Base Erosion and Profit - · PDF file • Multilateral instrument to modify bilateral tax...

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Transcript of Base Erosion and Profit - · PDF file • Multilateral instrument to modify bilateral tax...

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    Base Erosion and Profit

    Shifting („BEPS‟)

    Saptarishi Basu

    - Broad overview and India perspective

  • Recognised as Tier I firm by 2

    BEPS – But why?

  • Recognised as Tier I firm by 3

    Starbucks

  • Recognised as Tier I firm by 4

    Google

  • Recognised as Tier I firm by 5

    Why now?

    • Austerity drives globally

    • Pressure on revenue collections and Governments

    • Aggression of tax planning by MNCs

    • Inadequacy of current laws and treaty provisions to effectively deal with innovative business models

    • Political backdrop

    • Civil societies and morality in taxes

    • Unanimity among countries to tackle large scale tax avoidance

    • Increased realization regarding inadequacy of the present rules to tackle various avoidance techniques

    • Increasing impatience with traditional ways of looking at arm‟s length standard in TP, PE, deductibility of expenses, use of tax

    treaties, lack of exchange of information, inadequate KYC norms, bank secrecy laws

  • Recognised as Tier I firm by 6

    BEPS

  • Recognised as Tier I firm by 7

    BEPS initiative by OECD

    • Base Erosion and Profit Sharing (BEPS) refers to:

     Tax planning strategies

     that exploit gaps and mismatches in tax rules to make profits 'disappear' for tax purposes, or

     to shift profits to locations where there is little or no real activity but the taxes are low resulting in little or no overall corporate tax

    being paid

    • OECD aims to address BEPS issues on account of concerns raised by several countries regarding the potential of MNEs to reduce their tax liabilities through erosion of tax base or through shifting of income to no or low-tax countries

    • G8 and G20 governments have endorsed OECD‟s work on BEPS and have committed to make appropriate changes to their tax laws

    • Major developing (non-OECD) countries, including India, are actively participating in BEPS project

    • Multilateral instrument to modify bilateral tax treaties is scheduled to be open for signature by June 2017 in Paris

    In the recent past, MNCs like Starbucks, Apple, Microsoft, Google, Amazon, etc. made news for their aggressive tax structures. It

    is alleged that such structures are designed in a way so as to reduce the taxable income by shift of profit to lower tax jurisdictions

  • Recognised as Tier I firm by 8

    • Action Plan on BEPS released by OECD identified 15 actions based on three fundamental pillars:

     Introducing “coherence” in domestic tax rules that affect cross-border activities

     Reinforcing “substance” requirements in existing international standards

     Improving “transparency” as well as certainty for businesses and governments

    BEPS initiative by OECD

    Final package of measures (15 Reports) under BEPS released on 5 October 2015

  • Recognised as Tier I firm by 9

    15 Actions around 3 main pillars

    Coherence

    Neutralising effects of Hybrid Mismatch Arrangements (2)

    Counter Harmful Tax Practices (5)

    Limit base erosion via Interest

    Deductions (4)

    CFC Rules (3)

    Substance

    Preventing Tax Treaty Abuse (6)

    Prevent artificial avoidance of

    PE Status (7)

    TP Aspects of Intangibles (8)

    TP/Risk and Capital (9)

    TP/High Risk Transactions (10)

    Transparency

    Establish methodologies to collect and analyse BEPS

    data (11)

    Require taxpayers to disclose their aggressive tax planning arrangements (12)

    TP Documentation (13)

    Making Dispute Resolution more effective

    (14)

    Address tax challenges of digital economy (1)

    Development of multilateral instrument for amending bilateral treaties (15)

  • Recognised as Tier I firm by 10

    BEPS – Impact on India

    • India is a active participant in the BEPS project

    • India has already introduced the following measures in its domestic tax laws / bilateral tax treaties in order to combat BEPS:

     Introduction of “Equalisation Levy” for specified digital transactions

     Country-by-Country Reporting

     Introduction of Place of Effective Management Test („POEM‟) of corporate residency

     Levy of Buy-back tax to curb treaty abuse

     Revision of tax treaties with Mauritius, Cyprus and Singapore tax treaty to remove capital gains exemption

     Enactment of General Anti Avoidance Rules w.e.f. FY 2017-18

     Introduction of limitation of interest deductions

    • CBDT vide Press Release dated 8 January 2017 states that India fully committed to conclusion of pending design of BEPS

    rules and to ensure the successful implementation of the recommendations of BEPS Project in 2017

  • Recognised as Tier I firm by 11

    Action - 1

  • Recognised as Tier I firm by 12

    Typical challenge posed by digital economy

    US

    India /

    Japan

    China

    Bermuda

    • An Indian resident, while on a visit to Japan orders certain

    goods online

    • The order is received and processed by servers of the US

    based MNC which are located in Bermuda

    • However, the delivery of goods takes place from a warehouse

    located in China to India

    Which country has a right to tax such income arising

    from sale of goods?

  • Recognised as Tier I firm by 13

    Highlights of BEPS Report on Action 1

    • Aims at identifying issues raised by the digital economy and for developing detailed options to address them

    • Final Report contains a detailed overview of the digital economy, its business models and its key features, identifies the

    various BEPS challenges that arise in the context of the digital economy and provides recommendations on how to

    address them

    • Report discusses several tax and legal structures that are relevant in the context of the digital economy and the means by

    which they exacerbate BEPS risks both in the country of residence as well as in the country of source

    • For instance, the importance of intangibles in the context of the digital economy coupled with their mobility for tax

    purposes under the existing regime could generate substantial opportunities for minimising taxes in the country of

    residence

    • Few other measures in this regard (e.g. (a) a new nexus in the form of a significant digital presence test, (b) a withholding

    tax on certain kinds of digital transactions and (c) an equalisation levy) were considered, but not recommended.

    • This is based on an expectation that the measures developed as part of the BEPS project will mitigate some of the tax

    challenges posed by the digital economy and that consumption taxes will be effectively levied in the market country.

    Action 1 – Address the Tax Challenges of the Digital Economy

  • Recognised as Tier I firm by 14

    BEPS – Impact on India

    • India had advocated introduction of withholding tax on digital transactions (a position which was ultimately not accepted in

    the Report)

    • Led to introduction of “Equalisation Levy” vide Finance Act, 2016 (will be discussed in detail in ensuing slides)

    Action 1 – BEPS Impact on India

  • Recognised as Tier I firm by 15

    Equalisation Levy

    • Enacted under Chapter VIII of Finance Act 2016 - not part of domestic income-tax law (Fallout of BEPS recommendation

    on Action 1)

    • Leviable @ 6% on consideration received/ receivable by a non-resident not having a PE in India, inter-alia, from a person

    resident in India

    • Thus, if the non-resident has a PE in India, payments to such NR will not attract Equalisation Levy

    • Applicable on following “specified services”

     online advertisement;

     any provision for digital advertising space;

     any other facility or service for the purpose of online advertisement; and

     any other service as may be notified by the Central Government in this behalf.

    • Obligation on resident payers to deduct and deposit such levy

    • Failure to deduct and deposit levy would result in disallowance of tax deduction for the payer in addition to other penal

    consequences

    • Income exempt in the hands of non-resident recipient. Hence, no withholding tax obligation if the payment is subject to

    Equalisation levy

  • Recognised as Tier I firm by 16

    Equalisation Levy

    • Wide scope of the phrase “specified services”

     Cross charge from overseas parent for various group services, inter alia, including the Indian entity‟s share of online

    advertisement spending – whether covered?

     Is payment by advertisers to producers (for production of advertisement) also subject to this levy as the law uses the

    phrase “for the purpose of online advertisement”?

     „Online advertisement‟ can be one of the purpose and not the only purpose for which payment is made. In s