Base Erosion and Profit Sharing : Detailed Analysis

What is BEPS?
Base Erosion and Profit Shifting (BEPS) refers to tax planning strategies that exploit the gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid.
In an increasingly interconnected world, national tax laws have not always kept pace with global corporations, fluid movement of capital, and the rise of the digital economy, leaving gaps and mismatches that can be exploited to generate double non-taxation. This undermines the fairness and integrity of tax systems
What is BEPS initiative?
  • BEPS is of major significance for developing countries due to their heavy reliance on corporate income tax, particularly from multinational enterprises (MNEs)
  • The BEPS project was initiated by OECD as a response to the 2008 economic crisis to create sustainable economic growth, and step up the momentum of global recovery. The idea is to strengthen “the foundations for long-term growth” and avoid policies that “promote growth at other countries’ expense”
  • The BEPS plan aims to improve transparency – for business and governments – by introducing commonly agreed minimum standards for tax administration across countries. This includes alignment of taxation with the location of economic activity and value creation, reinforcing substance requirements in tax rules globally
  • It has been urging governments across the globe to curb the misuse of tax havens for tax evasion and tax avoidance
India’s role and its impact on India:
  • As a part of G20, India is actively pursuing BEPS project
  • As BEPS recommendations come into force, tax experts say companies are going to see greater need for sharing information, leading to increased transparency in their business operations globally.
  • Adoption of the BEPS framework means multinationals will have to disclose their profits, number of employees and taxes paid in each country
  • This will give tax authorities a clear picture of the activities of an MNC in each country of operation. It will prevent these companies from shifting profits to shell companies in tax havens and boost governments’ revenues. The compliance burden of MNCs will rise
What are the concerns in this initiative?
The biggest issue with the BEPS initiative is the lack of international consensus on the limits of a country’s legitimate tax base. For instance, some of India’s views regarding taxing e-commerce transactions, services, overseas share transfers, and permanent establishments are inconsistent with global approaches and create a risk of double taxation

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