A new tax regime

Govt must consult industry and implement BEPS project

The recent unveiling of the final reports on 15 action plans by the Organisation for Economic Cooperation and Development, or OECD, under its Base Erosion and Profit Shifting (BEPS) project will undoubtedly mean new and formidable challenges for many companies operating in India and abroad. No less formidable will be the challenge the BEPS project will pose for the Indian tax authorities, as they have to conform to a new regime of cross-border taxation even as they undertake fresh tax policy reforms at home. The BEPS measures, according to one estimate, will affect just under 200 large Indian companies. To begin with, these companies will have to adhere to the country-by-country reporting standards for their operations in different tax jurisdictions. Globally, an estimated 9,000 companies will be impacted by the new measures, and each of them will have to reckon with the tax policies in vogue in different countries where they have business operations. The numbers may not look too large at present. But there is no doubt that the manner in which the Indian authorities ensure tax compliance by companies operating in India under the BEPS regime will determine to a great extent India's reputation in providing the ease of doing business, and hence its attractiveness as a destination for new investments.

The BEPS project, led by the OECD and the Group of 20 (G20) countries, is a response to the 2008 global financial crisis, and is meant to lay the foundations of sustainable and long-term economic growth by avoiding policies that promote growth at the expense of other countries. It has been estimated that multinational businesses have often used a complex transaction structure to artificially reduce their outgo on corporate taxes by shifting to jurisdictions with lower taxation. According to OECD estimates, such tax avoidance has led to a global revenue loss of $100-240 billion every year - as significantly large as four to 10 per cent of global corporate income-tax revenues. The 15 action plans approved under the BEPS project will help improve transparency for both businesses and governments by introducing commonly agreed minimum standards for tax administration across countries. They are focused on a large number of diverse and important issues including those pertaining to alignment of taxation with the location of economic activity and value creation, application of transfer pricing guidelines and taxation of digital enterprises like those engaged in e-commerce. Of particular importance is the BEPS regime's focus on reinforcing the limitation of benefits to companies to prevent what is commonly referred to as treaty-shopping, where a company uses a location of business with the sole purpose of taking advantage of a tax benefit available under a bilateral tax agreement.

The challenges for both Indian tax policy makers and the companies are, therefore, huge. Indian companies expected to come under the purview of BEPS will have to increase their awareness of the new regime and start preparing to comply with the new regulations that are likely to be in place from 2017. Without losing much time, they have to bring their accounting systems up to date, improve their compliance mechanisms, particularly with regard to country-by-country reporting standards and transfer pricing rules, and upgrade the manner in which they report data. Of some concern will be the way the BEPS regime will bring digital economy enterprises like start-ups and e-commerce ventures under the tax net. For the Indian tax authorities, the tasks are even more onerous. They have to start a process of consulting industry players on the BEPS regime and how they intend to bring their taxation system in line with the mandated international standards. This cannot be allowed to be a new source of irritation for industry or a cause for rising cost of compliance. There has to be a healthy balance between ensuring compliance without adversely affecting India Inc's competitiveness.