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.