In 2015, there were exceptional changes in the global tax landscape — Base Erosion and Profit Shifting (BEPS) discussion drafts turned into final recommendations with many jurisdictions already legislating on a unilateral basis in anticipation of final recommendations. Across the globe, new and sometimes highly novel national legislation was released to address BEPS challenges. The BEPS project reflects the view that current international tax standards have not kept pace with changes in global business practices. It also sets out that the gaps in the interaction of domestic tax rules of various countries, the application of bilateral tax treaties to multi-jurisdictional arrangements and the rise of the digital economy, have led to weaknesses in the international tax system. The above trends indicate that BEPS is likely to substantially influence tax policy changes when the Finance Minister presents the Union Budget for 2016.
The output from the BEPS Action Plan, which is largely in the form of recommendations for the design of countries domestic laws, proposed changes to bilateral tax treaties and to the OECD Transfer Pricing Guidelines, broadly falls in the following categories — (1) agreed minimum standards; (2) reinforced international standards; and (3) common approaches and best practices for domestic tax law. The focus now shifts to countries, which must determine whether, when and how to implement various recommendations. The Government of India has actively participated to the BEPS project. The Government is expected to formulate its policy response that may very soon be reflected in changes to the Indian tax law and in bilateral tax treaties, as necessary. BEPS actions such as preventing tax treaty abuse, aligning transfer pricing outcomes with value creation, transparency through enhanced transfer pricing documentation, including country-by-country reporting and improving dispute resolution are likely to be priorities for the Government. In addition, preventing base erosion through excessive financial payments and taxation of the digital economy are also likely to be addressed. The Government is also likely to consider refining the general anti-avoidance provisions with regard to its inter-play with the BEPS actions that may be implemented.
Some of the above expectations would require amendments to the tax law and may be reflected in the Finance Bill, 2016. However, several other changes will require changes to bilateral tax treaties and in administrative practices and guidelines. The Government may use the Union Budget as an opportunity to present its road map for BEPS implementation in India so that taxpayers have clarity on the path ahead. In the 2015 Union Budget the Finance Minister had announced a phased reduction in Indian’s corporate tax rate from 30% to 25%. The business community also eagerly awaits the road map for the rate reduction plan. A reduction in the corporate tax rate would be a catalyst in improving the competitiveness of the Indian economy.
It is also important to recognize that much ground has shifted in the global tax debate. Many countries (including those with relatively low corporate tax rates) have enacted the so called “patent or innovation box” regime in order to spur innovation and domestic manufacturing. The regime grants a reduced tax rate on profits from intangibles, “boxing” them off from rest of the system. Along with a corporate tax rate reduction plan, the Government should also consider the need for developing an “innovation box” regime in India. With a strong technology and knowledge-driven economy, India may be in a sweet spot to attract investors in such a regime, who now need to ensure that such regimes are not harmful tax practices under the “nexus approach” as recommended by the OECD BEPS project, i.e., taxpayers can use IP regimes only if they show significant R&D occurs in that jurisdiction. An innovation box regime may prove to be a catalyst to progress from “make in India” to “innovate in India”.
The international tax changes, which may be implemented in the Union Budget 2016, could be far reaching. International investors will need to carefully monitor developments and assess impact on their operations.