Print Friendly, PDF & Email

Base Erosion and Profit Shifting

Topics covered:

  1. Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests.

 

Base Erosion and Profit Shifting

 

What to study?

For prelims and mains: BEPS- meaning, concerns associated and measures in place.

 

Context: The government has ratified the international agreement to curb base erosion and profits shifting (BEPS) Multilateral Convention to Implement Tax Treaty Related Measures, a bid to stop companies from moving their profits out of the country and depriving the government of tax revenue.

 

What is BEPS?

Base erosion and profit shifting refers to the phenomenon where companies shift their profits to other tax jurisdictions, which usually have lower rates, thereby eroding the tax base in India.

 

About the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting:

The Convention is an outcome of the OECD / G20 BEPS Project to tackle base erosion and profit shifting through tax planning strategies that exploit 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.

The Convention implements two minimum standards relating to prevention of treaty abuse and dispute resolution through Mutual Agreement Procedure.

The Convention will not function in the same way as an Amending Protocol to a single existing treaty, which would directly amend the text of the Covered Tax Agreements. Instead, it will be applied alongside existing tax treaties, modifying their application in order to implement the BEPS measures.

The Convention ensures consistency and certainty in the implementation of the BEPS Project in a multilateral context. The Convention also provides flexibility to exclude a specific tax treaty and to opt out of provisions or parts of provisions through making of reservations.

A list of Covered Tax Agreements as well as a list of reservations and options chosen by a country are required to be made at the time of signature or when depositing the instrument of ratification.

 

Benefits for India:

  • The Multilateral Convention will enable the application of BEPS outcomes through modification of existing tax treaties of India in a swift manner.
  • It is also in India’s interest to ensure that all its treaty partners adopt the BEPS anti-abuse outcomes.
  • The Convention will enable curbing of revenue loss through treaty abuse and base erosion and profit shifting strategies by ensuring that profits are taxed where substantive economic activities generating the profits are carried out and where value is created.

 

Background:

BEPS is of major significance for developing countries due to their heavy reliance on corporate income tax, particularly from multinational enterprises. Estimates since 2013 conservatively indicate annual losses of anywhere from 4 to10 per cent of global corporate income tax revenues, or $100-$240 billion annually.

 

Sources: the Hindu.