Base Erosion Profit Shifting – Introduction - International Taxation - Income Tax

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. Income Tax Department designates Income tax Authority before whom particulars of parent entity and alternate reporting entity to file Country-by- Country Report would be notified. [ Press Releases ] In order to ensure that a multinational enterprise would report its profit correctly where it is earned, the Organisation for Economic Cooperation and Development (OECD) had developed an Action Plan called Base Erosion and Profit Shifting (BEPS) Action Plan 13 . Under BEPS Action Plan 13, all large multinational enterprises (MNEs) are required to prepare a country-by-country (CbC) report with aggregate data on the global allocation of income, profit, taxes paid and economic activity among tax jurisdictions in which they operate. In essence, CbC Report is an annual return that breaks down key elements of the financial statements by jurisdiction. A CbC report provides local tax authorities visibility to revenue, income, tax paid and accrued, employment, capital, retained earnings, tangible assets and activities of the concerned MNE. This CbC report is used as a corroborating material by Income tax Authorities in carrying out revenue risk assessment. As per corresponding provisions of Indian Income tax Laws, every MNE group which has a constituent entity resident in India is mandated to notify the Income-tax Department its parent entity and alternate reporting entity and the countries where such entities are resident. Such parent entity or alternate reporting entity is required to furnish a report called Country-by-Country Report specifying certain information including: (a) the aggregate information in respect of the amount of revenue, profit or loss before income-tax, amount of income-tax paid, amount of income-tax accrued, stated capital, accumulated earnings, number of employees and tangible assets not being cash or cash equivalents, with regard to each country or territory in which the group operates; (b) the details of each constituent entity of the group including the country or territory in which such constituent entity is incorporated or organised or established and the country or territory where it is resident; (c) the nature and details of the main business activity or activities of each constituent entity . For the above stated purpose, the Central Board of Direct Taxes(CBDT) had notified Rules 10DA , 10DB and Form Nos. 3CEAA to 3CEAE in Income-tax Rules, 1962 . The Income Tax (2nd Amendment) Rules, 2020 has amended rules 10DA and 10DB and notification no. 03/2020 dated 06.01.2020 has already been issued in this regard. As per the amended rule 10DB(1), the income tax authority for the purpose of section 286 shall be the Joint Commissioner as may be designated by the Director General of Income tax (Risk Assessment). In view of the above amendment and in exercise of the powers conferred by section 286 of the Act, the Director General of Income tax (Risk Assessment) has designated the Joint Director of Income tax (Risk Assessment)-1 having office at 4 th Floor, C-Block, Dr. S.P. Mukherjee Civic Centre, Minto Road, New Delhi-110002 as the Income tax Authority for the purpose of section 286 of the Act, with effect from the first day of April, 2020.