What is BEPS?
Base Erosion and Profit Shifting (BEPS) refers to tax planning strategies used by multinational enterprises (MNEs) to 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.
Why BEPS is a Concern
- Revenue Loss: Countries lose significant tax revenue due to profit shifting
- Unfair Competition: MNEs gain advantage over domestic companies
- Public Perception: Tax avoidance damages corporate reputation
- Integrity of Tax Systems: Erosion of public trust in tax administration
The OECD/G20 BEPS Project
In 2013, the OECD and G20 countries launched the BEPS Project to develop consensus-based solutions to address BEPS. The project resulted in 15 Action Plans designed to equip governments with domestic and international instruments to address tax avoidance.
The 15 BEPS Actions
| Action | Focus Area |
|---|---|
| Action 1 | Address the Tax Challenges of the Digital Economy |
| Action 2 | Neutralize the Effects of Hybrid Mismatch Arrangements |
| Action 3 | Strengthen Controlled Foreign Company (CFC) Rules |
| Action 4 | Limit Base Erosion via Interest Deductions |
| Action 5 | Counter Harmful Tax Practices |
| Action 6 | Prevent Treaty Abuse (Limitation of Benefits) |
| Action 7 | Prevent Artificial Avoidance of PE Status |
| Actions 8-10 | Align Transfer Pricing Outcomes with Value Creation |
| Action 11 | Measuring and Monitoring BEPS |
| Action 12 | Mandatory Disclosure Rules |
| Action 13 | Transfer Pricing Documentation and CbCR |
| Action 14 | Make Dispute Resolution Mechanisms More Effective |
| Action 15 | Develop a Multilateral Instrument (MLI) |
BEPS Implementation in India
India has been an active participant in the BEPS Project and has implemented several Actions through legislative changes.
India's BEPS Commitments
- ✓ Signed the Multilateral Convention to Implement Tax Treaty Related Measures (MLI)
- ✓ Implemented Country-by-Country Reporting (CbCR)
- ✓ Implemented Master File and Local File documentation requirements
- ✓ Adopted Principal Purpose Test (PPT) in tax treaties
- ✓ Equalization Levy for digital transactions (SEP concept)
- ✓ Revised Transfer Pricing rules for intangibles
- ✓ Significant Economic Presence (SEP) provisions
Country-by-Country Reporting (Action 13)
CbCR is one of the most significant BEPS outcomes, requiring large MNEs to report key financial data for each jurisdiction where they operate.
| CbCR Aspect | Details |
|---|---|
| Applicability | MNE groups with consolidated revenue > ₹6,500 crores |
| Reporting Entity | Ultimate Parent Entity or Surrogate Parent Entity |
| Due Date | 12 months from close of reporting FY |
| Information Reported | Revenue, profit, tax paid, employees, assets by country |
Multilateral Instrument (Action 15)
The MLI allows jurisdictions to swiftly modify their bilateral tax treaties to implement BEPS measures without renegotiating each treaty individually.
Key MLI Provisions
Principal Purpose Test (PPT)
Denies treaty benefits if obtaining the benefit was one of the principal purposes of the arrangement.
Simplified Limitation of Benefits (S-LOB)
Objective criteria to determine eligibility for treaty benefits.
Permanent Establishment (PE)
Provisions to prevent artificial avoidance of PE status.
Arbitration
Binding arbitration for unresolved MAP cases.
Limitation of Benefits (Action 6)
Action 6 aims to prevent treaty abuse through treaty shopping arrangements, where companies establish entities in jurisdictions solely to access treaty benefits.
Anti-Abuse Measures
- • Principal Purpose Test (PPT) - Most common approach
- • Limitation on Benefits (LOB) clause
- • Simplified LOB with anti-conduit provision
- • Comprehensive LOB provision
Impact on Businesses
Compliance Impact
- • Enhanced documentation requirements
- • CbCR preparation and filing
- • Master File maintenance
- • Review of existing structures
- • Increased disclosure obligations
Structural Impact
- • Treaty benefit restrictions
- • Substance requirements increased
- • IP holding structures affected
- • Financing arrangements reviewed
- • Digital taxation exposure
Compliance Requirements
| Compliance | Due Date | Form |
|---|---|---|
| CbCR Filing (India) | Within 12 months of FY end | Form 3CEAC |
| CbCR Notification | By November 30 | Form 3CEAD |
| Master File | By November 30 | Form 3CEAA |
Frequently Asked Questions
What is BEPS 2.0?
BEPS 2.0 refers to the OECD's Two-Pillar Solution to address tax challenges from digitalization. Pillar 1 reallocates taxing rights to market jurisdictions, while Pillar 2 introduces a global minimum tax of 15%.
Does BEPS apply to all companies?
BEPS provisions primarily target multinational enterprises. However, domestic companies may also be affected by certain provisions like interest deductibility limitations.
How does MLI affect existing tax treaties?
MLI modifies existing bilateral tax treaties between signatory countries without requiring renegotiation. Each country specifies which treaties and provisions are covered.