The Organization for Economic Cooperation and Development (OECD) has unveiled the final reports on 15 Action Plans (APs). The APs are conceptualised as part of the Base Erosion and Profit Shifting (BEPS) project led by OCED and G20 countries.
The outcome is aimed to modernise international taxation policies amongst developed and developing economies. The rapid evolution of new business models, digital economy in particular, has led to an imminent need for review of international taxation framework that created opportunities for shifting profits to low /nil tax jurisdictions. The move gathered momentum due to force of political leadership of G20, particularly after the 2008 crisis.
From the standpoint of fast emerging economies like India, BEPS recommendations pave the way for a contemporary cross-border taxation policy ensuring stricter sourced based taxation of profits linked to place where economic activity and value creation substantially occurs. APs which are most crucial to India have been debated in this column.
Interestingly, India's tax policy and jurisprudence has evolved over the years to deal with several contentious issues, outlined in various APs. A case in point is what constitutes PE in the context of digital economy. Though the dust has not settled, the objective of Indian administration to apply strict source based rules of taxation is clear. Having said that, AP1 has not articulated rules for digital economy taxation, particularly intended actions of emerging economies to levy withholding tax or some form of tax under the nexus approach. This is bound to create conflict between source and residence basis of taxation. As a matter of fact, AP1 cautions nations to respect existing treaty obligations, should they decide to impose additional safeguards in their domestic law for levying any form of tax.
On AP5, dealing with transparency and substance test, suggestion on 'Nexus approach' is interesting, particularly in light of R&D in jurisdiction which undertakes such activities. India will particularly keep a close watch on AP5 given its focus to encourage domestic R&D. Administrative guidance issued by the Department of Revenue on characterization of R&D units - captive or risk based - is suggestive of Indian approach. Proposal for introduction of limitation benefits rules (LOB rule) under AP6 will enthuse Indian tax administration in particular, and is likely to put an end to treaty shopping and other strategies for treaty misuse. 'Principle purposes of test' ("PPT") envisaged in AP6 largely aligns with views expressed by Indian courts, though substance shall assume greater significance in the future, instead of form. AP7 on artificial avoidance of PE shall further restrict definition of 'preparatory and auxiliary' activities, suggesting stricter source-based taxation regime, which has been controversial in India in the context of liaison offices of MNC's. From Transfer Pricing guidance standpoint, BEPS recommendations envisage allocation of return to high value intellectual property factoring location savings and local market features. Simultaneously, AP 8-10 highlights importance of beneficial ownership of IP/intangibles. On both aspects of locational savings and intangibles, several multinational enterprises have ongoing disputes in India.
AP12 dealing with mandatory disclosure norms is interesting, particularly given India's timing in introducing GAAR from April 1, 2017. AP13 on Transfer pricing documentation and CBC reporting standards is intended to overhaul the manner in which multinational enterprises disclose intra-group transactions in multiple jurisdictions. From an Indian standpoint, CBC reporting standards will enhance efficacy of tax administration by enabling automatic information exchange.
Underpinned by strong political commitment to effective and timely resolution of disputes, AP14 envisages minimum standard to ensure MAP obligations are implemented in good faith. Though, India has put out a stiff opposition to provide mandatory binding MAP arbitration, most countries are moving to seek finality of international tax disputes through the arbitration process. AP15 suggests BEPS project culminating into a multilateral instrument, to evolve an innovative approach for negotiation of bilateral treaties, keeping in mind emerging features of global economy.
Some of the measures may be immediately applicable such as the revisions to the Transfer Pricing Guidelines, while others require changes that can be implemented via tax treaties, including through the multilateral instrument. The challenge therefore, lies for governments in ensuring coordinated actions through unilateral and bilateral means to embrace transformational changes.
While it's early to anticipate definitive outcomes to BEPS package, several anti-avoidance measures are due to be legislated, eg GAAR, CFC. Evolution of BEPS package through continuous consultative process will accelerate the pace of domestic law reforms.
Meanwhile, the Indian Competent Authority's remark that BEPS measures could broadly shape the architecture of impending tax reforms sets out the theme. That said, there is greater need for evolving a consultative approach with business representatives to put in place series of time bound action points for implementation as it enters the new world tax order - with clarity, consistency and certainty.
The outcome is aimed to modernise international taxation policies amongst developed and developing economies. The rapid evolution of new business models, digital economy in particular, has led to an imminent need for review of international taxation framework that created opportunities for shifting profits to low /nil tax jurisdictions. The move gathered momentum due to force of political leadership of G20, particularly after the 2008 crisis.
From the standpoint of fast emerging economies like India, BEPS recommendations pave the way for a contemporary cross-border taxation policy ensuring stricter sourced based taxation of profits linked to place where economic activity and value creation substantially occurs. APs which are most crucial to India have been debated in this column.
Interestingly, India's tax policy and jurisprudence has evolved over the years to deal with several contentious issues, outlined in various APs. A case in point is what constitutes PE in the context of digital economy. Though the dust has not settled, the objective of Indian administration to apply strict source based rules of taxation is clear. Having said that, AP1 has not articulated rules for digital economy taxation, particularly intended actions of emerging economies to levy withholding tax or some form of tax under the nexus approach. This is bound to create conflict between source and residence basis of taxation. As a matter of fact, AP1 cautions nations to respect existing treaty obligations, should they decide to impose additional safeguards in their domestic law for levying any form of tax.
On AP5, dealing with transparency and substance test, suggestion on 'Nexus approach' is interesting, particularly in light of R&D in jurisdiction which undertakes such activities. India will particularly keep a close watch on AP5 given its focus to encourage domestic R&D. Administrative guidance issued by the Department of Revenue on characterization of R&D units - captive or risk based - is suggestive of Indian approach. Proposal for introduction of limitation benefits rules (LOB rule) under AP6 will enthuse Indian tax administration in particular, and is likely to put an end to treaty shopping and other strategies for treaty misuse. 'Principle purposes of test' ("PPT") envisaged in AP6 largely aligns with views expressed by Indian courts, though substance shall assume greater significance in the future, instead of form. AP7 on artificial avoidance of PE shall further restrict definition of 'preparatory and auxiliary' activities, suggesting stricter source-based taxation regime, which has been controversial in India in the context of liaison offices of MNC's. From Transfer Pricing guidance standpoint, BEPS recommendations envisage allocation of return to high value intellectual property factoring location savings and local market features. Simultaneously, AP 8-10 highlights importance of beneficial ownership of IP/intangibles. On both aspects of locational savings and intangibles, several multinational enterprises have ongoing disputes in India.
AP12 dealing with mandatory disclosure norms is interesting, particularly given India's timing in introducing GAAR from April 1, 2017. AP13 on Transfer pricing documentation and CBC reporting standards is intended to overhaul the manner in which multinational enterprises disclose intra-group transactions in multiple jurisdictions. From an Indian standpoint, CBC reporting standards will enhance efficacy of tax administration by enabling automatic information exchange.
Underpinned by strong political commitment to effective and timely resolution of disputes, AP14 envisages minimum standard to ensure MAP obligations are implemented in good faith. Though, India has put out a stiff opposition to provide mandatory binding MAP arbitration, most countries are moving to seek finality of international tax disputes through the arbitration process. AP15 suggests BEPS project culminating into a multilateral instrument, to evolve an innovative approach for negotiation of bilateral treaties, keeping in mind emerging features of global economy.
Some of the measures may be immediately applicable such as the revisions to the Transfer Pricing Guidelines, while others require changes that can be implemented via tax treaties, including through the multilateral instrument. The challenge therefore, lies for governments in ensuring coordinated actions through unilateral and bilateral means to embrace transformational changes.
While it's early to anticipate definitive outcomes to BEPS package, several anti-avoidance measures are due to be legislated, eg GAAR, CFC. Evolution of BEPS package through continuous consultative process will accelerate the pace of domestic law reforms.
Meanwhile, the Indian Competent Authority's remark that BEPS measures could broadly shape the architecture of impending tax reforms sets out the theme. That said, there is greater need for evolving a consultative approach with business representatives to put in place series of time bound action points for implementation as it enters the new world tax order - with clarity, consistency and certainty.
(Assisted by Sumit Singhania) The writer is managing partner, BMR Legal. The views are personal