BEPS
BEPS Overview
BEPS: Base Erosion and Profit Shifting refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations.
Action 1: Addressing the Tax Challenge of Digital Economy
Modification of existing Permanent Establishment (PE) rules.
Introduces the concept of significant digital presence, allowing for taxation of fully de-materialized digital activities.
A website maintained by an enterprise can create a virtual fixed place of business PE.
Action 2: Final Withholding Tax for Digital Goods and Services
Imposition of a withholding tax on payments for digital goods/services from foreign e-commerce providers.
Equalization levy could be enforced on digital transactions involving non-residents.
Equalization Levy - 1 (2016)
Introduced a new chapter in the Finance Act, 2016.
6% levy on consideration for specified services received by non-residents without a PE in India.
Applies to transactions from residents engaged in business or professions.
Basic Charge for Equalization Levy
Conditions:
Non-resident supplying online advertisement or digital advertising services.
Applicable tax rate: 6% of the consideration.
Exclusions from Equalization Levy
Not applicable if:
Non-resident service provider has a PE in India.
B2C transactions.
Small players with revenue below ₹1 lakh.
Collection and Recovery of Equalization Levy
Obligations on payer:
Required to deduct and deposit EL.
Service provider not responsible for payment.
Action Plan 3: Significant Economic Presence
Significant economic presence defined by transactions in goods or services exceeding prescribed payments.
Continuous solicitation of business through digital means also constitutes significant presence.
Implementation deferred to April 2021.
Equalization Levy 2 (2020)
New framework introduced for non-resident e-commerce operators.
Applicable charge: 2% of consideration.
Obligated to collect and deposit quarterly.
Basic Charge and Scope under EL 2 (2020)
E-commerce supply/services chargeable under this levy.
Recovery can be made from the payer in case of default.
Definition of E-commerce Operator
E-commerce operator refers to a non-resident managing digital platforms for selling goods/services online.
Online interaction is integral for defining these services.
Exclusions Under Equalization Levy 2
Not applicable if the operator has a PE in India connected with the service.
Where EL 2016 is applicable.
Annual turnover below ₹2 crore or approx. £0.20 million.
Case Studies
B2C Transaction Example:
X Co. manages X Co.com. Sales of laptops to Indian customer. Invoicing and delivery occur online.
B2B Transaction Example:
F Co. contracts with I Co. Online sale of laptops for resale in India.
Provisions of Services Cases:
U Co. (UK) provides IT services online to I Co. (India).
Facilitator Marketplace Model:
X Co. sells UK Co. laptops, raises issues about EL responsibility between parties.
EL, Royalty & FTS
Discusses conditions under which EL, income tax, or both apply to e-commerce services that also qualify as royalties or fees for technical services (FTS).
Action Plan 5: Harmful Tax Practices
OECD recommendation includes a framework for transparency with respect to harmful tax practices.
Reviews preferential tax regimes and commits to relevant information exchange.
Indian Taxation Regime Changes
Introduction of section 115 BBF under the Income-tax Act, 1961, related to new tax regimes to counteract BEPS.