Transparency in tax payments and compliances is a common challenge across the world. Every country has budgets to improve citizens’ lives, and tax is an important source of money for budgets. Large multinational corporations are expected to be the main contributors to this revenue stream. However, strategies adopted to tap loopholes in tax rules end up eroding the tax base. Either with or without the required clarity on jurisdiction to tax, profits are shifted to low/ no-tax territories, mostly lacking economic substance, thus giving rise to Base Erosion and Profit Shifting (BEPS).

So, is BEPS illegal? Broadly it is not, considering the outdated rules in the present environment of globalisation. The current tax rules do not address the ever-increasing scope of intangible and digital transactions. The question that arises next is: why is it relevant? MNCs — through BEPS — create an uneven playing field for domestic taxpayers, and discourage relatively smaller taxpayers who voluntarily comply. This creates the illusion that respective governments are imposing higher tax burdens on smaller players, thereby eroding trust among the smaller taxpayers.

To address double taxation, there are more than 3,000 bilateral tax treaties, which provide BEPS opportunities and lead to situations wherein income may not be taxed at all. To address this, it would be optimal for all countries to unanimously spell out certain coordinated rules that deter such practices. Any decision by a single country may lead to double taxation, creating an unfavourable investment and growth climate. Thus, there is a need for combined global effort, and the Organisation for Economic Co-operation and Development (OECD) project to address BEPS has received significant attention — various governments and the G20 are supporting the OECD.

In February 2013, the OECD released a detailed report on BEPS, highlighting examples, reflecting global business models, key tax principles and opportunities, and addressing concerns. The report spells out certain key pressure areas, such as international mismatches in entity and instrument characterisation; application of treaty concepts to profits derived from the delivery of digital goods and services; tax treatment of related-party financial transactions; transfer pricing, especially related to the shifting of risks and intangibles; effectiveness of anti-avoidance measures, general anti-avoidance rules (GAAR), controlled foreign corporation (CFC) regimes, thin capitalisation rules, and rules to prevent tax treaty abuse; and availability of harmful preferential regimes.

The goal of the BEPS project is to prevent countries taking unilateral positions that could result in double taxation, as well as prevent double non-taxation and create a level playing field. In the Indian context, we have experienced unilateral positions, such as the spate of retrospective amendments, the recently issued circulars by the Central Board of Direct taxes (CBDT) pertaining to application of profit split method and guidance for identification of development centres engaged in contract R&D services with insignificant risk. This can arguably be construed as an effort to address BEPS opportunities — however, there is a greater chance that this would result in double taxation for earlier years.

Based on initial data gathered, it is difficult to quantify BEPS, but there is ample circumstantial evidence to conclude that it is widespread. There is no magic solution for BEPS, but the report mentions the development of a comprehensive action plan by June 2013. The plan will identify actions, set deadlines, and identify the resources and methodology for implementing the proposed solutions.

The report calls for suggestions from tax administrations — therefore, the Forum of Tax Administration in Moscow, in May 2013, is expected to focus on BEPS. They are invited to draw on OECD’s work in the area of aggressive tax planning, with more than 400 schemes included in the tax planning directory. Though the current report does not highlight how inputs from the business community will be factored in, it will be an integral part of the project. In the short term, it would be crucial for MNCs to the monitor progress of the BEPS project for a discussion with OECD and local governments.

(Yatin Nageshkar, Manager, Grant Thornton, contributed to the article)

(The author is Partner and Practice Leader, Transfer Pricing Services, Grant Thornton India LLP)

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