOB can be denied such
benefits under PPT

16. ActionPlan6–Indiaperspective
• Supreme Court Ruling in Azadi Bachao
Andolan on India-Mauritius treaty
• LOB - a key component of India’s recent
tax treaty negotiations / re-negotiations
(such as treaties signed by India with UK,
Spain and Poland)
• GAAR provisions introduced in Indian
Income-tax Act (proposed to be effective
from FY 2017-18)
• Indian tax office could use BEPS
recommendations to deny treaty benefits
for inbound investments in India through
mere holding / shell companies
• Urgent need to evaluate investment
holding structures, international
transactions, etc. and build appropriate
commercial rationale

17. ActionPlan7–ArtificialAvoidanceofPE-AgencyPE
Existing OECD Model
• Article 5 (5) provides that an agent which habitually exercises an authority to conclude
contracts in the ‘name of the foreign enterprise’ forms a PE of such enterprise in the
source jurisdiction
− Standard contracts directly entered into by the customers with foreign principal may
not create a PE even though agent played principal role for conclusion of contract
− Contracts concluded with third party on behalf of the principal but in the name of the
agent (such as in Commissionaire arrangements): generally no PE
Recommendation of Action 7
• Foreign principal deemed to have PE when a person acting on its behalf habitually
concludes contracts or habitually plays the principal role leading to the conclusion of
contracts and no material modification by the principal
− Commissionaires that are dependent agents could give rise to a PE for the principal
− Contracts concluded by a person even though not legally binding the enterprise to third
party but indirect obligation is cast on such enterprise are covered
− Convincing buyers to accept standard terms of contract without any material
modification of contract terms could create PE

18. ActionPlan7–ArtificialAvoidanceofPE-Independentagent
Article 5 (6)
• Para 5 (Agency PE) shall not apply where the agent is an independent agent acting in the
ordinary course of the business
• However, if the agent acts exclusively / almost exclusively for closely related enterprises,
he shall not be considered to be an independent agent
− close relation to be determined based on control test or beneficial interest test
• Exclusively / almost exclusively for closely related enterprise(s)
− sales by agent for unrelated enterprise is less than 10% of over all sales concluded by
such agent
Existing
Depending on the facts and
circumstances, an agent acting on
behalf of a related enterprise
could be considered to be an
independent agent
Proposed
A person acting exclusively or almost
exclusively on behalf of one or more
enterprises to which it is closely related shall
not be considered to be an independent
agent

19. ActionPlan7–ArtificialAvoidanceofPE-Impactareas
• Mere approval by Foreign Co of Order and signature outside India is no more
relevant
− need to demonstrate active participation in conclusion of contracts / material
modification by Foreign Co (re-design commercial arrangement / documents
trail)
• Higher exposure for digital commerce (such as search engines, digital
advertisement, e-commerce, online streaming videos / content, etc)
− Indian agents securing orders where standard contracts are signed by the
Indian customer with the foreign companies could create PE exposure
• An agent acting exclusively or almost exclusively for closely related enterprise
could create PE exposure – not an Independent agent
• Distribution model (reseller) can be considered to mitigate PE exposure
‒ Title to property should pass on
‒ Negative Indian judicial precedent in the context of “service” business

20. ActionPlan7–ArtificialAvoidanceofPEPreparatoryorAuxiliaryactivities
Existing OECD Model
• Article 5(4) of the OECD Model Tax Convention provides for list of activities which, even if
carried by foreign company from fixed place in the source state, do not give rise to PE in
source state:
– List of such activities are use of facilities or maintenance of stock of goods, solely for the
purpose of storage, display or delivery; purchase of goods or collection of information,
etc.
Recommendation of Action 7
• Activities shall not constitute PE provided that such activity or the overall activity of the fixed
place of business, is of a preparatory or auxiliary character
• Preparatory or auxiliary activities should be carried for the enterprise itself - activities carried
on for other enterprises including for entities within the same group should not qualify for
exemption
• Anti-fragmentation rule introduced – carrying out complementary functions through
different places would not be considered as preparatory or auxiliary activities

21. Actions11,12and14
Measuring and monitoring BEPS
Six indicators to act as dashboard of BEPS behaviors
• Improved data and analysis tools are recommended with an intention to lead to better
identification of BEPS activities and impact of actions taken to address BEPS
Measuring and monitoring BEPS
Taxpayer to disclose aggressive tax planning arrangement
• Tax authorities to introduce mandatory disclosure regime with design features that
include who reports, what to report, when to report and consequences of non-reporting
Making dispute resolution mechanisms more effective
Strengthening the effectiveness and efficacy of Mutual Agreement Procedures
• Agreement on minimum standard to secure progress on dispute resolution with effective
monitoring mechanism
• MAP arbitration to be included in bilateral tax treaties to guarantee resolution within
specified time frame
Note
• India is not a signatory to the agreement seeking MAP arbitration

22. Action15–MultilateralInstrument
Develop a Multilateral Instrument (MLI)
Innovative approach to resolve international tax matters
• An ad hoc group to develop a MLI on tax treaty measures to tackle BEPS and conclude
the work by 31 December 2016
Indian perspective
• India, being a member of the ad hoc group, is expected to play a significant role in
drafting of the framework for the MLI

23. ImportantTakeaways
Review of the
existing
inbound /
outbound
structures
Examining the
existing IP
structures
located in
preferential
regimes
Review of
business
arrangements to
determine the
potential PE
exposure (if any)
in light of the
proposed
recommend-
ations
Review of
hybrid
instruments /
hybrid entity
structures
Need to watch
out for
regulations
pertaining to
CFC and
interest
deductibility

24. TransferPricing(‘TP’)–
Actions8to10and13

25. Actions8-10
Aligning TP outcomes with Value Creation
Intangibles
• Legal ownership of an intangible does not by itself provide a right to all (or indeed any) of the returns
generated from its exploitation. Instead those returns accrue to the entities which carry out the DEMPE
Functions - Development, Enhancement, Management, Protection and Exploitation - in relation to that
intangible.
Risk re-characterisation and special measures
• Emphasis on the need to accurately delineate a transaction and to ensure that the actual conduct of
parties is reflected in contractual arrangements. Transactions can be disregarded for TP purposes
where they lack commercial rationality.
• Contractual allocations of risk to be respected only when they are supported by actual decision-
making i.e. exercising control over these risks coupled with financial capacity to assume such risks.
• ‘Cash boxes’ or entities merely providing funds without performing significant activities - entitled only
to risk-free returns to the extent of their capital contribution, if they have no de-facto control on the
associated risks
Hard-To-Value Intangibles (HTVI)
• Intangibles or rights in intangibles for which, at the time of transfer between associated enterprises
- no reliable comparables exist, and
- projections of future cash flows or income is highly uncertain
• HTVI’s may include, partially developed intangible, intangibles whose commercial exploitation is
deferred until several years, intangibles which may be exploited in a novel manner, etc.

26. Actions8-10:ImportantConsiderations
Legal
ownership
v. economic
ownership
(Entitled to
returns
based on
DEMPE
functions)
Significant
difference
between ex
ante value v.
ex-post
value of
intangibles
could be
adjusted,
unless
robust
evidence is
provided
Actual
conduct
more
important
than
contracts
Performing
and
controlling
functions
and risks
are more
important
than
funding
Extensive
guidance in
litigative
issues -
marketing
intangibles,
intra-group
services,
location
savings,
R&D
Transfer
pricing
outcomes to be
in line with
‘value creation’
Need to have
robust
business
structures /
documentation

27. Action13–TPDocumentationandCbyCReport
TP documentation and CbyC report
Three-tier documentation structure applicable to Multinational Enterprises (MNEs) having a
consolidated group revenue greater than EUR 750 million.
Master File to Provide
• Blueprint of an MNE’s global value chain
– Group’s organisational structure and geographical location of operating entities
– Description of the group's business, including important drivers of business profits,
strategy on intangibles, and location of R&D facilities / management, intercompany
financial activities, and financial and tax positions.
Local File to Provide
• Material transfer pricing positions of the local entity / taxpayer with its foreign affiliates
– Demonstrates the arm’s length nature of transactions
– Contains the comparable analysis
Country by Country (CbyC) report to Provide
• Jurisdiction-wise information on global allocation of income, taxes paid / accrued, the
stated capital, accumulated earnings, number of employees and tangible assets
• Entity-wise details of the main business activities which highlight the value chain of inter-
company transactions
India has introduced the three tier documentation structure vide Finance Bill 2016

28. Country-by-Country-ReportingTemplate
CbyC template –Page 1*
Country
Revenues
Profit (loss)
before
income tax
Income tax
paid (on a
cash basis)
Income tax
accrued –
current year
Stated capital
and
accumulated
earnings
Number
of
employees
Tangible
assets other
than cash and
cash
equivalents
Related
Party
Unrelated
party Total
Country A X X X X X X X X X
Country B X X X X X X X X X
CbyC template –Page 2* (onwards)
Activities
Country
Constituent
entities resident
in country
Country of
organisation or
incorporation in
different country
from that of
residence
R&D
Purchasingand
procurement
Manufacturingand
production
Sales,marketing
anddistribution
Administrative,
managementand
supportservices
Externalservice
business
Regulatedfinancial
services
Insurance
Holdingcompany
Dormant
Other
Country
A
Entity A Country B  
Entity B   
*Information obtained from annexure III to chapter V of OECD / G20 base erosion and profit shifting
Project: Transfer pricing documentation and Country-by-Country reporting

29. Action13-Importantconsiderations
Important for
companies
operating in
India,
specifically
for Indian
headquartere
d companies
Whether
global TP
documentati
on is
consistent
and tells the
same story
of the
corporate
group value
chain
Do the
profits in
overseas
jurisdictions
align with
the
operations
in those
jurisdictions
Whether the
internal
accounting
and MIS
system is
geared to
gather data
required for
CbyC
reporting
Immediate
action required
by the BOD /
management /
audit
committee of
companies -
to understand
the
implications
and
transparency
requirements
of BEPS

30. Thankyou
Hitesh D. Gajaria
Chartered Accountant