Evolution of BEPS and its effects
on Taxation Regime in India
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Base Erosion and Profit Shifting – Evolution and impact on Indian Tax Regime
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Introduction
• In recent past the extant International tax framework revealed weakness that create opportunities for Base Erosion and
Profit Shifting (BEPS). BEPS refers to tax planning strategies that exploits 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.
• Stakes are high, with estimates indicating that global corporate income tax (CIT) revenue losses could be between 4%
to 10% of global CIT revenues i.e. USD 100 to 240 Billion annually.
• For the first time all OECD and G20 countries have worked together on an equal footing to design common responses
to international tax challenges with unprecedented participation by developing countries as well. The OECD came with
final 15 BEPS Action Plan in October 2015. The aim of BEPS measures is to realign taxation with economic
substance and value creation, while preventing double taxation.
• The BEPS Actions are developed around the three fundamental pillars:
• Coherence
• Substance
• Transparency and tax certainty
• Some of the BEPS recommendations would immediately applicable, while others requires changes that can be
implemented via tax treaties , including the multilateral instruments. Some other requires domestic law changes.
• India has been an active participants of the BEPS project and is committed to its outcomes. The same has been/would
be implemented via changes in domestic law, treaty negotiation and multilateral instruments.
• The BEPS measures are classified into following categories:
• Minimum standards
• Revisions/updates
• Best practices
Base Erosion and Profit Shifting – Evolution and impact on Indian Tax Regime
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BEPS Action Plan Summary
Base Erosion and Profit Shifting – Evolution and impact on Indian Tax Regime
Action Summary Outcome
1 Digital Economy ADDRESSING THE TAX CHALLENGES OF THE DIGITAL ECONOMY Report
2 Hybrids NEUTRALISING THE EFFECTS OF HYBRID MISMATCH ARRANGEMENTS Domestic law/ Model
3 CFC Rules DESIGNING EFFECTIVE CONTROLLED FOREIGN COMPANY (CFC) RULES Domestic law
4 Interest Deductions LIMITING BASE EROSION INVOLVING INTEREST DEDUCTIONS AND OTHER FINANCIAL PAYMENTS
Domestic law
5 Harmful Tax Practices
COUNTERING HARMFUL TAX PRACTICES MORE EFFECTIVELY, TAKING INTO ACCOUNT TRANSPARENCY AND SUBSTANCE
Model
6 Treaty Abuse PREVENTING THE GRANTING OF TREATY BENEFITS IN INAPPROPRIATE CIRCUMSTANCES
Domestic law/ Model
7 Permanent Establishment
PREVENTING THE ARTIFICIAL AVOIDANCE OF PERMANENT ESTABLISHMENT STATUS
Model
8 -10 Transfer Pricing ALIGNING TRANSFER PRICING OUTCOMES WITH VALUE CREATION TPG/Model
11 Data Analysis MEASURING AND MONITORING BEPS Recommendations/TPG
12 Disclosure of Aggressive Tax Planning
MANDATORY DISCLOSURE RULES Recommendations/TPG
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BEPS Action Plan Summary
Base Erosion and Profit Shifting – Evolution and impact on Indian Tax Regime
Action Summary Outcome
13 Transfer Pricing Documentation
TRANSFER PRICING DOCUMENTATION AND COUNTRY-BY-COUNTRY REPORTING
Recommendations/TPG
14 Dispute Resolution MAKING DISPUTE RESOLUTION MECHANISMS MORE EFFECTIVE Model
15 Multilateral Instrument
MULTILATERAL CONVENTION TO IMPLEMENT TAX TREATY RELATED MEASURES TO PREVENT BEPS
New Treaty
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Action Plan 1 : Addressing the Tax Challenges of the Digital Economy
• The digital economy is the result of a transformative process brought by information and communication
technology (ICT), which has made technologies cheaper, more powerful, and widely standardised, improving
business processes and bolstering innovation across all sectors of the economy.
• Because the digital economy is increasingly becoming the economy itself, it would be difficult, if not
impossible, to ring-fence the digital economy from the rest of the economy for tax purposes. While the digital
economy and its business models do not generate unique BEPS issues, some of its key features exacerbate
BEPS risks.
• Broader Tax challenges: relates in particular to nexus, data, and characterisation for direct tax purposes, which often
overlap with each other. It also creates challenges for VAT collection, particularly where goods, services and intangibles
are acquired by private consumers from suppliers abroad. The report proposes to address such issues through
other action plans as discussed hereunder:
• Key observations/suggestions:
• Action 7 - Artificial avoidance of PE status: modification in the list of exceptions to the definition of PE to ensure that
each of the exceptions included therein is restricted to activities that are otherwise of a “preparatory or auxiliary”
character, and to introduce a new anti-fragmentation rule. Eg. Maintenance of a very large local warehouse with
significant number of employees.
• Action 7 –modification in the definition of PE to address circumstances in which artificial arrangements relating to the
sales of goods or services of one company in a multinational group effectively result in the conclusion of contracts by
that company. Eg. Sales force of local subsidiary of an online seller/advertiser habitually plays the principal role in
conclusion of contracts and these contracts are routinely concluded without material modification by the parent
company.
• Revised transfer pricing guidance : legal ownership alone would not necessarily result in all returns from exploitation
of intangible, but group companies making significant contributions (based on FAR) would be entitled to appropriate
return.
• Action 3 : Design of effective Controlled foreign company (CFC) rules in order to enable taxation of CFC income
earned in the digital economy in the jurisdiction of the ultimate parent entity.
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Action Plan 1 : Addressing the Tax Challenges of the Digital Economy
• Other options analysed by Task Force on Digital Economy (TFDE) though not recommended by OECD. Although
countries could introduce any of three options in their domestic laws as additional safeguards, provided they respect
existing treaty obligations:
• a new nexus in the form of a significant economic presence;
• a withholding tax on certain types of digital transactions, and
• an equalisation levy
Indian tax regime
• In order to address the challenges in terms of taxation of digital transactions, India vide Finance Act, 2016 introduced
‘Equalisation levy @ 6% of the amount of consideration for specified services received or receivable by a non-resident
not having PE in India from a
• Resident in India who carries out business or profession; or
• Non-resident having PE in India
• In order to reduce the burden of small taxpayers in digital domain, it is also provided that no such levy shall be made if
aggregate amount does not exceeds one lakh rupees in any previous year. Further in order to avoid double taxation,
income on which equalisation levy is chargeable, would be exempt under section 10(50) of the Act.
• In order to ensure compliance with provisions, it is also provided that expenses incurred shall not be allowed as
deduction in case of failure to deduct and deposit the equalisation levy –Section 40(a)(ib) of the Act.
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Action Plan 2 : Neutralising the effects of Hybrid Mismatch Arrangements
• Hybrid mismatch arrangements exploits the differences in the tax treatment of an entity or instrument under the laws of
two or more tax jurisdictions to achieve the double non-taxation, including long-term deferral. Hybrid mismatches
are:
• Multiple deductions for single expense
• Deduction without corresponding taxation
• Multiple foreign tax credits for one amount of foreign tax paid
• Country laws which allows to opt for tax treatment of certain domestic and foreign entities may result in hybrid
mismatches. It may not be easy to find out which country has lost tax revenue, since laws of each country have been
complied with; however, there is a reduction of the overall tax paid as a whole, which ultimately has an adverse effect
on competition, economic efficiency, transparency and fairness.
• The report contains two parts, Part I contains recommendations to amendments in domestic law, while Part-II contains
the recommendations to tax treaty issues.
• Part-I : The recommendations take form of linking rules that align the tax treatment of an instrument or entity with the
tax treatment in the counterparty jurisdiction but otherwise do not disturb the commercial outcomes. There are primary
rules and secondary or defensive rules. The recommended primary rule is that countries deny the taxpayer’s deduction
for a payment to the extent that
• it is not included in the taxable income of the recipient in the counterparty jurisdiction;
• or it is also deductible in the counterparty jurisdiction.
If primary rules are not applied, then the counterparty jurisdiction can generally apply defensive rule, requiring the
deductible payment to be included in income or denying the duplicate deduction
• Part-II : aims at ensuring that hybrid instruments and entities, as well as dual residents entities, are not used to obtain
unduly the benefits of tax treaties and that tax treaties do not prevent application of domestic law recommended in Part-
I.
• Dual resident entities
• Application of tax treaties to hybrid entities
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Action Plan 2 : Neutralising the effects of Hybrid Mismatch Arrangements
Recommendations
• Denying transparency to entities where in the non-resident country treats the entity as opaque;
• Denying exemption or credit of foreign tax for dividends that are deductible by the payer;
• Denying foreign tax credit for withholding tax where tax is also credited to some other entity
• Amendments to CFC and similar regime-attributing local shareholder income of foreign entities that are treated as
transparent under their local law
2017 report : Treatment of Branch mismatches
• The 2015 report addresses mismatches that are a result of differences in the tax treatment or characterisation of hybrid
entities, but did not consider similar issues that can arise through use of branch structures. These branch mismatches
occur where two jurisdictions take a different view as to the existence of, or allocation of income or expenditure
between, branch and head office of same entity. Report identifies following three types of mismatches:
• Deduction-no inclusion outcome
• Indirect deduction-no inclusion outcomes
• Double deduction outcomes
Indian perspective
• Foreign investors also invest in India through hybrid instruments viz convertible debentures/Bonds which are treated as
debt and interest payments are allowed as tax deductible, while such instrument may be treated as equity and not debt
in the home country of investor and consequently such interest income may be treated as dividend in home country. If
home country does not tax such dividend, it may result in deduction-non inclusion scenario.
• Although India has stated that hybrid mismatch is not such a major issue in the Indian context. However, India may
consider reviewing the funding structures of many multinationals operating in India where potential risk of hybrid
mismatches may be there.
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Action Plan 3 : Designing effective controlled foreign company rules
• Parent/investor is not taxed on corporation’s income until the income is distributed as dividend. It is common for MNEs
to form foreign subsidiaries in tax havens and shift investment and passive income to those subsidiaries. Such MNE
have tendency to leave profits in such foreign subsidiaries indefinitely without declaring a dividend.
• Countries are concerned that MNE keep large amount of profits offshore with the objective of deferring home country
taxation. Recent Google’s case in which it said to move $ 19.2 Billion to a Bermuda shell company in 2016 avoiding
taxation of atleast $3.7 billion using Dutch Sandwich (Economic Times-3rd Jan, 2018).
• In order to address this issue, the govt of various countries have introduced the CFC rules to deny the benefit of
deferral, by taxing income in parent country even when the income has not been repatriated or remitted. CFC rules
respond to the risk that taxpayers with controlling interest in foreign subsidiaries can strip the base of their country or in
some other case, other countries by shifting income into a CFC. OECD does not propose it as minimum standard but
as best practice mainly due to fundamental disagreement over the CFC regime.
• Report sets out the following six building blocks for design of effective CFC rules
Base Erosion and Profit Shifting – Evolution and impact on Indian Tax Regime
•How to determine sufficient influence and how non-corporate entities and their income would be brought within CFC rules
Definition of CFC
•Suggests that rules apply to CFC that are subject to effective tax rates that are meaningfully lower than parent jurisdiction CFC exemptions and threshold
•Recommends to include a definition of CFC income and sets out a non-exhaustive list of approaches or combination of approaches Definition of income
•Use the parent jurisdiction rules. Recommends CFC losses should only be offset against profits of same CFC Computation of income
•Attribution threshold should be tied to the control threshold and amount attributed should be computed by reference to proportionate ownership or influence. Attribution of income
•CFC rules should not result in double taxation. Exemption or credit method is proposes Prevention & elimination of double taxation
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Action Plan 3 : Designing effective controlled foreign company rules
Indian tax regime
• India had proposed CFC rules in much debated draft of Direct tax Code, however eventually CFC could not find its
place in the legislation. However, India has concessional tax regime @ 15% on profits repatriated (in form of dividends)
from the specified foreign company (26%) [Section 115BBD].
• Under current scenario, it is unlikely that CFC provisions would be introduced soon. Though India is mindful of the
situation of deferment of distribution, inspite of concessional tax regime @ 15%. It is yet to be seen whether, India
would implement the BEPS recommendations on CFC rules and in what form.
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Action Plan 4 : Interest deductions and other financial payments
• MNEs may achieve favourable tax results by adjusting the amount of debt in a group entity. Financial instrument can
also be used to make payments which are economically equivalent to interest but having different legal form. BEPS
risks in this area arises in three basic scenarios:
• Placing higher levels of third party debt in high tax countries
• Using intra-group loans to generate interest deductions in excess of the group’s actual third party interest
expenses
• Using third party or intra-group financing to fund the generation of tax exempt income.
Fixed ratio rule
• The recommended approach is based on the fixed ratio rule which limits the entity’s net deduction for interest to a
percentage of its earnings before interest, taxes depreciation and amortisation (EBITDA). The recommended approach
includes a corridor of possible ratios of between 10% to 30%. The approach is supplemented by a group ratio rule.
Group ratio rule
• This ratio would allow an entity with net interest expense above a country’s fixed ratio to deduct interest up to the level
of the net interest/EBIDTA ratio of its worldwide group.
• The recommended approach may be supplemented with other provisions that reduce the impact of rules on
entities/situations which poses less BEPS risk
• A de minimis threshold which carves out the entities having low level of net interest expense.
• Exclusion of interest paid to third party lenders on loans used to fund public benefit projects
• Carry forward of disallowed or unused interest
• The report also recommends the target rules to tackle specific BEPS risk
• Updation of BEPS Action 4 : In December 2016, the OECD released an updated version of report which includes
further guidance on two areas: the design and operation of group ratio rule and approaches to deal with risks posed by
the banking and insurance sectors.
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Action Plan 4 : Interest deductions and other financial payments
Indian tax regime
• In line with the recommendations of OECD BEPS Action Plan 4,, India vide Finance Act, 2017 introduced a new section
94B in the Act, to provide that interest expense paid by an entity to its associated enterprises (AE) shall be restricted to
30% of its EBIDTA or interest paid/payable to AE, whichever is less.
• The provisions are applicable to an Indian company or permanent establishment of foreign company in India.
Further debt shall be deemed to be treated as issued by AE where it provides an implicit or explicit guarantee to lender
or deposits a corresponding and matching amount of funds with lender.
• In order to target only large interest payments, it is proposed to provide a threshold of interest expenditure of one crore
rupees. Further, provisions allow for carry forward of disallowed interest expense to 8 assessment years to the extent
of maximum allowable interest expenditure.
• Banks and insurance companies have been excluded from the ambit of said provisions in view of special nature of
these businesses.
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Action Plan 5 : Countering harmful tax practices
• Current concerns are primarily about preferential regime that being used for artificial profit shifting and about lack of
transparency in connection with certain rulings. The main focus has been on agreeing and applying a methodology to
define the substantial activity requirement to assess preferential regime, looking first at intellectual property regimes
and then other preferential regimes.
Substantial activity for preferential regimes
• Countries agreed that the substantial activity requirement used to assess preferential regimes should be strengthened
in order to realign taxation of profits with the substantial activities that generate them. ‘Nexus approach’ was
developed in the context of IP regimes, and it allows a taxpayer to benefit from an IP regime only to the extent that the
taxpayer itself incurred qualifying research and development (R&D) expenditures that gave rise to the IP income.
Improving transparency
• A framework covering all rulings that could give rise to BEPS concerns in the absence of compulsory spontaneous
exchange has been agreed. The framework covers six categories of rulings:
• (i) rulings related to preferential regimes;
• (ii) cross border unilateral advance pricing arrangements (APAs) or other unilateral transfer pricing rulings;
• (iii) rulings giving a downward adjustment to profits;
• (iv) permanent establishment (PE) rulings;
• (v) conduit rulings; and
• (vi) any other type of ruling where the FHTP agrees in the future that the absence of exchange would give rise to
BEPS concerns
Indian tax regime
• Finance Act, 2016 has introduced a concessional tax regime @ 10% for royalty income from patents in order to
promote in-house research and development and making India a hub for R&D [Section 115BBF]. The new provision is
in line with the nexus approach recommended by BEPS Action 5. For the purpose of this section atleast 75% of R&D
expenditure for development of patent should be incurred in India by the eligible assessee for any invention in respect
of which patent is granted under Patents Act, 1970.
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Action Plan 6 : Preventing treaty abuse
• BEPS project identifies treaty abuse, and in particular treaty shopping, as one of the most import source of BEPS
concerns. This report includes new treaty anti-abuse rules that provides safeguards against the abuse of treaty
provisions and offer a certain degree of flexibility.
• The new treaty anti-abuse rules first address treaty shopping, which involves strategies through which a person who
is not a resident of a state attempts to obtain benefits that are conferred on resident of that state eg. Establishing
letterbox company in that state. The following approaches are recommended to deal with these strategies:
• Intent : A clear statement that contracting states intent to avoid creating opportunities for non-taxation or
reduced taxation through tax evasion or avoidance, including through treaty shopping to be included in tax
treaties
• Limitation on benefits (LOB) : that limits the availability of treaty benefits to entities that meet certain
conditions. These conditions are based on legal nature, ownership in and general activities seek to ensure
sufficient link between entity and its state of residence.
• Principal purpose test (PPT) : to address other forms of treaty abuse, including treaty shopping a more general
anti-abuse rule based on principal purposes of transactions or arrangement will be included.
Developments in India
• The Government of India has amended few treaties with the aim of avoiding treaty abuse and curbing evasion of tax.
Year 2016 witnessed the conclusion of much talked about treaty negotiation with Mauritius, Singapore and Cyprus.
• As regards the LOB, India amended its treaty with Singapore by inclusion of LOB clause way back in 2005. Thus
OECD has now been recommending as BEPS measure, which India has been doing long back. Recently LOB clause
has also been inserted in treaty with Mauritius and taxing rights of capital gains on alienation of shares have been given
to source country on shares acquired on or after 01.04.2017. Further, tax rate on such capital gains arising during the
period 01.04.2017 to 31.03.2019 would, not exceed 50% of tax rate applicable on such capital gains in India, subject to
fulfilment of conditions of LOB clause. A shell or conduit company (not meeting the purpose and expenditure test) shall
not be entitled to this benefit.
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Action Plan 7 : Preventing artificial avoidance of PE status
• Tax treaties generally provides that business profits of a foreign enterprise are taxable in a state only to the extent that
the enterprise has in that state a permanent establishment to which profits are attributable. Therefore, definition of PE
in tax treaty are crucial.
• OECD called for a review of PE definition to prevent the use of certain common tax avoidance strategies used to
circumvent the existing PE definition. Changes to PE definition are also necessary to prevent the exploitation of the
specific exceptions to the PE definition currently provided in Article 5(4).
Commissionaire arrangement
• Commissionaire arrangement may be loosely defined as an arrangement through which a person sells products in a
state in its own name but on behalf of a foreign enterprise that is the owner of these products. Through such
arrangement, a foreign enterprise is able to sell its products in a state without technically having a PE. Since Article 5(5)
relies on the formal conclusion of contracts in the name of foreign enterprise, it is possible to avoid the application of
rule by changing the terms of contracts without material changes in functions performed.
• Similar strategies also involves, situations where contracts which are substantially negotiated in a state are not formally
concluded in that state as they are finalised or authorised abroad, or where the person that habitually exercises an
authority to conclude contracts constitutes an “independent agent” to which the exception of Article 5(6) applies even
though it is closely related to the foreign enterprise on behalf of which it is acting.
• Report suggests that where the activities that an intermediary exercises in a country are intended to result in the
regular conclusion of contracts to be performed by a foreign enterprise, that enterprise should be considered to have
a taxable presence in that country unless the intermediary is performing these activities in the course of an independent
business.
Preparatory or auxiliary activities
• While introducing the exceptions to definition of PE in Article 5(4), activities of preparatory and auxiliary nature were
considered as exceptions.
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Action Plan 7 : Preventing artificial avoidance of PE status
• Since introduction of these exceptions, there have been dramatic changes in the way that business is conducted.
Activities previously considered to be merely preparatory or auxiliary in nature may now days correspond to core
business activities. In order to ensure that profits derived from core activities performed in a country can be taxed in
that country, Article 5(4) is modified to ensure that each of the exceptions included therein is restricted to activities that
are otherwise of a “preparatory or auxiliary” character. Eg. Warehouse facility, purchasing office particularly in e-
commerce scenario, Liaison Offices ? (PPT).
• Further anti-fragmentation rules are proposed to counter the avoidance of PE status by fragmenting a cohesive
business into several small operations in order to artificially designate each part merely preparatory or auxiliary.
Construction PE
• The exception in Article 5(3), which applies to construction sites, has given rise to abuses through the practice of
splitting-up contracts between closely related enterprises. The Principal Purposes Test (PPT) rule that will be added to
the OECD Model Tax Convention as a result of the adoption of the Report on Action 6 (Preventing the Granting of
Treaty Benefits in Inappropriate Circumstances) will address the BEPS concerns related to such abuses.
• The Changes to the definition of PE included in this report will be among the changes proposed for inclusion in
multilateral instrument.
• Indian perspective
• India has endorsed the view taken in this report. Infact it states that this is something which the India has been saying
for long. Indian courts have examined the PE issues particularly in context of ‘preparatory or auxiliary’ activities and
have been on the similar views. The changes proposed may invite a greater scrutiny of subsidiaries of foreign
companies operating in India and undertaking marketing and sales support activities. Further in many cases, such
subsidiaries habitually plays principal role in concluding the contracts, which would expose them to PE establishment of
foreign entity. Similar impact would be seen on EPC and turnkey contracts performed by the foreign companies in India.
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Action Plan 8-10 : Aligning TP outcomes with value creation
• OECD identified that existing standards for transfer pricing rules can be misapplied resulting in outcomes in which the
allocation of profits is not aligned with the economic activity that produced the profits. The work under Actions 8-10 of
the BEPS Action Plan has targeted this issue, to ensure that transfer pricing outcomes are aligned with value creation.
• This report on transfer pricing has focused on three key areas.
• Action 8 : involving intangibles, since misallocation of profits generated by valuable intangibles has resulted in
BEPS
• Action 9 : Contractual allocation of risks, and resulting allocation of profits to those risk which may not
correspond with activities actually carried out. It also address the level of returns to funding provided by capital
rich MNE group member.
• Action 10 : focused on other high risk areas, including
• (i) profits allocation from transactions which are not commercially rational,
• (ii) targeting the use of TP methods which result in diverting profits from most economically important
activities, and
• (iii) neutralising the use of certain payments between MNE (management fee & HO expenses)
Intangibles:
• For intangibles, guidance clarifies that legal ownership alone does not necessarily generate a right to all of return that is
generated by the exploitation of the intangible. The group companies performing important functions, controlling
economically significant risks and contributing assets, as determined through the accurate delineation of the actual
transaction, will be entitled to an appropriate return reflecting the value of their contributions.
Contractual relations and conduct of parties:
• The revised guidance requires analysing the contractual relations between the parties in combination with the conduct
of the parties. The conduct will supplement or replace the contractual arrangements if the contracts are incomplete
or are not supported by the conduct. In circumstances where the transaction between associated enterprises lacks
commercial rationality, the guidance continues to authorise the disregarding of the arrangement for transfer pricing
purposes.
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Action Plan 8-10 : Aligning TP outcomes with value creation
Risk and return
• In order to address this, the Report determines that risks contractually assumed by a party that cannot in fact exercise
meaningful and specifically defined control over the risks, or does not have the financial capacity to assume the
risks, will be allocated to the party that does exercise such control and does have the financial capacity to assume the
risks.
Contractual relations and conduct of parties
• The revised guidance requires analysing the contractual relations between the parties in combination with the conduct
of the parties. The conduct will supplement or replace the contractual arrangements if the contracts are incomplete or
are not supported by the conduct. In circumstances where the transaction between associated enterprises lacks
commercial rationality, the guidance continues to authorise the disregarding of the arrangement for transfer pricing
purposes
Transfer pricing method to ensure allocation of profits
• Finally, the guidance ensures that pricing methods will allocate profits to the most important economic activities, thus
advocating the profit split method to provide additional guidance. In respect of low value adding intra-group services,
the guidance provides for an elective approach with limited mark up on costs (Standard mark-up of 5% on cost).
Linkages with other Actions
• The guidance under these Actions is linked in a holistic way with other Actions. This holistic approach to tackling BEPS
behaviour is supported by the transparency requirements agreed under Action 13. Transfer pricing analysis depends on
access to relevant information. The access to the transfer pricing documentation provided by Action 13 will enable the
guidance provided in this Report to be applied in practice, based on relevant information on global and local operations
in the master file and local file. In addition, the Country-by-Country Report will enable better risk assessment practices
by providing information about the global allocation of the MNE group’s revenues, profits, taxes, and economic activity.
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Action Plan 8-10 : Aligning TP outcomes with value creation
Indian perspective
• Indian authorities believe that excessive intra-group service payments in form of management fee, technical fee,
royalty, interest etc have been major source of base erosion and thus one of the high risk area. These intra-group
payments are also the one of the most litigated issue in India. The Indian courts have delivered judgement both in
favour of taxpayer and revenue authorities on case to case basis. Indian government though believes that many
recommendations of reports are already being followed by the tax authorities and they are sort of endorsement or give
support to the approach already being followed.
• On intangibles, India endorses the emphasis of substance, that mere capital does not attract income unless it does
something to enhance the value. It also expressed that reports does not specifically comment on marketing intangible
and for which it need to find solution locally.
• On recharacterisation or disregarding a transaction as articulated in Action 8-10, Government has stated that GAAR
provisions will take into account the concepts.
• On low-value adding services, the India has recently introduced the revised safe harbour rules which also
incorporates the low value adding services. The safe harbour rules specifies the mark-up of 5% on cost, thus broadly
aligning the treatment recommended by the OECD BEPS Action 8-10 for receipt of low-value adding services.
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Action Plan 11 : Measuring and monitoring BEPS
• Measuring the scale of BEPS proves challenging given the complexity of BEPS and the serious data limitations, today
we know that the fiscal effects of BEPS are significant-eg Corporate income-tax revenue loss ranges between USD 100
to 240 billion annually. In addition to significant tax revenue losses, BEPS causes other adverse economic effects,
including tilting the playing field in favour of tax-aggressive MNEs, exacerbating the corporate debt bias, misdirecting
foreign direct investment, and reducing the financing of needed public infrastructure.
• Six indicators of BEPS activity highlight BEPS behaviours using different sources of data, employing different metrics,
and examining different BEPS channels.
• The focus of the report is on improved access to and enhanced analysis of existing data, and new data proposed to be
collected under Actions 5, 13 and, where implemented, Action 12 of the BEPS Project.
Base Erosion and Profit Shifting – Evolution and impact on Indian Tax Regime
S.No Indicators
1. The profit rates of MNE affiliates located in lower-tax countries are higher than their group’s average
worldwide profit rate
2. The effective tax rates paid by large MNE entities are estimated to be lower (4 to 8½ percentage
points ) than similar enterprises with domestic-only operations
3. Foreign direct investment (FDI) is increasingly concentrated
4. The separation of taxable profits from the location of the value creating activity is particularly clear
with respect to intangible assets
5. Royalties received by entities located in low-tax countries accounted for 3% of total royalties
6. Debt from both related and third-parties is more concentrated in MNE affiliates in higher statutory
tax-rate countries
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Action Plan 12 : Mandatory disclosure rules
• The lack of timely, comprehensive and relevant information on aggressive tax planning strategies is one of the main
challenges faced by tax authorities worldwide. The main objective of mandatory disclosure regimes is to increase
transparency by providing the tax administration with early information regarding potentially aggressive or abusive tax
planning schemes and to identify the promoters and users of those schemes. Another objective of mandatory
disclosure regimes is deterrence: taxpayers may think twice about entering into a scheme if it has to be disclosed.
• Design principles of mandatory disclosure regime:
• clear and easy to understand,
• should balance additional compliance costs to taxpayers with the benefits obtained by the tax administration,
• should be effective in achieving their objectives,
• should accurately identify the schemes to be disclosed,
• should be flexible and dynamic enough to allow the tax administration to adjust the system to respond to new
risks, and
• should ensure that information collected is used effectively.
• Basic design questions:
• Who has to report?
• What has to be reported ?
• When information is to be reported?
• What other obligation to be placed on promoters?
• What are the consequences of non-compliances?
• What are the consequences of disclosure?
• How to use information collected?
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Action Plan 13 : Transfer pricing documentation and CbCR
• Action 13 of the Action Plan on BEPS requires the development of rules regarding transfer pricing documentation to
enhance transparency for tax administration, taking into consideration the compliance costs for business. The rules
developed will include a requirement that MNEs provide all relevant governments with needed information on their
global allocation of the income, economic activity and taxes paid among countries according to a common template”.
• In response to this requirement, a three-tiered standardised approach to transfer pricing documentation has been
developed.
• Taken together, these three documents (master file, local file and Country-by-Country Report) will require taxpayers to
articulate consistent transfer pricing positions and will provide tax administrations with useful information to assess
transfer pricing risks, make determinations about where audit resources can most effectively be deployed, and, in the
event audits are called for, provide information to commence and target audit enquiries.
Base Erosion and Profit Shifting – Evolution and impact on Indian Tax Regime
Master file Provides tax administrations with high-level information regarding global business
operations and transfer pricing policies in a “master file” that is to be available to
all relevant tax administrations
Local file Detailed transactional transfer pricing documentation specific to each country,
identifying material related party transactions, the amounts involved in those
transactions, and the company’s analysis of the transfer pricing determinations
they have made with regard to those transactions
Country by country
report (CbCR)
Provides annually and for each tax jurisdiction in which they do business the
amount of revenue, profit before income tax and income tax paid and accrued. It
also requires MNEs to report their number of employees, stated capital, retained
earnings and tangible assets in each tax jurisdiction. Finally, it requires MNEs to
identify each entity within the group doing business in a particular tax jurisdiction
and to provide an indication of the business activities each entity engages in
22
Action Plan 13 : Transfer pricing documentation and CbCR
Indian tax regime
• For the purpose of implementing the international consensus on Action 13, Finance Act, 2016 introduced w.e.f.
Assessment year 2017-18 the requirement of
• Maintenance and filing of Master file [Proviso to section 92D(1)]
• Filing of Country by country reporting [Section 286]
Further Government notified the final rules on Master file and CbCR on 31st October, 2017 as detailed hereunder:
• Keeping, maintenance and e-filing of Master file by each Indian entity as under: (Form No.3CEAA)
(a) Certain basic details about the group - PART A of Form No. 3CEAA to be furnished by every Indian constituent
entity of the international group; and
(b) Complete Master file detailing all the particulars about the group – PART B of Form No. 3CEAA to be furnished
if the following conditions are satisfied:
(i) Consolidated revenue of the group during the accounting/previous year exceeds INR 500 crores ($ 78.9
Million) and
(ii) Value of international transactions during the relevant year exceeds INR 50 Crores ($7.89 million) (or INR 10
crores-$1.58 Million in case of transactions involving intangibles).
The above form should be filed on or before the due date of return. For FY 2016-17, the due date has been
extended to 31st March, 2018.
• Country by Country report (‘CbCR’): (Form No.3CEAC and 3CEAD)
Further, every constituent entity has to notify the Tax authority (Director General of Income Tax-Risk Assessment)
two months prior to the due date, whether it is the alternate reporting entity or details of parent entity or alternate
reporting entity in Form No. 3CEAC. (Since the due date for FY 2016-17 is 31st March, 2018, the date by which
such notice should be filed by X ltd. would be 31st January, 2018).
The threshold of turnover for applicability of CbCR is INR 5,500 crores (equivalent to $867.9 million) of group
revenue in the immediately preceding previous year. CbCR need to be filed in form no. 3CEAD on or before due
date.
Base Erosion and Profit Shifting – Evolution and impact on Indian Tax Regime
23
Action Plan 13 : Transfer pricing documentation and CbCR
Table 1 : Criteria for applicability of CbCR and Master File
Base Erosion and Profit Shifting – Evolution and impact on Indian Tax Regime
Rule Description Criteria Evaluation
Period
Threshold
exceeding
Rs.
Time
Limit
10DA -
Master
File
Information and
Documents (Master
File / Master File) to be
kept, maintained and
furnished by a
constituent entity /
parent entity / alternate
reporting
entity of an
International group as
per Section 92D
– Form 3CEAA
•Part A is to be filed by
every constituent entity
•In addition Part B is to
be filed if given criteria
is fulfilled.
(i) Consolidated
revenue of the
international group
Accounting/
previous year
500 Crores
($ 78.9
Million)
31 March
2018
AND
(ii) A. Aggregate value
of international
transactions of the
constituent entity
Year under
consideration
50 Crores
($7.89
million)
OR
(ii) B. Aggregate value
of international
transactions involving
intangibles of the
constituent entity
Year under
consideration
10 Crores
($1.58
Million)
10DB - CbCR Furnishing of CbC
Report by a constituent
entity / parent entity /
alternate reporting
entity of an
International group
Total consolidated
group revenue of the
international group
Immediately
preceding
previous year
5,500
Crores
($867.9
million)
31 March
2018
24
Action Plan 13 : Transfer pricing documentation and CbCR
Table : Rules for Master File
Base Erosion and Profit Shifting – Evolution and impact on Indian Tax Regime
Rule Information to be filed Forms –FY
2016-17
Due Date –FY
2016-17
Remarks
Rules for Master File
10DA(2) Master file to be filed by a
constituent entity of an international
group, satisfying the criteria laid
down in Table 1 above
3CEAA 31 March 2018 To be furnished on or before due
date as specified under section
139(1) i.e. 30 November 2017
However, for FY 2016–17, the due
date has been extended to 31 March
2018.
Master File consists of:
Part A – to be filed by all the
constituent entities
Part B – to be filed by entities
satisfying the criteria laid down in
Table 1 above
10DA(4) Intimation to the authorities
concerned in respect of the
constituent entity that would be
filing the Master File, where there
are more than 1 constituent entity in
India
3CEAB 01 March 2018 To be furnished at least 30 days
before due date as specified under
section 139(1) i.e. 31 October 2017.
However, for FY 2016–17, the due
date has been extended to 01 March
2018.
25
Action Plan 13 : Transfer pricing documentation and CbCR
Table : Rules CbCR
Base Erosion and Profit Shifting – Evolution and impact on Indian Tax Regime
Rules for CbCR
10DB(2) Constituent entity to notify as to
whether it is the alternate
reporting entity or furnish the
particulars of Parent entity/
alternate reporting entity
3CEAC 31 January
2018
To be furnished at least 2 months
prior to due date as specified under
section 139(1) i.e. 30 September
2017. However, for FY 2016–17,
the due date has been extended to
31 January 2018.
10DB(3) Parent entity / alternate reporting
entity resident in India to file
CbCR information
3CEAD 31 March 2018 To be furnished on or before due
date as specified under section
139(1) i.e. 30 November 2017.
However, for FY 2016–17, the due
date has been extended to 31
March 2018.
10DB(4) If more than one constituent entity
in India of an international group,
other than the entity referred to in
Rule 10DB(3), then the Indian
constituent entity nominated by
the Parent entity in this behalf has
to notify in Form No. 3CEAE –
Section 286(4)
3CEAE 31 March 2018
Rule Information to be filed Forms –FY
2016-17
Due Date –FY
2016-17
Remarks
26
Action Plan 14 : Making dispute resolution more effective
• The measures developed under Action 14 of the BEPS Action Plan aim to strengthen the effectiveness and efficiency of
the MAP process. They aim to minimise the risks of uncertainty and unintended double taxation by ensuring the
consistent and proper implementation of tax treaties, including the effective and timely resolution of disputes regarding
their interpretation or application through the mutual agreement procedure.
• Minimum standard : will ensure
• that treaty obligations related to the mutual agreement procedure are fully implemented in good faith and that
MAP cases are resolved in a timely manner
• the implementation of administrative processes that promote the prevention and timely resolution of treaty-
related disputes; and
• that taxpayers can access the MAP when eligible.
Indian perspective
• India continues to be reluctant to accept mandatory arbitration. It tend to rely on appellate mechanism and court to deal
with the disputes. It believes in strengthening the effectiveness and efficiency of MAP process under tax treaties and
feels mandatory arbitration as addition complication rather than an additional solution. Being a minimum standard, India
has opted for bilateral notification or consultation. Indian has also been unwilling to adopt the Chapter VI of MLI dealing
with mandatory arbitration.
• APAs and MAP are tools of alternative tax dispute resolution mechanism in matters involving transfer pricing. Recently,
India has relaxed the norms and decided to accept Transfer Pricing MAP and bilateral APA applications regardless of
the presence or otherwise of Paragraph 2 of Article 9 (or its relevant equivalent Article) in the DTAAs viz ‘corresponding
adjustment’ (Press release dt. 27.11.2017). India has concluded around 189 APAs which includes 173 unilateral APAs
and 16 Bilateral APAs. Out of which maximum APAs (more than110) concluded from service sector (IT, Finance &
Banking). India signed its first Bilateral APA with Japan in December 2014. Recently India signed first ever bilateral APA
with USA covering IT/ITeS transactions; India has already signed 16 bilateral APAs with countries like Japan, UK,
Netherlands etc. Similarly, India has been actively resolving MAP cases for two years and more than 180 cases have
been resolved.
Base Erosion and Profit Shifting – Evolution and impact on Indian Tax Regime
27
Action Plan 15 : Developing multilateral instrument
• Globalisation has exacerbated the impact of gaps and frictions among different countries’ tax systems. As a result,
some features of the current bilateral tax treaty system facilitate base erosion and profit shifting (BEPS) and need to be
addressed. Further, sheer number of bilateral treaties makes updating the current tax treaty network highly
burdensome.
• The goal of Action 15 is to streamline the implementation of the tax treaty-related BEPS measures. This is an
innovative approach with no exact precedent in the tax world. The treaty measures that will be included in the
multilateral includes those of hybrid mismatches, treaty abuse, permanent establishment and MAP.
• In line with this Action, an ad-hoc group was formed with pre-defined purpose of development of MLIs. On 7th June,
2017, 68 countries and jurisdictions including India, signed the MLI. Indian has signed MLI with certain reservations.
• The convention would not functional in the same way as an amending protocol to a single treaty. Instead, it will be exist
and applied alongside the existing tax treaties, modifying their application in order to implement the BEPS measures.
Base Erosion and Profit Shifting – Evolution and impact on Indian Tax Regime
Conclusion
The Indian Union Budget 2017 – Highlights
OCED initiatives on BEPS projects have received a significant participation and involvement from the countries across the
globe. For successful implementation of BEPS project continuous consensus and coherence among counties is vital. Some
of the actions are immediately applicable, while other requires changes in domestic law and in tax treaties and hence may
take time for implementation.
As far as India is concerned, it has been an active participant and contributor in the BEPS project since initiation. India has
been committed to the implement the minimum standards to tackle the BEPS issue. Recently, India has made several
amendments in its domestic laws and treaties to bring them in line with the BEPS recommendations. Further a developing
country like India, it is vital to balance the implementation of BEPS recommendations, while continues to be a attractive
investment destination for foreign investors.
S.R. Dinodia & Co. LLP – Your Intelligent Connect
For more information on how S.R. Dinodia & Co. LLP can provide business solutions that work for you
Contact us at [email protected] or visit us at www.srdinodia.com
This information contained herein is in summary form and is therefore intended for general guidance only. This publication is not intended to address
the circumstances of any particular individual or entity. No one should act on such information without appropriate professional advice after a thorough
examination of the particular situation. This publication is not a substitute for detailed research and opinion. Before acting on any matters contained
herein, reference should be made to subject matter experts and professional judgment needs to be exercised. S.R. Dinodia & CO. LLP cannot accept
any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication.
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