CA Aparna M
The finance bill 2016 has introduced three changes that has originated from the “BEPS Action plan”. What are these “BEPS Action plan” recommendations and what has it got to do with our Tax systems and economy?
What is BEPS ?
BEPS aka ‘Base Erosion and Profit Sharing‘ Action Plans are tax policy recommendations formulated by OCED (Organisation for Economic Co-operation and Development) on initiative directions from the G20 summit to prevent double non taxation and ensure MNC’s pay their fair share of taxes. G20 summit is an international forum on economic cooperation and development which has gained prominence since the 2008 global financial crisis and OECD is the think tank and policy making body on taxation policies.
OECD estimates that governments around the world (mainly the developing countries) do not tax 4% to 10% of global corporate revenues, i.e. USD 100 to 240 billion[i] by shifting of profits to Nil or low tax jurisdictions and aggressive tax planning by MNC’s. Huge MNC’s such as Apple, Amazon, Facebook, Google pay approximately 5% corporate tax whereas small companies pay 20 – 30% corporate tax[ii]. To curb such aggressive tax planning, ensure tax neutrality and encourage inclusive economic development, OECD formulated BEPS Action plans i.e tax policies to be implemented by respective countries.
Implementation of BEPS Action Plan means, MNC’s have to disclose revenue and profits, number of employees, intangibles and taxes paid in each country where the MNC operates. This would provide a clear picture of the MNC’s economic activity in each country and ensure that profits are taxed in the country where economic activity is performed and where value is created and not in the country where the profits are accounted in the books.
Evolution of BEPS [iii]
OECD has formulated 15 Action Plan encompassing Digital Economy, Transfer Pricing, Country by Country reporting, indirect taxes on cross border transactions and multilateral tax treaty instrument which promises to prevent double non taxation and ensure that MNC’s pay up their fair share of taxes.
|June 2012||G20 Summit launches BEPS Project.|
|February 2013||OECD publishes BEPS background report[iv].|
|September 2013||G20 leader’s declaration at St Petersburg endorsing the project, making it a joint project between OECD and G20|
|September 2014||OECD presents G20 with draft BEPS Action Plan (1,2,5,6,8,13&15)[v]|
|October 2015||OECD presents G20 with Final BEPS Action Plan[vi]|
|November 2015||G20 Leaders summit adopt the final BEPS reports|
|February 2016||India starts to implement changes based on BEPS Action Plan|
Proposals from BEPS Action Plan adopted in the Finance Bill 2016
India has been active participant in the BEPS policy making process and is one of the first countries to put it to action through Finance Bill 2016. The Finance Bill 2016 has introduced three key changes which originate from BEPS Action Plan.
1. Patent Tax u/s 115BBF – based on Action Plan 5 ‘Countering Harmful Tax practices more effectively, taking into account transparency and substance’
Royalty income earned by non-resident companies with respect to patent developed and registered in India shall be taxed at 10%. The aim of this provision is tax Patent income in the country where substantial R&D activities are undertaken rather than the jurisdiction of legal ownership only.
2. Country by Country Reporting (CbC Reporting) u/s 286 – based on Action Plan 13 ‘Guidance on Transfer Pricing & Country by Country Reporting ‘
Indian multinational having consolidated revenue exceeding Euro 750 million (approx. Rs. 5625 crores) (Bharathi Airtel, Tata steel, Tata Motors, TCS, Hindalco etc) and foreign multinationals having Indian subsidiary will be subject to exhaustive reporting and documentation norms. This would effect in periodic exchange of information between international tax authorities, ensure transparency and effective taxation of MNC’s.
3. Equalization Levy under chapter VIII of Finance Bill,2106 – based on Action Plan 1 ‘Addressing Tax challenges of Digital economy ’
Income from online advertisement, digital advertisement and services or facilities in relation to online advertisement earned by a non-resident company from resident or non-resident having Permanent establishment in India shall be taxed at 6%. This is popularly called ‘Google Tax’ attacking the digital companies and E commerce companies such as Google, Facebook, Amazon etc.
4. Apart from the above Finance Bill 2015 introduced ‘Place of Effective Management (POEM)’ u/s 6 – based on Action Plan 7 ‘Preventing artificial avoidance of permanent establishment status’
This amendment aims to redefine ‘Permanent Establishment’ where a foreign company will be a tax resident in India if Place of Effective Management (POEM) is in India. These rules impact Indian companies that shift profit to foreign subsidiaries and claim treaty benefits on being a ‘Permanent Establishment’.
Effect of BEPS
Adoption of BEPS Action plan would increase India’s tax revenues and would aid in India’s inclusive development and growth. It would lead to increased exchange of tax information between countries, more co-ordination between tax authorities, more transparency and more tax litigations.
Adoption will have major implications for foreign companies doing business in India as well as Indian multinational companies that have overseas subsidiaries. It would affect foreign investment and could undermine India’s competitiveness compared to other emerging economies. Foreign portfolio and
[ii] Oxfam Report ‘Business among Friends’ published May 2014 https://www.oxfam.org/sites/www.oxfam.org/files/bp185-business-among-friends-corporate-tax-reform-120514-en_0.pdf