CA Hitesh Arora

(A)   Concept

What is BEPS

–          BEPS refers to 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.

–          BEPS is of major significance for developing countries due to their heavy reliance on corporate income tax, particularly from multinational enterprises (MNE’s).

–          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 that can be exploited to generate double non-taxation. This undermines the fairness and integrity of tax systems.

–          How BEPS Arise

–          The major reason for BEPS is Globalization. The free movement of capital and labour, the shift of manufacturing bases from high-cost to low-cost locations, the gradual removal of trade barriers, technological and telecommunication developments, and the ever-increasing importance of managing risks and of developing, protecting and exploiting intellectual property, have had an important impact on the way cross-border activities take place.

–          Globalization has boosted trade and increased foreign direct investments in many countries. Hence it supports growth, creates jobs, fosters innovation, and has lifted millions out of poverty. As the economy became more globally integrated, so did corporations. Multi-national enterprises (MNE) now represent a large proportion of global GDP.

–          Globalization has resulted in a shift from country-specific operating models to global models based on matrix management organizations and integrated supply chains that centralize several functions at a regional or global level.

–          Moreover, the growing importance of the service component of the economy, and of digital products that often can be delivered over the Internet, has made it much easier for businesses to locate many productive activities in geographic locations that are distant from the physical location of their customers.

–          These developments have opened up opportunities for MNEs to greatly minimize their tax burden. 

(B)   Disadvantages

Major disadvantages of BEPS are;

(a) Loss to Exchequers/Governments:

–          Less revenue and a higher cost to ensure compliance.

–          Integrity of the tax system is hampered

–          In developing countries, the lack of tax revenue leads to critical under-funding of public investment and economic growth is hampered.

(b) Individual taxpayers are harmed:

–          When tax rules permit businesses to reduce their tax burden by shifting their income away from jurisdictions where income producing activities are conducted, other taxpayers in that jurisdiction bear a greater share of the burden.

(c) Businesses are harmed:

–          MNEs may face significant reputational risk if their ETR is viewed as being too low.

–          Corporations operating only in domestic markets may face difficulty competing with MNEs that have the ability to shift their profits across borders to avoid or reduce tax.

Fair competition is harmed by the distortions induced by BEPS.

(C)   Action Plan

–          Action Plan has been formulated by OECD. First draft has been launched in 2014.

–          Fundamental changes are needed to effectively prevent double non-taxation, as well as cases of no or low taxation associated with practices that artificially segregate taxable income from the activities that generate it.

–          An action plan containing 15 plans have been prepared.

–          An overview of the same is depicted in the table on next slides.

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