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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”
TAXATION
What 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
• 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
countries
Inadequacy of current
treaty provisions to
effectively deal with
innovative business
models
Ineffectiveness 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
PROJECT
2015 Final Reports on Various Action Items of OECD
Challenges/Problem Recommendation
ACTION 1 – TAXING DIGITAL ECONOMY
Challenges/Problem Recommendation
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
Challenges/Problem Recommendation
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
Challenges/Problem Recommendation
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.
Challenges/Problem Recommendation
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
Challenges/Problem Recommendation
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
Country B
• USA
• Controlling Entity for
Country A and Country B
Challenges/Problem Recommendation
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
Challenges/Problem Recommendation
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
Challenges/Problem Recommendation
ACTION 7 – ARTIFICIAL AVOIDANCE
PERMANENT ESTABLISHMENT
▪ Entities mandatorily covered as Permanent Establishment
▪ Delivery Branch
▪ Purchasing offices
▪ Offices for collection of information
Challenges/Problem Recommendation
• 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
Challenges/Problem Recommendation
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
Challenges/Problem Recommendation
ALIGNMENT STRATEGY
OF BEPS IN INDIA
Adaptation of BEPS in the Indian Tax
Laws
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

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Base Erosion and Profit Shifting

  • 2. OUTLINE - BEPS OECD and G20 Double “Non” Taxation OECD/G20 Base Erosion and Profit Shifting Project Indian Strategy for BEPS Alignment
  • 4.
  • 5.
  • 6. 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.”
  • 8. 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
  • 9. EXAMPLE • 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
  • 10. CAUSES OF BEPS Existence of loopholes, gaps or mismatches in the interaction of domestic tax laws of countries Inadequacy of current treaty provisions to effectively deal with innovative business models Ineffectiveness or lack of anti-abuse measures in some tax jurisdictions
  • 11. 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
  • 12. 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
  • 13. OECD/G20 BASE EROSION AND PROFIT SHIFTING PROJECT 2015 Final Reports on Various Action Items of OECD Challenges/Problem Recommendation
  • 14. ACTION 1 – TAXING DIGITAL ECONOMY Challenges/Problem Recommendation
  • 15. 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 Challenges/Problem Recommendation
  • 16. 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 Challenges/Problem Recommendation
  • 17. 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. Challenges/Problem Recommendation
  • 18. 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 Challenges/Problem Recommendation
  • 19. 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 Country B • USA • Controlling Entity for Country A and Country B Challenges/Problem Recommendation
  • 20. 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 Challenges/Problem Recommendation
  • 21. 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 Challenges/Problem Recommendation
  • 22. ACTION 7 – ARTIFICIAL AVOIDANCE PERMANENT ESTABLISHMENT ▪ Entities mandatorily covered as Permanent Establishment ▪ Delivery Branch ▪ Purchasing offices ▪ Offices for collection of information Challenges/Problem Recommendation • 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.
  • 23. 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 Challenges/Problem Recommendation
  • 24. 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 Challenges/Problem Recommendation
  • 25. ALIGNMENT STRATEGY OF BEPS IN INDIA Adaptation of BEPS in the Indian Tax Laws
  • 26. 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
  • 27. 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
  • 28. 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.
  • 29. 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.
  • 30.
  • 31. SECTION 6 – RESIDENTIAL STATUS
  • 32. 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
  • 33.
  • 34. THANK YOU AND QUESTIONS  Anusha Dharmaraj Dalen D’Souza Janardhan Gouda Jyothi Vidyashree Roopika Shetty Shinoj Isac Shravan Kumar Sneha Rao Bharath Rao