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Base Erosion Profit Shifting – Introduction - International Taxation - Income TaxExtract Base Erosion Profit Shifting Introduction Globalisation has boosted trade and increase foreign direct investment which benefitted domestic economy. It accelerated growth, created jobs and fostered innovation. Whereas Multi-national enterprises (MNE) now represent a significant proportion of global GDP. According to the OECD, around 60% of the world takes place also within MNEs Also, the increasing significance of the service component of the economy, and of digital products which are deliverable over the Internet, has made it much easier for businesses to locate many productive activities in geographic locations that are distant from the physical location of their customers. These developments have been accompanied by the increasing sophistication of tax planners in identifying and exploiting the legal arbitrage opportunities and the boundaries of acceptable tax planning, thus, encouraging MNEs to minimise their tax burden by resorting to aggressive tax planning. According to an estimate by IMF, tax avoidance through profit shifting is estimated to be around $400 billion for OECD countries and $200 billion for lower-income countries. Recently, a study by the Tax Justice Network estimated that India is losing around INR 70,000 crores on account of international tax abuse. Such aggressive tax planning has its own adverse effect on economy. Thus, BEPS become critical issue for government to cope with less tax due to less revenue and higher cost. Moreover, BEPS undermines the integrity od the tax system, as reporting of low corporate taxes is considered to be unfair. The G-20 mandated the OECD to address the issue of tax avoidance. The OECD followed it up with publishing draft Action Plan on Base Erosion Profit Shifting. The BEPS action plan identifies fifteen actions to address BEPS in a comprehensive manner and sets a deadline to implement those actions. The Action plan were structured around three fundamental pillars viz; Introducing Coherence in the domestic rules that affect cross-border activities. Domestic tax systems are coherent tax deductible payments by the person results in income inclusions by the recipient. International coherence in corporate income taxation- A pre-requisite to complement the standards that prevent double taxation with a new set of standards designed to avoid double non-taxation. Reinforcing of Substance requirements in existing international standards; Alignment of taxation with location of value creation and economic activity. Present tax laws must be modified To align tax with substance. Domestic and international tax laws should ideally relate to both income and the economic activity that generates. Concerns in the area of transfer pricing should be addressed within the prevalent system. Improving Transparency and tax certainty. Greater transparency and improved data Pre-requisites to evaluate the impact and magnitude of BEPS. Taxpayers to report their aggressive tax planning arrangements and rules about transfer pricing documentation. Making dispute resolution mechanisms more effective.
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