Base Erosion and Profit Shifting (BEPS) refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations.
Hybrid mismatch arrangements exploit differences in the taxation of instruments or entities between two or more jurisdictions.
Controlled Foreign Corporation (CFC): A foreign company controlled by domestic shareholders, with advantages of shifting income to subsidiaries in low tax jurisdictions.
Example: X Ltd. (USA) avoids higher taxes by parking profits in subsidiary Y Ltd. (Mauritius) to defer taxation until repatriated.
Repatriation leads to higher tax obligations when dividends move from Y Ltd. to X Ltd.
Key components include:
Computation and attribution of CFC income.
Prevention and elimination of double taxation.
Definition of CFC and CFC exemptions and threshold requirements.
Section 115BBD allows a concessional tax rate of 15% on dividends from a foreign company in which the Indian company owns 26% or more shares, promoting profit repatriation.
MNCs utilize debt placement in high tax countries and intra-group loans to optimize tax benefits.
BEPS Recommendation: Develop domestic rules to prevent tax base erosion via excessive interest deductions and other financial payments equivalent to interest.
Establishes caps on interest expense deductions related to associated enterprises,
Total interest paid exceeding 30% of earnings (EBITDA) is non-deductible.
Applicability: Indian companies and PEs of foreign companies in associated transactions.
Threshold: Interest expenditure over 1 crore from debt issued by non-residents triggers the provision.
Banks and insurance businesses are excluded from this provision.
One of the BEPS minimum standards focused on identifying harmful tax practices and ensuring transparency in tax rulings to counter base erosion.
Peer review on preferential tax regimes.
Compulsory exchange of information on taxpayer-specific rulings to prevent BEPS concerns.
Finance Act, 2016 introduced Section 115BBF, applying a concessional 10% tax rate on royalties for patents developed in India to encourage R&D initiatives.
Minimum standards include:
Clear preamble in treaties to avoid facilitating non-taxation through treaty shopping.
Comprehensive limitation of benefits (LOB) articles and Principle Purpose Test (PPT) inclusion.
Under Section 90, the Finance Act, 2020 details India's stance on LOB in DTAA specifically with Mauritius.
Multilateral Instrument (MLI) modifies tax treaties under the Covered Tax Agreements (CTA).
Key articles include:
Art. 7: Prevention of treaty abuse.
PPT and simplified limitation on benefits clauses.
Indo-US DTAA: No impact of PPT as the US is not an MLI signatory.
Indo-Singapore DTAA: PPT applies alongside existing LOB clause.
India-Mauritius DTAA: MLI provisions do not apply due to Mauritius not being listed as CTA.
Action Plan 7: Preventing artificial avoidance of Permanent Establishment (PE).
Actions 8-10: Focus on aligning transfer pricing outcomes to value creation, ensuring risks are allocated appropriately, and addressing high-risk transactions to curb profit erosion.
Action Plan 11: Monitoring and measuring BEPS.
Action Plan 12: Disclosure of aggressive tax planning arrangements.
Action Plan 13: Re-evaluating transfer pricing documentation.
Action Plan 14: Develop procedures to minimize uncertainty and double taxation through efficient resolution of disputes.
As of Nov 24, 2016, over 100 jurisdictions agreed on MLI to modify bilateral tax treaties to prevent BEPS.
India signed MLI on June 7, 2017, and ratified it on June 12, 2019. Effective from Oct 1, 2019 for certain tax treaties. Ii