Will Budget 2018 clear the haze around BEPS?

Base Erosion and Profit Shifting (BEPS), a collective effort of the Organization for Economic Cooperation and Development (OECD) and G20 nations, including India, aims to provide a road map to reform the global international tax framework and to protect legitimate tax base erosion in the context of aggressive international tax planning.

BEPS seeks to minimise gaps and mismatches in both domestic tax and international taxation, especially through planning around tax treaties, which allowed multinational companies (MNCs) to shift profits to low tax jurisdictions.

The BEPS project, initiated in 2012, was rolled out in October 2015. To implement BEPS action points, participating countries were either to unilaterally enact or amend domestic laws or required to amend bilateral tax treaties through a multilateral instrument (MLI). Some implemented BEPS in various forms, such as the Australian MAAL (multinational antiavoidance law), the UK’s diverted profit tax, Italian Google tax and the US’ own version termed as the base erosion and anti-abuse tax (BEAT), under the latest US tax reforms in 2017.

BEPS scorecard for India so far is impressive. Recent the negotiations of the Mauritian and Singapore tax treaties, increased focus on limitation of benefit (LOB) and mutual exchange of information while negotiating treaties puts India in the right direction.

Through the Union Budgets of 2016 and 2017, India formalised some of the BEPS actions points through changes in domestic legislations. Such as adoption of (a) thin capitalisation rules i.e. restricting the foreign loan interest to 30 per cent of the Ebitda (earnings before interest, tax, depreciation and amortisation) (b) imposition of equalisation levy at six per cent on gross B2B transitions (c) introduction of rationalised IP patent box regime at 10 per cent royalty tax on qualified transactions (d) Country-by-country reporting (CbCR), including stringent disclosure and maintaining of master and local files (e) reference to domestic laws where any term is not defined in a bilateral treaty and (f) introduction of secondary adjustments to address the collateral consequences arising from a primary TP adjustments.

The presence of place of effective mechanism (PoEM) concept in domestic legislation clearly shows India’s intention to deal with treaty abuse seriously. The literature, scope and treaty overriding effect of on General Anti-Avoidance Regulations (GAAR), having emphasis on commercial substance and business purpose test and covering both domestic and cross-border transactions, intend to make tax abuse nearly impossible.

Indian authorities view these developments as ratification of their existing positions such as taxability of marketable intangibles, of location savings, adoption of substance over legal form approach, virtual PE taxation, etc.

The government is already under pressure to lower the corporate tax rate to 25 per cent, especially after US rates were cut from 35 per cent to 21 per cent. We hope the government would issue explanations on already adopted actions points such as (a) the operational aspect of thin capitalisation (b) clarifications on share transfer rules (c) clarity on taxation of e-commerce transactions (d) legal and tax framework around digital currency and harmonisation of CbCR reporting (f) further clarity on patent box regime and (g) widening the scope of the equalisation levy. The changes are also expected to increase the efficiency of dispute resolutions and MAP proceedings to bring these at parity with global best practices.

While doing so, India needs to proactively ensure the implementation of the BEPS Action Plan is reasonable for MNCs. Using intermediary holding company structures, MNCs engage in ecommerce transactions with KPOs /BPOs in India. These global investors need to revisit their existing structures from the perspective of substance and PoEM, to secure the legitimate treaty relief.

The Indian government continues its focus on being business-friendly by regularly bringing reforms in the tax and regulatory environment. Recent developments such as rationalisation of foreign direct investment norms, commitment to further improve the ease of doing business ranking, promise to achieve an aggressive annual growth rate of 7.3 per cent (ahead of China) and formulation of a tax task force to redraft a new direct tax legislation, in the light of international practices, place BEPS on a high position on India’s tax policy agenda.

The government is already under pressure to lower the corporate tax rate to 25%, especially after US rates were cut from 35% to 21%