SCALING BEPS - Taxsutra · 2016. 1. 16. · In our first newsletter post release of the final OECD...

Issue - 7December 2015 / January 2016

OECDBEPSG20

SCALING

BEPS

Scaling BEPS December 2015 / January 2016 - Issue 72

SCALING

BEPS


CONTENTS

1 DISSECTING BEPS ACTION PLANS 05

ACTION PLAN 15: MULTILATERAL INSTRUMENTS – WHY, HOW & SO FAR

2 BEPS – THE UNFINISHED AGENDA 08

10 AREAS ON OECD's RADAR IN 2016

3 EXPERT GAZE 12

5 THINGS TO WATCH OUT FOR IN 2016 ON BEPS PROJECT: BY MS MARY BENNETT (PARTNER, BAKER & McKENZIE’S TAX PRACTICE GROUP)

4 SHOOTING STRAIGHT: PHILIP BAKER 14

5 BEPS REFLECTIONS – EXPERTS’ REACTIONS 17

6 INDIA CORNER 22

WHAT INDIA SHOULD BE LOOKING FOR FROM BEPS: BY MR. ASHUTOSH DIKSHIT (BMR)

7 THE BEPS STRING 2015 28


I NTRODUCTION

Note from the Editor:

For tax professionals/tax world, we may as well wish “Happy BEPS 2016...”! Make no mistake - it is another year of BEPS, BEPS & more BEPS but with one big difference: It is Showtime. We have not only crossed the threshold of spirited debate on several Action Plans but also got to that critical stage where all eyes will be on how different countries implement BEPS as also the OECD's promise of monitoring this implementation.

In our first newsletter post release of the final OECD BEPS Action Plans, we turn our focus to the one Action Plan that, by the stroke of a pen, has the potential to make seismic changes to thousands of DTAAs - i.e. the Multilateral Instrument. In the Expert Gaze series, Ms.Mary Bennett (formerly with OECD) tells us the 5 points to watch out for this year, from the BEPS stable and no surprise that development of an "inclusive framework" for implementing/monitoring BEPS is on top of her list! Mr. AshutoshDikshit (BMR) shares the India view on BEPS, especially the legislative changes likely in the forthcoming Annual Budget document of the Government, to ring in some of the final outcomes like CbC reporting. In his Shooting Straight piece, Philip Baker as usual gives us a contrarian take & minces no words in criticising the final BEPS outcome and says that this sure is not the “dawn of a new international tax order."

Finally, we leave you with some memorable quotes from regulators & tax experts, who graced the inaugural Taxsutra Conclave in India, in late 2015. Ride the BEPS Express in 2016 with Taxsutra& BMR's 'Scaling BEPS.'


1 D ISSECTING BEPS ACTION PLANSACTION PLAN 15: MULTILATERAL INSTRUMENTS – WHY, HOW & SO FAR

1http://www.oecd.org/tax/developing-a-multilateral-instrument-to-modify-bilateral-tax-treaties-action-15-2015-final-report-9789264241688-en.htm

The focus to curb tax erosion has crystallized with the final reports released under the OECD-BEPS project. After two years of work, the 15 actions are now completed. The key to transferring these efforts from paper to practice is the ‘Multilateral Instrument’, under the final action of the BEPS project. The BEPS proposals are designed to be implemented via changes in domestic law and practices, and via treaty provisions, with negotiations underway for a multilateral instrument to be finalized in 2016. Action Plan 15 focusses on the development of a multilateral instrument that countries can use to implement various treaty-related measures developed under the project. The goal of Action Plan 15 is to streamline the implementation of the tax-treaty related BEPS measures. The Final Report1 on Action Plan 15: “Developing a Multilateral Instrument to Modify Bilateral Tax Treaties” (‘Final Report’) recognizes that this is an innovative approach with no precedent in the tax world, but precedents are available in arenas of public international law. The 2014 report on this Action Plan concluded the feasibility of such an instrument and an Adhoc group was formed in May 2015 to take the discussions forward. The group expects to bring out the multilateral instrument for signature by 31 December 2016.

Multilateral Instrument: Why & How?

The Final Report contains a reproduction of the 2014 report on Action Plan 15. The Report recognizes the specific reasons that push ahead the requirement of a multilateral instrument. Recognizing the wide network of bilateral tax treaties in existence, it comments that any changes to these could take a generation to implement. The need to eliminate BEPS being urgent, the Report puts forth that multilateral instruments are innovative and a unique opportunity and would facilitate speedy action. The Report also states that the multilateral instrument will co-exist with the bilateral tax treaty network. This aspect of the instrument was preferred over the other two options of a ‘self-standing instrument’ overriding all treaties or an instrument of ‘amending protocols’ as it is viewed as more efficient and targeted.

“The most promising approach for pursuing the goal of a multilateral instrument to consistently modify the existing, varied, 3000+ tax treaty architecture involves developing a multilateral instrument that would co-

exist with bilateral tax treaties” – Final Report on Action 15

http://www.oecd.org/tax/developing-a-multilateral-instrument-to-modify-bilateral-tax-treaties-action-15-2015-final-report-9789264241688-en.htm

http://www.oecd.org/tax/developing-a-multilateral-instrument-to-modify-bilateral-tax-treaties-action-15-2015-final-report-9789264241688-en.htm


The Report also explains as to how the multilateral instrument will co-exist with the existing bilateral treaty network. In this aspect, the Report states that the multilateral instrument would:

• Be governed by International law and would be legally binding on all parties; It would govern the relationship between parties who have a bilateral treaty in place amongst themselves, except with respect to the dispute resolution mechanism;

• Modify a limited number of provisions common to most existing bilateral treaties, and for those treaties that do not already have such provisions, add new provisions specifically designed to counter BEPS;

• Clarify compatibility with tax treaties of other anti-BEPS measures developed in the course of the BEPS project;

• Be accompanied by an explanatory report to facilitate implementation of the provisions;

• Allow for tailoring of the level of certain commitments towards all the other parties and/or depending on the partner country.

The aspects of the multilateral instruments which have been discussed in the report are summarized below:

Benefits of a Multilateral Instrument

• Overcome the hurdle of cumbersome bilateral negotiations

• Opportunity for developing countries to fully benefit from the BEPS project

• Increased consistency and continued reliability of the international tax treaty network

Technical challenges viz-a-viz similar provisions in existing bilateral treaties

• Variations in scope can be resolved through inclusion of specific ‘compatibility’ or ‘primacy’ clauses

• Variations in wording can be addressed through superseding language

• Variations in numbering of provisions to be dealt with carefully due to inconsistent numbering in the model and the treaties

Specific issues that could be addressed through multilateral instruments

• Multilateral MAP (Action 14)• Dual residence structures (Action 2)• Transparent entities in the context of hybrid mismatch arrangements (Action 2)• “Triangular” cases involving PEs in third states (Action 7)• Treaty abuse (Action 6)




Adhoc Group: progress so far..

February 2015

May 2015

October 2015

November 2015

OECD and G20 authorised the formation of the Adhoc group to develop the multilateral instrument.

Adhoc group formed with over 80 Countries (excluding U.S.). Presently there are 94 member countries including the BRICS.

Participation of U.S. was confirmed with the emphasis that the decision does not indicate becoming a signatory to the instrument.

Mr. Mike Williams in an interview to Taxsutra on

multilateral instruments -“It is quite challenging

that the 3000 tax treaties are not uniform..while

the destination is the same, the starting place is

not similar”.

Inaugural Meeting held. Discussions on:- Organisation of the work- approaches for adressing key

substantive issues such as relationship with the existing bilateral treaty network

- Establishment of a sub-group for development of the optional provision of mandatory binding MAP arbitration.

Mr. Mike Williams, Director Business and International Tax, UK is the Chairman of the Adhoc group. He has a long history in economic policy being part of significant reforms in several countries. He specializes in institution and capacity building, governance, debt strategy and market development, and developing a more efficient and proactive approach to the management of the government’s cash.


2 B EPS – THE UNFINISHED AGENDA10 AREAS ON OECD's RADAR IN 2016

5 October 2015 marked the major milestone in the two years BEPS project with the release of the final reports on all of the 15 Action plans. It has been noted as a breakthrough tax reform by the OECD and G20 together with participation of over 60 developing countries. While it does put forth several proposals to tackle the BEPS issues, there is still some work to be done over the course of the next two years. Given below are the top ten items identified in the final reports on 15 action points to watch out for in the coming years.

BEPS Facts!!• 23 Discussion Drafts• 12000 pages of comments

received• 11 Public consultations

1 Limit on Interest deduction

Action 4: Limiting Base Erosion Involving Interest Deductions and Other Financial Payments

The primary recommendation of Action is the “fixed ratio” supplemented with the “group ratio” rule that would limit the net interest deductions claimed by an entity to a fixed percentage of earnings before interest, taxes, depreciation and amortization of the entity/group, as the case may be. The detailed operation of the “group ratio” rule and specific rules to address banking and insurance sectors are expected to be completed in 2016. Specific issues on application of the “group ratio” rule such as adjustment for tax items and loss making entities are yet to be addressed. Further, transfer pricing aspects of financial transactions will also be dealt with in 2016 and 2017.

2 Limitation of Benefits (‘LOB’) Clause

Action 6: Preventing the Granting of Treaty Benefits in Inappropriate Circumstances

The final report on Action 6 recommends (a) modification to the title and preamble of the OECD Model Tax Convention (‘MTC’) stressing the avoidance of double non-taxation and (b) a LOB clause or a principal purpose test or a combination of both. The LOB clause finalized in the discussion draft of 22 May 2015 has been retained in the final report. The report maintains that the LOB clause and the commentary thereto are not finalized and await the finalization of the proposed changes to the US Model Tax Treaty. As with the earlier discussion drafts, the treaty entitlement of non-collective investment vehicles and pension funds are yet to be worked upon. All these issues are expected to be completed in the first part of 2016.


2 B EPS – THE UNFINISHED AGENDA

3 Attribution of profits to the new Permanent Establishments (‘PE’)

Action 5: Preventing the Artificial Avoidance of Permanent Establishment Status

The final report on Action 5 proposes changes to the PE definition in Article 5 of the OECD MTC to prevent usage of strategies involving commissionaire arrangements, preparatory or auxiliary activities exemption and artificial fragmentation of activities. While the report provides the change in model convention and the commentary, it postpones work on determination of profits to be attributed to the PEs that will result from these changes to 2016. Guidance on attribution of profits are expected to be released by end of 2016.

4 Transactional Profit Split Method

Action 8-10: Aligning Transfer Pricing Outcomes with Value Creation

In 2014, OECD had released a discussion draft to discuss matters relating to the application of the transactional profit split method. This was followed by comments and consultations which resulted in the conclusion that transactional profit splits can offer a useful method which has the potential when properly applied, to align profits with value creation in accordance with arm’s length principle, particularly in transactions where application of other methods become problematic. The guidance provided in the final report on Action 8-10 “Aligning Transfer Pricing Outcomes with Value Creation” would serve as a draft for further work on this subject which will be finalized in the first half of 2017. The related discussion draft will be released in 2016.




5 Hard-to-Value Intangibles (‘HTVI’)


The Final report on Action 8-10 also provided guidance on determining the arm’s length pricing of HTVI by considering actual, ex post outcomes. Further guidance on the implementation of this approach will be provided in 2016.

6 Low-value adding Intra-group Services


On the subject of law-value adding intra-group services, the report introduces an elective, simplified approach specifying a wide category of common services which command a low mark-up, application of consistent allocation key for all recipients and ensures greater transparency through documentation. Countries are expected to endorse this approach by 2018. Follow up work on design of the threshold and implementation issues will be finalized in 2016.

7 Country-by-Country (‘CbC’) reporting

Action 13: Guidance on Transfer Pricing Documentation and Country-by-Country Reporting

As per the proposals of Action 13 “Transfer Pricing Documentation and Country-by-Country Reporting”, the CbC reporting requirements are to be implemented for fiscal years beginning on or after 1 Jan 2016 and apply to multinational enterprises with annual consolidated group revenue equal to or exceeding EURO 750 million. To facilitate the implementation, an xml schema and a related user guide was expected to be developed by end of 2015.




8 Taxation of Digital Economy

Action 1: Addressing the Tax Challenges of the Digital Economy

The final report on Action 1 ruled out creation of a separate taxing mechanism for the digital economy stating that it cannot be ring-fenced. It largely subscribed to the modifications to the definition of PE, updates to transfer pricing guidelines and changes to controlled foreign company rules to address identified challenges of digital economy. It also recommends application of the OECD’s International VAT/GST guidelines, calling for countries to introduce the collection mechanisms provided therein. The Action Plan is still not regarded complete and a mandate will be developed in 2016 to monitor developments in the digital economy and consideration of other digital tax options.

9 Dispute Resolution Mechanisms

Action 14: Making Dispute Resolution Mechanisms More Effective

According to the final report on Action 14, countries will commit to develop a minimum standard in the context of treaty-related disputes and ensure effective implementation of this standard through the establishment of a peer-based monitoring process. For the peer monitoring process, the ‘Terms of reference’ will be developed which will include the minimum standards upon which countries will be assessed. The procedure for the peer monitoring process will be established through the ‘Assessment methodology’. Both these documents are expected to be finalized in 2016.

10 Multilateral Instrument

Action 15: Developing a Multilateral Instrument to Modify Bilateral Tax Treaties

The key to the implementation of the BEPS proposals is the multilateral instrument. Work began with the formation of the adhoc group which concluded its first meeting in November 2015. The instrument is expected to be finalized and opened for signature by 31 Dec 2016. Several of the additional mandates / follow-up work on issues listed above are a pre-requisite to the completion of the multilateral instrument.



Ms Mary Bennett is Partner in Baker & McKenzie’s Tax Practice Group and earlier worked at senior positions with U.S. Treasury and the Organization for Economic Cooperation and Development (OECD). Ms Bennett outlines 5 key things to watch out for in 2016 in OECD’s BEPS Project.

E XPERT GAZE:35 THINGS TO WATCH OUT FOR IN 2016 ON BEPS PROJECT: BY MS MARY BENNETT

The October 2015 publication of the final reports in the OECD/G20’s BEPS Project marked the end of one phase in the initiative which was explicitly described as designed to produce “the most fundamental change to the international tax rules since the 1920s”.2 The documents produced by the OECD do indeed represent significant achievements in developing a new international consensus on many important issues in international tax. That said, the BEPS initiative is a long way from completion, and 2016 will see a number of important follow-on developments deserving of close attention. Five of the most key BEPS items to watch out for in the New Year are described below.

Inclusive Framework for Implementing and Monitoring BEPS

The BEPS Project was developed by about 46 countries acting on an equal footing, including OECD members, other G20 members, and OECD accession candidates. Another 16 or so countries participated directly in the discussions, albeit without the full status of the first group. The G20 has now mandated that the OECD design an “inclusive framework” by February, to allow interested non-G20 jurisdictions that commit to implement the BEPS project, including developing economies, to participate “on an equal footing” in supporting and monitoring the implementation of the BEPS package. The development of this inclusive framework is potentially an important milestone, as it may indicate the way in which the BEPS spawned partnership between the OECD and G20 could evolve into a more global forum. While the immediate focus of the new framework will be on implementing and monitoring the standards set during the BEPS Project, it will be interesting to see whether the framework expands to include standard-setting, and how new participants will associate themselves with the standards that have been set.

Attribution of Profits to Permanent Establishments

The final report on BEPS Action 7 recommended modifications to the definition of “permanent establishment” (PE) in Article 5 of the OECD Model Tax Convention. The new definition will lower the PE threshold by expanding the Article 5(5) “dependent agent PE” category, reducing the scope of the Article 5(4) “preparatory or auxiliary activity” exceptions, and introducing antifragmentation rules. In developing the new definitions, however, the BEPS participants did not consider the amount of profit that would be attributable to the new PEs. Instead, that critically important work is just beginning now. The Action 7 report says the work will involve developing guidance on how the existing rules for attributing profit to PEs under Article 7 of the OECD Model will apply to the new PEs. The goal is to produce that guidance before the end of 2016, so that it can be taken into account in the multilateral

2Speech of OECD Secretary-General Angel Gurría upon release of the BEPS Action Plan in July 2013.


instrument being developed under BEPS Action 15. The outcome of that guidance project may well determine whether the United States is prepared to accept the new PE definitions and whether other governments are satisfied that the new definitions adequately address their PE related BEPS concerns.

Guidance on the Profit Split Method

Action 10 of the BEPS Action Plan had called for clarification of the application of the transactional profit split method in the context of global value chains. A consultation document issued in December 2014 generated widespread concern that the guidance was moving in a direction that would make the profit split method the most commonly applied transfer pricing method, and that one sided methods would become the exception. The OECD decided it needed more time to complete its work on this topic, and a new discussion draft expected to be released in the spring of 2016 will give a first look at how the revised guidance is shaping up.

Completion of the work on Treaty Abuse

The final report on BEPS Action 6 (Preventing Treaty Abuse) left a number of issues open. Perhaps the largest category of these relates to the Limitation on Benefits and other proposals made by the United States in May 2015 in the context of a draft revision to the US Model Treaty. Once the United States finalizes its new Model in early 2016, the OECD will revisit its own Action 6 conclusions. These changes could have far reaching implications for whether commonly used structures will retain their eligibility for treaty benefits.

Development of the Multilateral Instrument

The Action 15 final report calls for the development of a multilateral instrument which would allow participating jurisdictions to introduce BEPS changes across their entire bilateral treaty network in one fell swoop. The goal is to open the multilateral instrument for signature by the end of 2016, and almost 100 countries are already participating in its development. This unprecedented, hugely complicated, and very ambitious initiative, if successful, could revolutionize the way bilateral treaties are updated in the future.

E XPERT GAZE:35 THINGS TO WATCH OUT FOR IN 2016 ON BEPS PROJECT: BY MS MARY BENNETT

How many countries have signed the “Multilateral Competent Authority Agreement” for automatic exchange of financial account information in tax matters?

(a) 93(b) 78(c) 54See answer on page 16


Mr. Philip Baker, Queen's Counsel, UK

S HOOTING STRAIGHT4PHILIP BAKER

While the OECD is flying high on its BEPS Project, there is one person who does not believe that BEPS initiative has created waves in the international tax waters – and that person is none of other than one of the most eminent international tax luminaries, Mr. Philip Baker (Queen’s Counsel).

The Taxsutra Conclave held on 16-17 October 2015 was presented with the opportunity to witness Mr. Philip Baker’s views on the BEPS project through his keynote address on the topic “Emerging International Tax Trends – Preparing for the New World Order!” Speculating about the future of the tax world, Mr. Baker divided his address into four broad categories: (a) BEPS, (b) the new international tax architecture, (c) Transparency in real world and (d) taxpayer’s rights. All the four blocks were however connected with one common thread, the OECD’s BEPS project.

BEPS - not a new international tax order:

Mr. Baker vociferously expressed that BEPS has not created a new international tax order and BEPS publication is “not the dawn of a new age.” He commented upon how the discussions still revolve around the age-old tax concepts such as source v. residence, bilateral tax treaties etc. He stated that the focus of BEPS has remained very narrow with the limelight resting on just multinational companies (‘MNCs’) and direct taxes, while the implementation of the proposals would result in a fair degree of collateral damage by forcing all types of entities to adhere to the proposals. Dissecting the BEPS proposals, Mr. Baker lauded the development of a multilateral instrument, stating it as a hugely overdue process in streamlining treaty modifications. Another aspect which was appreciated by Mr. Baker was the minimum standards on MAP and commitment to arbitration. However, he also did not rule out the possibility of increase in tax disputes as a result of BEPS. On the impact of BEPS, Mr. Baker stated that the proposals on transfer pricing changes will have an enormous effect as it goes beyond the understanding of the currently understood ALP concept while Country by Country (CbC) reporting and restrictions on interest deductibility will also have far reaching consequences. His word of caution pointed to the uncertainty created as a result of the BEPS proposals, specifically referring to actions on treaty abuse and permanent establishments. On the whole, he concluded that the BEPS project has dealt with just the consequences failing to deal with the causes of BEPS.

“There wasn’t any time spent at the beginning analyzing the real causes of BEPS… consequences have been dealt with rather than the underlying causes.. Perhaps too much was attempted in a very short time and traditional OECD consensus model was adopted which meant that some countries could effectively veto and prevent further progress being made on certain issues.”



OECD + G20 + other countries - Path for a new international tax architecture - Though, Mr Baker expressed discontent on some aspects of the BEPS project, he stated that the BEPS project has incidentally laid the path for a new international tax architecture. He noted that the BEPS project has brought the OECD and G20 countries as equal participants and also the countries other

than 34 member countries were given an opportunity to be part of the tax policy discussions, specifically highlighting the large participation in development of the multilateral instrument. He then gave a brief history of the formation of the OECD and the connection with the United Nations and also highlighted the difference in the functioning of the two bodies. Welcoming this broader group participation in OECD, he remarked that this marks a new tax architecture with the participation being open to developing countries like India, who will now have the opportunity to voice out their concerns on a larger forum and at a much earlier stage of tax policy making.

Transparency, not BEPS by-product

“Transparency” according to Mr. Baker is not a by-product of the BEPS project, but pre-dates to the commencement of BEPS discussions. He also stated that the Country-by-Country reporting, disclosure requirements and exchange of rulings are some of the transparency moves prompted by the BEPS project. He explained how the Governments became interested in tax matters of companies with incidents of whistleblowers giving information to parliamentary committees. He also explained the difference in perception of things by the people in the tax world and in the real world, by bringing up some witty examples and expressing that the corporate structures are too complicated for common man to understand and trust. He also recounted the recent mayhem in U.K. around Facebook paying corporate tax of less than 5,000 pounds, with the Government launching a review around it. He also commented upon artificially created aspects of taxation like the jurisdiction choices of companies or the arm’s length price and ended with saying that arm’s length world does not exist.

“The OECD consensus approach gave too much power to individual countries to stop progress. We need to move to a new pattern that continues to involve other countries… the BEPS project shows we need to involve a much broader range of countries in the development of new principles”

“Greater transparency is simply now a fact of life… large companies, high net worth individuals have to accept a higher level of scrutiny over their tax affairs than was the previous case and there is no reason to think that, that scrutiny is going to ease up.”

Which of the countries intend to commence automatic exchange of information in 2017?

Australia, US, UK, Mauritius, Singapore, BRICSSee answer on page 21



Taxpayers’ rights and Safeguards:

The last and most important part of Mr. Baker’s address was on Taxpayer’s rights. In this regard, he stated that greater power of the Revenue Authorities will require a balance of greater safeguards and justification is necessary to enhance voluntary compliance. Taking facts from his work from IFA Basel 2015 Congress, he revealed how several countries have cut down on taxpayer’s protection under pressure from OECD to comply with cross border exchange of data and establish a better peer review process. He did not miss to touch upon the UN v. OECD debate, by highlighting that there is absence of ‘protection rights’ only in international taxation, the one international item dealt with by OECD and present in most other governmental areas which are usually dealt with by the UN. He stated the availability of data protection rights in Europe and also referred to a recent ruling of the European Court which held that companies cannot transfer data to the U.S. due to the absence of data protection in U.S., thus raising concerns over FATCA disclosures. Concluding on this topic he commented that data protection is not just about confidentiality and is about identification of the purpose of the information, allowing data owners to verify and rectify the information and discarding the information once the purpose is served and this should form part of the new world architecture. Once again, Mr. Baker did not hesitate to point out that OECD has been woefully remiss in protecting taxpayers’ rights and if the international tax reform was in the capable hands of the UN, they probably would not have been so remiss.

As concluding remarks, Mr. Baker reiterated that BEPS is not the new world order, but has incidentally pointed towards the new world order in garnering a wider group participation which would pave way to the new international tax architecture. Specifically with regard to India, Mr. Baker suggested that the Government should restrict making retrospective amendments, safeguard confidential financial data of taxpayers’ and protect taxpayers’ rights in audit process.

“This focus on taxpayers’ rights has to be part of the new world international tax order. It will set out for conduct of revenue authorities, minimum standards and it will set out best practices.”

Answer:

78


5 B EPS REFLECTIONS – EXPERTS’ REACTIONS

One subject which was brought up in all panels in the Taxsutra Conclave held on the 16-17 Oct 2015, was Base Erosion and Profit Shifting (‘BEPS’). On the whole, major discussions circled around the success of the BEPS project in addressing the identified tax issues, the importance of “transfer pricing” issues dealt therein, Country-by-Country (‘CbC reporting’), taxation of digital economy and aspects of transparency. Panelists also expressed their concerns on implementation of the proposals, with Mr. Akhilesh Ranjan, Joint Secretary & Competent Authority, India throwing some light on the mode of implementation expected in India. The common grievance expressed by most experts was the lack of consideration of ‘taxpayer’s rights’ in the whole of the BEPS project. Senior Advocate Porus Kaka specifically commented that “The BEPS pendulum currently swings in favour of the Revenue and should be balanced with some recognition of taxpayer’s rights.”

Given below are snippets of what the Panelists’ and other tax experts had to comment on BEPS at the Taxustra Conclave.

On the BEPS Project – There was a mixed response on the overall construct of the BEPS project, with some experts lauding the specific efforts, while some viewing it as increasing the confusion prevailing in the tax world.

BEPS project is the biggest shake up of International tax rules, which were framed way back in 1920 - Mr Mohit Shah, Former Chief Justice, Bombay High Court

BEPS has had a successful outcome as it has provided options to policymakers and the BEPS pendulum has swung from tax minimization to tax risk management - Grace Perez-Navarro, Dy. Director, OECD’s Centre for Tax Policy and Administration

BEPS has not created an international tax order and the BEPS publication is not the dawn of the new age; too much has been attempted in a very short time, without analyzing the root causes of BEPS. The good aspects of the BEPS initiative are the development of a multilateral instrument, proposals on minimum standards on MAP and commitment to arbitration. It has created uncertainty by its work on Treaty Abuse/ PE Changes, made little progress on digital economy / CFC rules and increased opportunity for disputes - Philip Baker, Queen's Counsel



On Digital Economy – The BEPS Action on digital economy was perhaps the most followed one as it was the need of the hour amidst the burgeoning digital market. The views of the experts in the conclave seem to indicate that not much clarity has been attained in this aspect.

BEPS project on digital economy is a fresh beginning. A platform will need to be established to review the proposals afresh - Akhilesh Ranjan, Joint Secretary & Competent Authority, India

There are no concrete recommendations on digital economy. BEPS has created a new discussion on digital presence which is not a great story for Indian service exports. Indirect taxation is the only method to tax digital economy transactions, every other method would be sub-optimal. - P.V. Srinivasan, Former Head of Tax, Wipro

“Tax legislation is a matter of national sovereignty… disparate rules lead to international tax avoidance and therefore Russia will seek to ensure that its rules are more closely aligned with those of other countries.” – Ilya Trunin, Russian Director of the Department for Tax and Customs Policy at the Ministry of Finance.



On Transfer pricing and CbC Reporting – Transfer pricing was stated to be at the heart of the BEPS project. Speaking on the transfer pricing related proposals, Ms Marlies de Ruiter of OECD explained that further work is scoped on transactional profit split method and also on developing guidance on commodities transaction. The experts also spoke about CbC reporting and its intended use for the revenue authorities. They also discussed on the need for readiness among the corporates.

CbC reporting will give the tax authorities a clear picture about how much profits have arisen in each jurisdiction. - Mohit Shah, Former Chief Justice, Bombay High Court

High threshold of EUR 750 million for CbC reporting was expected to capture 90% of global revenues; considering that it is a nascent concept we did not want to subject all MNCs to CbC until its effectiveness is reviewed.- Grace Perez-Navarro, Dy. Director, OECD’s Centre for Tax Policy and Administration

Information sought through CbC reporting would not be used for global formulary apportionment and countries have agreed that it would be used for risk analysis only.- Marlies de Ruiter, Head of Tax Treaty, Transfer Pricing and Financial Transactions division, OECD

CbC reporting will result in a huge shift in the compliance paradigm and companies should start preparing for CbC reporting implementation at the earliest. - Deepak Dhanak, EVP- Finance & Head of Tax, Asia – 21st Century Fox



On mandatory arbitration – Several experts including Philip Baker felt that mandatory arbitration is one of the good proposals of the BEPS project.

On Transparency and taxpayer rights – One of the guiding principles of the BEPS project is “transparency”. Transparency results in divulge of business information pertaining to the taxpayer to the revenue’s domain, thereby calling for focus on protection of taxpayers’ rights. Every comment on transparency inherently contained the call for consideration of taxpayers’ rights.

Arbitration today is resisted in India in both domestic and international context because of number of disputes, leave alone the resolutions. Accepting compulsory arbitration through MAP will do India good. The main challenge for India would be to benchmark Indian tax administration with what is happening with the rest of the world.- Dr. Parthasarathi Shome, Former Advisor to Finance Minister

Mandatory arbitration is a good step, however a sanitization process is required to implement the proposals- Grace Perez-Navarro, Dy. Director, OECD’s Centre for Tax Policy and Administration

Transparency in exchange of information cannot be one-sided and should be expected from both taxpayer and tax administration - Bela Sheth-Mao, Head of Tax, Shell India

Guiding principles of BEPS are substance and transparency, but taxpayers' rights should not be forgotten during implementation of BEPS.. Not only should corporations be transparent but Government will also need to be transparent to taxpayers - William Morris, Director, Global Tax Policy, GE

One action item missing in the frenzied BEPS debate is the taxpayer's charter of rights and privacy which should have formed the 16th action item. The BEPS pendulum currently swings in favour of the Revenue and should be balanced with some recognition of taxpayer's rights. - Porus Kaka, Senior Advocate

Transparency and substance are two key pillars of BEPS. If information is not forthcoming, we would still be "in the dark"....It was to balance taxpayers' rights and usefulness of information that the exchange of information proposal was introduced. - Marlies de Ruiter, Head of Tax Treaty, Transfer Pricing and Financial Transactions division, OECD

Taxpayer rights should not be forgotten during implementation of BEPS Action Plans.- Philip Baker, Queen's Counsel



On Implementation – While the BEPS proposals are being dissected and analyzed across the tax world by experts, the key to the success of all the proposals rests with the implementation. Several experts stressed on the importance of implementation and the Joint Secretary, Akhilesh Ranjan elaborated upon the implementation plans in India.

India does face BEPS problems, but not to the extent other OECD countries face... Considering India's investment policies, BEPS action plans implementation in India will strike a balance between compliances and competitiveness. Proposals are currently being studied and analysed in great detail and a plan for implementation will be chartered in due course. All proposals will not be implemented in one go, but will be phased out over a period of time and care will be taken not to dramatically alter existing principles or take unilateral measures.Strengthening capacity utilization and ability of tax officers should be a key focus in BEPS implementation. - Akhilesh Ranjan, Joint Secretary & Competent Authority, India

Systematic readiness is necessary by making investment in infrastructure, connecting the missing links in obtaining data/ information while cutting down on the cost of compliance. - Sunil Kothare, Director, Finance and Tax, South Asia, Citigroup

Answer:UK, Mauritius, India and South Africa.Singapore, Brazil, Russia and US are are not signatories to the Multilateral Competent Authority Agreement.


Mr. Ashutosh Dikshit is Of Counsel at BMR & Associates LLP. He earlier served as Joint Secretary with the Government of India. Mr Dikshit writes about India outlook on BEPS action plan and what changes India would consider in BEPS implementation in the forthcoming Indian annual Budget in February 2016.

I NDIA CORNER6WHAT INDIA SHOULD BE LOOKING FOR FROM BEPS: BY MR. ASHUTOSH DIKSHIT

The BEPS Project launched by the OECD along with the G20 (of which India is a member) is meant to provide governments with solutions for closing the gaps in the domestic tax laws and international tax treaties, in the wake of increasing concerns that corporate income tax revenues of countries were being significantly impacted on account of tax avoidance practices. The 15 Action Plans of the BEPS initiative, released in October 2015, lay down certain common minimum standards for governments, aimed at preventing corporate profits from escaping tax, entirely or substantially - either by corporations artificially shifting them to low/no tax jurisdictions or due to ’double non-taxation’ arising from differences in domestic tax laws or tax treaty interplay .

Actions which require countries to amend their existing bilateral treaties are sought to be done through a multilateral instrument, currently being developed (Action Plan 15) and proposed to be put up for countries to sign by end of 2016. The extent of consensus on some of the minimum standards proposed in the action plans will, therefore, be tested at that stage. In the absence of countries actually signing the multilateral instrument, many of the proposed actions may not be able to take off, given that amending each bilateral tax treaty independently is a tortuous and long drawn process.

India has been ahead of the curve in trying to protect its corporate tax base, asserting principles similar to the BEPS recommendations. Indian Revenue has been taking an aggressive approach in tax policy and assessments, while looking at existence of PE and making transfer pricing adjustments on the basis of perceived value creation. It is understood that the Government is actively looking at the OECD recommendations and is likely to announce measures soon, possibly, in the forthcoming Annual Budget due in February 2016.

Country by Country Reporting

The Country by Country Reporting and master/local file for transfer pricing documentation (Action 13) will increase the information flow to the Indian tax authorities for transfer pricing analysis. Confidentiality and appropriate use of such data is likely to be the biggest concern for taxpayers in India. While the Indian Revenue seems to be indicating that adequate processes and protocols are or will be put in place to ensure confidentiality and prevent misuse and that data will be used only for implementing a risk based approach to transfer pricing assessments, one would need to wait and watch how this unfolds in practice. Some of the Indian multinationals having overseas operations are likely to get covered in the threshold prescribed for CbCR. India is yet to come out with any legislation implementing CbCR. Possibly, this will also be a part of the Budget next year.

Now that India has accepted, as a part of the BEPS recommendations, that it would provide access to MAP for transfer pricing cases, it would be useful to also allow bilateral APAs in such cases under existing treaties through the MAP process, especially as APAs, without rollbacks, being prospective would not require corresponding adjustments.



India has been ahead of the curve in trying to protect its corporate tax base, asserting principles similar to the BEPS recommendations. Indian Revenue has been taking an aggressive approach in tax policy and assessments, while looking at existence of PE and making transfer pricing adjustments on the basis of perceived value creation. It is understood that the Government is actively looking at the OECD recommendations and is likely to announce measures soon, possibly, in the forthcoming Annual Budget due in February 2016.

Preventing treaty abuse (Action 6)

The common minimum standard regarding preventing treaty abuse (Action 6) prescribes a Limitation on Benefits (LOB) clause in all tax treaties besides a Principle Purpose Test (PPT). Only a few of India’s tax treaties have these provisions, for instance the treaty with Singapore has an LOB while the one with Luxembourg has a PPT although under an LOB clause. However, a PPT , to some extent , is addressed by the impending General Anti-Avoidance Rules (GAAR) in the domestic tax laws, which will become effective from financial year 2017-18 as it provides for a tax treaty override in case of “impermissible avoidance arrangements”. Detailed guidance is required and also expected, before the GAAR provisions become effective, to provide further clarity to taxpayers.

While India’s tax to GDP ratio is low, it is not on account of low corporate tax collections - India’s corporate tax to GDP ratio in 2014 was 3.5 per cent compared to the OECD average of 2.9 per cent.



Dispute Resolution

One of the major challenges in India’s tax environment is the domestic dispute resolution process which goes through multiple levels and can take more than a decade to achieve finality. The bilateral tax treaties which India has entered into with 92 different jurisdictions are with a view to avoid double taxation, prevent fiscal evasion and promote economic cooperation. India, at this stage of its economic development, is a net importer of capital and the Government’s stated aim is to attract foreign investment by improving the ease of doing business, which includes a predictable, stable and competitive tax environment. While moving towards plugging loopholes in the current international tax architecture, India would simultaneously need to create a positive international tax environment by improving the mechanisms and time-lines for dispute resolution and relief from double taxation, as mandated under Action Plan 14. Action plan 14 charts out, inter alia, common minimum standards for tax administrations such as committing to resolve cases within 24 months under the Mutual Agreement Procedure (MAP) provided in tax treaties, granting access to MAP for transfer pricing disputes, timely and complete reporting of MAP statistics, publishing and disseminating rules, guidelines and procedures regarding MAP, empowering MAP related functionaries with sufficient authority to resolve cases, delinking performance measurement of the MAP function from quantum of adjustment made or tax revenue collected and agreeing to a peer review of adherence with these standards. While India has progressed on pre-empting transfer pricing disputes through the Advance Pricing Arrangement (APA) mechanism, a stumbling block in implementing bilateral APAs exists where the tax treaty does not have Article 9(2) which allows for a corresponding tax relief arising from a transfer pricing adjustment in the other tax jurisdiction. India’s stand date has been that it would not enter into bilateral APAs with taxpayers from such tax jurisdictions through the MAP (Article 25) provisions. Currently, such a situation can only be remedied by amending or renegotiating a treaty, as has been done recently in case of the India-Korea tax treaty. Now that India has accepted, as a part of the BEPS recommendations, that it would provide access to MAP for transfer pricing cases, it would be useful to also allow bilateral APAs in such cases under existing treaties through the MAP process, especially as APAs, without rollbacks, being prospective would not require corresponding adjustments.

While India’s tax to GDP ratio is low, it is not on account of low corporate tax collections - India’s corporate tax to GDP ratio in 2014 was 3.5 per cent compared to the OECD average of 2.9 per cent.


The BEPS recommendations are, however, not likely to prevent double taxation arising from some of the strong differences in the way Indian Revenue characterises certain transactions as compared to the general international practice. A number of burning issues in international tax in India like the taxation of software as royalty, the taxation of reimbursements to foreign associated entities for secondment of their personnel as fees for technical services etc. await final adjudication through the Indian court system.

These issues will be compounded by India’s slow pace in achieving MAP resolutions and resistance to a mandatory binding arbitration under its tax treaties.


“Cross-border tax issues require coordinated international solutions. To maintain a stable pro-growth global environment for investment while minimizing opportunities for tax arbitrage, BEPS recommendations should be consistently applied across all state and non-state tax jurisdictions to ensure a level playing field. Singapore supports an inclusive monitoring mechanism that is conducted in a fair, open and objective manner with participation on an equal footing by all relevant tax jurisdictions” - Singapore’s Minister for Finance, Mr. Heng Swee Keat


T HE BEPS STRING 20157

Month Action Plans Country developments

Jan • Public comments released on Action Plan 6 (Prevent treaty abuse), Action 7 (Prevent the artificial avoidance of PE status), Action 10 (low-value adding intra group services) and Action 14 (Make dispute resolution mechanism more effective),

• Singapore introduced new transfer pricing guidelines broadly in line with BEPS discussion drafts.

• European council adopted a binding GAAR in the parent subsidiary directive to be adopted by member states by 31 Dec 2015.

Feb • Guidance on implementation of CbC reporting (Action 13) released.

• Agreement on IP regimes (Action 5) released.

• Mandate on multilateral instrument (Action 15) issued.

• Public comments released on Action 4 (Interest deductions and other financial payments), Action 8-10 (revisions to Chapter I of transfer pricing guidelines) Action 10 (cross-border commodity transactions and profit splits) and international VAT/GST guidelines,

• South African budget proposed three-tier documentation for transfer pricing and changes to CFC regime in digital economy.

• India postponed GAAR regime to 1 April 2017 with grandfathering citing that it would be implemented as part of a comprehensive regime to deal with BEPS and aggressive tax avoidance once the outcome of the OECD BEPS project is finalized.


Mar • Discussion draft released on Action 12 (Mandatory disclosure rules).

• European Union introduced the tax transparency package.

Apr • Discussion drafts released on Action 3 (Strengthening CFC rules), Action 8 (Cost contribution agreements), Action 11 (Data analysis).

• UK Diverted profits tax takes effect.• UK and Australia form a joint diverted

profits working group.• France released a list of ‘abusive

tax schemes’ asking taxpayers to disclose upfront.

May • Revised discussion drafts released on Action 6 (Prevent treaty abuse), Action 7 (Prevent the artificial avoidance of PE status).

• Public comments released on Action 3 (Strengthening CFC rules), Action 11 (Data analysis) and Action 12 (Mandatory disclosure rules).

• Australian budget proposed a draft GAAR targeting MNCs and draft law to apply GST on digital products and services by foreign suppliers to Australian consumers.

• US released proposed modification to US model convention addressing BEPS concerns.

Jun • Discussion draft released on Action 8 (Hard to value intangibles)

• Public comments released on Action 8 (Cost contribution agreements and Hard to Value intangibles), Action 6 (Prevent treaty abuse), Action 7 (PE status).

• Implementation package for CbC reporting released

• US House committee on ways and means expressed concerns on BEPS project.

• G7 Leader’s summit reaffirmed support for BEPS project.



Jul • European Parliament proposed expansion of CbC reporting to large groups and public interest entities in notes to financial statements.

• Dutch and German Governments agreed on automatic exchange of tax rulings.

• Spain enacted regulations on CbC reporting w.e.f 1 January 2016 and several transfer pricing amendments in line with BEPS proposals.

• Brazil introduced measures for companies to disclose tax planning structures.

• US introduced drafts of innovation box regime.

• Italy introduced patent box regime.• South Korea introduced VAT on

electronic services provided by Foreign Service providers.

• Saudi Arabia introduced virtual service PE concept.

Aug • Documents released for implementation of automatic exchange of financial information: implementation handbook, guidance and implementation of voluntary disclosure programs and model protocol of OECD tax information exchange agreement.

• Chile issued a resolution with instructions on the contents of a sworn statement to be provided by foreign residents seeking treaty benefits.

• Korea proposed new documentation requirements for multinationals in line with BEPS Action 13.

• Spain amended patent box regime in line with BEPS proposals.


“As tax administrators, when we used to say, please pay your taxes because you have added value in India, we were a minority voice. With the BEPS project, our concerns have been heard and we are now the majority voice” – Ms. Anita Kapur, Former Chairperson of Central Board of Direct Taxes


Sep • OECD announced that BEPS reports will be released on Oct 5.

• China Denmark published consultation drafts for changes to transfer pricing rules in line with BEPS proposals.

• Netherlands introduced CbC reporting and transfer pricing documentations in line with Action 13 w.e.f 1 Jan 2016.

• Kuwait tax authorities adopt virtual service PE concept.

• Indonesia introduced thin-capital regulations.

Oct • Final BEPS reports released• G20 leaders endorsed the final

BEPS reports.

• EU adopted exchange of rulings amongst member states commencing from 1 Jan 2017 covering rulings rendered within 5 years before that date.

• UK introduced draft regulations on CbC reporting w.e.f. 1 Jan 2016.

• Ireland introduced patent box regimes, CbC reporting in budget.

• Norway amended CFC rules and introduced CbC reporting in budget.

• Poland proposed transfer pricing documentation and CbC reporting in line with Action 13.



Nov • G20 leaders endorse BEPS proposals and called on the OECD to monitor progress and to develop, by early next year, an inclusive framework including the participation of developing economies on equal footing.

• Inaugural meeting of adhoc group formed for multilateral instrument.

• Australia and Germany revised the tax treaty incorporating certain proposals of Action 6 and 7.

• France proposed for CbC reporting w.e.f 1 Jan 2016.

• Mexico introduced transfer pricing documentation and CbC reporting w.e.f 1 Jan 2016.

Dec • Australian Parliament passed the bills enacting the multinational anti-avoidance law and introducing CbC reporting w.e.f 1 Jan 2016.

• US tax committee holds hearing on International tax including BEPS. It was stated that the Treasury will now focus on implementation and monitoring of changes in other countries, particularly on CbC reporting and related rules. Several members voiced concern over the undue burdening on US headquartered companies owing to increased compliances, disclosure and taxes in other states.



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