Base Erosion and Profit Shifting (BEPS) has been the talk of tax town with good reason — multinational corporations have ceaselessly been in the eye of a political storm over strategies to reduce their tax bill. The G20 nations wanted the OECD to intervene, which resulted in the OECD BEPS project.
Although the OECD BEPS project, commenced in 2013 by putting in place an action plan, things have come a long way since. In the initial days of its evolution, many were dismissive of the efficacy of the BEPS project. The fact that countries will be in concert so quickly was not immediately evident. However, the project has recharged governments and legislators in their pursuit of crackdown on tax avoidance by multi-nationals. Countries are being more collaborative in their efforts, as tax avoidance becomes a global political issue.
We are now at a stage where all signs — within India and outside — point toward the imminence of OECD BEPS recommendations trickling down into country level legislations and tax treaties in one form or another.
The final recommendation reports on all 15 action plans are expected to be released in October 2015. And the release will be followed by the G20 Finance Ministers meeting. This will only increase the decibel of the call for action.
Country actions internationally
The substantial support that BEPS has received has resulted in an environment where administrations are not afraid to push for plugging gaps, which were leading to avoidance. Although final reports on all actions are yet to come out, there has been significant activity globally with respect to countries taking unilateral actions and furthering legislative amendments. This is illustrated in the following discussion.
- The UK introduced the Diverted Profits Tax from April 2015, with the primary intent to tackle arrangements wherein taxable presence in the UK was being avoided by companies. Similar measures are being proposed in Italy and Australia.
- Luxembourg published draft laws on anti-abuse and anti-hybrids.
- Country-by-country reporting (CbCR) is being implemented in the UK, Spain, Poland and Australia.
- China proposed implementation of General Anti-Avoidance Rules (GAAR) along with certain specific anti-avoidance measures.
India’s views on BEPS
India has been an active participant in the BEPS project, as a G20 member. It has advocated the cause of developing countries in cross-border tax scenarios and highlighted aspects that need to be taken cognizance of to make the BEPS project effective across the spectrum of countries.
Besides, tax avoidance has been no light matter in the Indian establishment of late. Though the proposed GAAR had prickled taxpayers for their design, placing reliance on the principle of “substance over form” by itself is not unjustified.
Accordingly, while deferring implementation of GAAR by two years in this year’s Budget, it was stated that it will be proper that GAAR provisions are implemented as part of a comprehensive regime to deal with BEPS and aggressive tax avoidance.
All this goes to show the importance the Indian Government attaches to the BEPS project and we can expect swift action in amendment of domestic legislation once the final OECD deliverables are released. It goes without saying that the Government will take heart from the pace at which other countries have acted and reacted and it may not be far-fetched to expect some changes as soon as the forthcoming Union Budget in 2016.
Once significant amendments are enacted in law, perhaps the biggest consequence for corporations will be reassessing and re-imagining global structures and supply chains. This has already begun in part, due to the unilateral country changes talked about earlier. And from an Indian perspective, this is equally important for the inbound as well as outbound investor.
Tax treaties, which were once a safe harbour, are being overridden through domestic law in various cases due to treaty abuse and shopping. Renegotiation of treaties is taking place — India and Mauritius being a noteworthy case in point.
With increased reporting and exchange of information, the importance of confidentiality and data privacy will also assume new meaning. The onus will be on governments to ensure adequate physical, virtual and legal protection. This is just one of many risks businesses will find themselves exposed to in the course of implementation of BEPS recommendations/anti-avoidance measures.
However, at this stage, whether and to what extent there would be any grandfathering provisions remains unclear and is something that will weigh heavy on the minds of corporate.
Altogether, too many things may be shifting at the same time and this makes it absolutely necessary for businesses to be vigilant and clued in to BEPS-related developments — both, at the OECD level, as well as with respect to changes in various countries.
Article includes contribution from Raju Kumar, Tax Partner, EY India