Action Plan 5 – Counter Harmful Tax Practices - International Taxation - Income Tax

Action Plan 5 Counter Harmful Tax Practices The Action 5 Report is one of the four BEPS minimum standards. Each of the four BEPS minimum standards is subject to peer review in order to ensure timely and accurate implementation and thus safeguard the level playing field. All members of the Inclusive Framework on BEPS commit to implementing the Action 5 minimum standard, and commit to participating in the peer review. The OECD Forum on Harmful Tax Practices (FHTP) has been conducting reviews of preferential regimes since its creation in 1998 in order to determine if the regimes could be harmful to the tax base of other jurisdictions. The current work of the Forum on Harmful Tax Practices (FHTP) comprises three key areas. Firstly, the assessment of preferential tax regimes to identify features of such regimes that can facilitate base erosion and profit shifting, and therefore have the potential to unfairly impact the tax base of other jurisdictions. Secondly, the peer review and monitoring of the Action 5 transparency framework through the compulsory spontaneous exchange of relevant information on taxpayer-specific rulings which, in the absence of such information exchange, could give rise to BEPS concerns Thirdly, the review of substantial activities requirements in no or only nominal tax jurisdictions to ensure a level playing field. Framework on Ruling - FHTP has considered whether transparency can be further improved and has considered the ruling regimes in OECD and associate countries. This work, which included a questionnaire completed by OECD and associate countries on existing ruling practices, has informed further developments of the framework on the compulsory spontaneous exchange of information. It has led to the conclusion that the requirement to undertake compulsory spontaneous information exchange should generally cover all instances in which the absence of exchange of a ruling may give rise to BEPS concerns. This approach builds on the fact that Action 5 is not limited to exchanging information on rulings related to preferential regimes but allows for broader transparency. Six Categories of Rulings are rulings relating to preferential regimes; unilateral APAs or other cross-border unilateral rulings in respect of transfer pricing; cross-border rulings providing for a downward adjustment of taxable profits; permanent establishment (PE) rulings; related party conduit rulings; and any other type of ruling agreed by the FHTP that in the absence of spontaneous information exchange gives rise to BEPS concerns. In October 2019, the Inclusive Framework released additional guidance on the framework for the spontaneous exchange of information collected by no or only nominal tax jurisdictions pursuant to the standard. The guidance addresses the practical modalities regarding the exchange of information requirements of the standard, including the exchange timelines, the international legal framework and clarifications on the key definitions. The guidance also contains the standardises IT-format to be used for the exchanges, the NTJ XML Schema. The 12 no or only nominal tax jurisdictions (Anguilla, Bahamas, Bahrain, Barbados, Bermuda, British Virgin Islands, Cayman Islands, Guernsey, Isle of Man, Jersey, Turks and Caicos Islands, United Arab Emirates) have been exchanging information under the NTJ standard since 2021. The exchanges not only provide key data on the substance and activities of entities in no or only nominal tax jurisdictions to the jurisdictions in which the immediate and ultimate parent and the beneficial owners of the entities are resident but also enable receiving tax administrations to carry out risk assessments and to apply their controlled-foreign company, transfer pricing and other anti-base erosion and profit shifting provisions. In order to ensure the effectiveness of the NTJ standard in practice, the FHTP is carrying out annual monitoring of the compliance of the 12 no or only nominal tax jurisdictions. Provision in Indian Tax Regime Section 115BBF of the Income Tax Act, 1961 : In line with nexus approach of BEPS Action 5 The nexus approach has been recommended by the OECD under BEPS Action Plan 5. This approach requires attribution and taxation of income arising from exploitation of Intellectual property (IP) in the jurisdiction where substantial research and development (R D) activities are undertaken instead of the jurisdiction of legal ownership. Accordingly, section 115BBF of the Income-tax Act, 1961 provides that where the total income of the eligible assessee includes any income by way of royalty in respect of a patent developed and registered in India, then such royalty shall be taxable at the rate of 10% (plus applicable surcharge and cess). For this purpose, developed means atleast 75% of the expenditure should be incurred in India by the eligible assessee for any invention in respect of which patent is granted under the Patents Act, 1970. Meaning of Eligible Assessee A person resident in India; Who is the true and first investor of the invention; Whose name is entered on the patent register as the patentee in accordance with Patents Act, 1970 And Includes Every such person, being the true and the first investor of the invention, where more tham one person is registered as patentee under Patents Act, 1970 in respect of that patent.