In an increasingly interconnected world, national tax laws have not always kept pace with how global corporations have developed, or with the rise of the digital economy, leaving gaps, which can be exploited to generate double no-taxation. This undermines the fairness and integrity of tax systems. The first set of Base Erosion and Profit Shifting (BEPS) measures and reports were released in September 2014. Combined with work to be completed in 2015, these measures will give countries tools they need to ensure that profits are taxed where profit-generating economic activities are performed and where value is created, while at the same time give businesses increased certainty by reducing disputes over the application of international tax rules and standardizing requirements. The OECD/G20 BEPS project is leading to concrete change and it is now for the participating countries (which includes India as a G20 member) to look at implementing these measures. The upcoming 2015 Union Budget provides a chance for India to consider this.
As a developing country, India may lack the necessary legislative measures to address BEPS and measures to challenge BEPS may often be hindered by lack of information. The lack of effective legislation and gaps in information is likely to leave the door open to simpler, but potentially more aggressive tax avoidance than is typically encountered in developed economies.
Action 13 of the BEPS Action Plan
Action 13 recognizes that enhancing transparency for tax administrations by providing them adequate information to conduct transfer pricing (TP) risk assessments is an essential part of tackling BEPS. The OECD guidance on TP documentation requires MNEs to provide tax administrations high-level global information regarding their global business operations and TP policies in a “master file” that would be available to all relevant country tax administrations. It also requires that more transactional TP documentation be provided in a “local file” in each country. The key element of the OECD TP documentation, however, is the template for country-by-country reporting (CbCR) of income, earnings, taxes paid and certain measures of economic activity. Taken together, these documents will require taxpayers to articulate consistent TP positions, will provide tax administrations with useful information to assess TP risks and determine where audit resources can be most effectively deployed.
The scope of the template has been narrowed down from the draft proposal. Currently, the CbCR template no longer requires reporting of inter-company payments for royalty, interest and service charges. Interestingly, the OECD report mentions that countries from emerging markets (which included India) pointed out that insights into similar payment flows outside the local country could indeed be relevant information and find it challenging to obtain information on global operations of an MNE group headquartered in another country.
Implementing Action 13 in the 2015 Union Budget
A senior official from the Ministry of Finance had recently mentioned at an international tax conference that India will start framing new rules for TP documentation from mid-2015. One will need to wait and see if the Finance Minister uses the upcoming Budget to lay out a road map to implement some of the BEPS measures, especially those related to TP documentation. There are several important considerations while framing TP documentation rules based on the OECD report, which will require careful implementation. The OECD’s recent guidance on implementation of the CbC Report, together with a work plan for developing an implementation package will need to be considered by the Government.
Countries participating in the OECD/G20 BEPS project have agreed to the following conditions underpinning the obtaining and use of the CbC Report:
• Confidentiality: Jurisdictions should have in place and enforce legal protections of confidentiality of the reported information.
• Consistency: Jurisdictions should use their best efforts to adopt a legal requirement that MNE groups’ ultimate parent entities resident in their jurisdictions prepare and file the CbC Report.
• Appropriate use: Jurisdictions should use appropriately the information in the CbC Report template. In particular, jurisdictions will commit to use the CbC Report for assessing high-level TP risk. Jurisdictions may also use the CbC Report for assessing other BEPS-related risks.
The participating countries have also agreed to develop a comprehensive implementation package containing draft legislation/secondary measures, arrangements for automatic exchange of CbC Reports etc., is expected to be finalized by April 2015.
OECD’s new framework for TP documentation requires more information than is provided currently in TP documentation of most MNEs. The new framework is likely to require a complete re-look at a company’s approach to its TP documentation and perhaps also at many of its TP policies. While the FM is likely to consider outlining India’s commitment to anti-BEPS measures in his budget speech, considerable consultation with business and stakeholders may be necessary before implementation. With the BEPS project still a work in progress, the Government may well re-consider implementing unilateral GAAR as a tool to deal with BEPS.