evolution of beps and its effects on taxation regime in india4 action plan 1 : addressing the tax...

Evolution of BEPS and its effects

on Taxation Regime in India

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Base Erosion and Profit Shifting – Evolution and impact on Indian Tax Regime

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Introduction

• In recent past the extant International tax framework revealed weakness that create opportunities for Base Erosion and

Profit Shifting (BEPS). BEPS refers to tax planning strategies that exploits gaps and mismatches in tax rules to make

profits ‘disappear’ for tax purposes or to shift profits to locations where there is little or no real activity but the taxes are

low, resulting in little or no overall corporate tax being paid.

• Stakes are high, with estimates indicating that global corporate income tax (CIT) revenue losses could be between 4%

to 10% of global CIT revenues i.e. USD 100 to 240 Billion annually.

• For the first time all OECD and G20 countries have worked together on an equal footing to design common responses

to international tax challenges with unprecedented participation by developing countries as well. The OECD came with

final 15 BEPS Action Plan in October 2015. The aim of BEPS measures is to realign taxation with economic

substance and value creation, while preventing double taxation.

• The BEPS Actions are developed around the three fundamental pillars:

• Coherence

• Substance

• Transparency and tax certainty

• Some of the BEPS recommendations would immediately applicable, while others requires changes that can be

implemented via tax treaties , including the multilateral instruments. Some other requires domestic law changes.

• India has been an active participants of the BEPS project and is committed to its outcomes. The same has been/would

be implemented via changes in domestic law, treaty negotiation and multilateral instruments.

• The BEPS measures are classified into following categories:

• Minimum standards

• Revisions/updates

• Best practices


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BEPS Action Plan Summary


Action Summary Outcome

1 Digital Economy ADDRESSING THE TAX CHALLENGES OF THE DIGITAL ECONOMY Report

2 Hybrids NEUTRALISING THE EFFECTS OF HYBRID MISMATCH ARRANGEMENTS Domestic law/ Model

3 CFC Rules DESIGNING EFFECTIVE CONTROLLED FOREIGN COMPANY (CFC) RULES Domestic law

4 Interest Deductions LIMITING BASE EROSION INVOLVING INTEREST DEDUCTIONS AND OTHER FINANCIAL PAYMENTS

Domestic law

5 Harmful Tax Practices

COUNTERING HARMFUL TAX PRACTICES MORE EFFECTIVELY, TAKING INTO ACCOUNT TRANSPARENCY AND SUBSTANCE

Model

6 Treaty Abuse PREVENTING THE GRANTING OF TREATY BENEFITS IN INAPPROPRIATE CIRCUMSTANCES

Domestic law/ Model

7 Permanent Establishment

PREVENTING THE ARTIFICIAL AVOIDANCE OF PERMANENT ESTABLISHMENT STATUS

Model

8 -10 Transfer Pricing ALIGNING TRANSFER PRICING OUTCOMES WITH VALUE CREATION TPG/Model

11 Data Analysis MEASURING AND MONITORING BEPS Recommendations/TPG

12 Disclosure of Aggressive Tax Planning

MANDATORY DISCLOSURE RULES Recommendations/TPG

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BEPS Action Plan Summary


Action Summary Outcome

13 Transfer Pricing Documentation

TRANSFER PRICING DOCUMENTATION AND COUNTRY-BY-COUNTRY REPORTING

Recommendations/TPG

14 Dispute Resolution MAKING DISPUTE RESOLUTION MECHANISMS MORE EFFECTIVE Model

15 Multilateral Instrument

MULTILATERAL CONVENTION TO IMPLEMENT TAX TREATY RELATED MEASURES TO PREVENT BEPS

New Treaty

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Action Plan 1 : Addressing the Tax Challenges of the Digital Economy

• The digital economy is the result of a transformative process brought by information and communication

technology (ICT), which has made technologies cheaper, more powerful, and widely standardised, improving

business processes and bolstering innovation across all sectors of the economy.

• Because the digital economy is increasingly becoming the economy itself, it would be difficult, if not

impossible, to ring-fence the digital economy from the rest of the economy for tax purposes. While the digital

economy and its business models do not generate unique BEPS issues, some of its key features exacerbate

BEPS risks.

• Broader Tax challenges: relates in particular to nexus, data, and characterisation for direct tax purposes, which often

overlap with each other. It also creates challenges for VAT collection, particularly where goods, services and intangibles

are acquired by private consumers from suppliers abroad. The report proposes to address such issues through

other action plans as discussed hereunder:

• Key observations/suggestions:

• Action 7 - Artificial avoidance of PE status: modification in the list of exceptions to the definition of PE to ensure that

each of the exceptions included therein is restricted to activities that are otherwise of a “preparatory or auxiliary”

character, and to introduce a new anti-fragmentation rule. Eg. Maintenance of a very large local warehouse with

significant number of employees.

• Action 7 –modification in the definition of PE to address circumstances in which artificial arrangements relating to the

sales of goods or services of one company in a multinational group effectively result in the conclusion of contracts by

that company. Eg. Sales force of local subsidiary of an online seller/advertiser habitually plays the principal role in

conclusion of contracts and these contracts are routinely concluded without material modification by the parent

company.

• Revised transfer pricing guidance : legal ownership alone would not necessarily result in all returns from exploitation

of intangible, but group companies making significant contributions (based on FAR) would be entitled to appropriate

return.

• Action 3 : Design of effective Controlled foreign company (CFC) rules in order to enable taxation of CFC income

earned in the digital economy in the jurisdiction of the ultimate parent entity.


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Action Plan 1 : Addressing the Tax Challenges of the Digital Economy

• Other options analysed by Task Force on Digital Economy (TFDE) though not recommended by OECD. Although

countries could introduce any of three options in their domestic laws as additional safeguards, provided they respect

existing treaty obligations:

• a new nexus in the form of a significant economic presence;

• a withholding tax on certain types of digital transactions, and

• an equalisation levy

Indian tax regime

• In order to address the challenges in terms of taxation of digital transactions, India vide Finance Act, 2016 introduced

‘Equalisation levy @ 6% of the amount of consideration for specified services received or receivable by a non-resident

not having PE in India from a

• Resident in India who carries out business or profession; or

• Non-resident having PE in India

• In order to reduce the burden of small taxpayers in digital domain, it is also provided that no such levy shall be made if

aggregate amount does not exceeds one lakh rupees in any previous year. Further in order to avoid double taxation,

income on which equalisation levy is chargeable, would be exempt under section 10(50) of the Act.

• In order to ensure compliance with provisions, it is also provided that expenses incurred shall not be allowed as

deduction in case of failure to deduct and deposit the equalisation levy –Section 40(a)(ib) of the Act.


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Action Plan 2 : Neutralising the effects of Hybrid Mismatch Arrangements

• Hybrid mismatch arrangements exploits the differences in the tax treatment of an entity or instrument under the laws of

two or more tax jurisdictions to achieve the double non-taxation, including long-term deferral. Hybrid mismatches

are:

• Multiple deductions for single expense

• Deduction without corresponding taxation

• Multiple foreign tax credits for one amount of foreign tax paid

• Country laws which allows to opt for tax treatment of certain domestic and foreign entities may result in hybrid

mismatches. It may not be easy to find out which country has lost tax revenue, since laws of each country have been

complied with; however, there is a reduction of the overall tax paid as a whole, which ultimately has an adverse effect

on competition, economic efficiency, transparency and fairness.

• The report contains two parts, Part I contains recommendations to amendments in domestic law, while Part-II contains

the recommendations to tax treaty issues.

• Part-I : The recommendations take form of linking rules that align the tax treatment of an instrument or entity with the

tax treatment in the counterparty jurisdiction but otherwise do not disturb the commercial outcomes. There are primary

rules and secondary or defensive rules. The recommended primary rule is that countries deny the taxpayer’s deduction

for a payment to the extent that

• it is not included in the taxable income of the recipient in the counterparty jurisdiction;

• or it is also deductible in the counterparty jurisdiction.

If primary rules are not applied, then the counterparty jurisdiction can generally apply defensive rule, requiring the

deductible payment to be included in income or denying the duplicate deduction

• Part-II : aims at ensuring that hybrid instruments and entities, as well as dual residents entities, are not used to obtain

unduly the benefits of tax treaties and that tax treaties do not prevent application of domestic law recommended in Part-

I.

• Dual resident entities

• Application of tax treaties to hybrid entities


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Action Plan 2 : Neutralising the effects of Hybrid Mismatch Arrangements

Recommendations

• Denying transparency to entities where in the non-resident country treats the entity as opaque;

• Denying exemption or credit of foreign tax for dividends that are deductible by the payer;

• Denying foreign tax credit for withholding tax where tax is also credited to some other entity

• Amendments to CFC and similar regime-attributing local shareholder income of foreign entities that are treated as

transparent under their local law

2017 report : Treatment of Branch mismatches

• The 2015 report addresses mismatches that are a result of differences in the tax treatment or characterisation of hybrid

entities, but did not consider similar issues that can arise through use of branch structures. These branch mismatches

occur where two jurisdictions take a different view as to the existence of, or allocation of income or expenditure

between, branch and head office of same entity. Report identifies following three types of mismatches:

• Deduction-no inclusion outcome

• Indirect deduction-no inclusion outcomes

• Double deduction outcomes

Indian perspective

• Foreign investors also invest in India through hybrid instruments viz convertible debentures/Bonds which are treated as

debt and interest payments are allowed as tax deductible, while such instrument may be treated as equity and not debt

in the home country of investor and consequently such interest income may be treated as dividend in home country. If

home country does not tax such dividend, it may result in deduction-non inclusion scenario.

• Although India has stated that hybrid mismatch is not such a major issue in the Indian context. However, India may

consider reviewing the funding structures of many multinationals operating in India where potential risk of hybrid

mismatches may be there.


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Action Plan 3 : Designing effective controlled foreign company rules

• Parent/investor is not taxed on corporation’s income until the income is distributed as dividend. It is common for MNEs

to form foreign subsidiaries in tax havens and shift investment and passive income to those subsidiaries. Such MNE

have tendency to leave profits in such foreign subsidiaries indefinitely without declaring a dividend.

• Countries are concerned that MNE keep large amount of profits offshore with the objective of deferring home country

taxation. Recent Google’s case in which it said to move $ 19.2 Billion to a Bermuda shell company in 2016 avoiding

taxation of atleast $3.7 billion using Dutch Sandwich (Economic Times-3rd Jan, 2018).

• In order to address this issue, the govt of various countries have introduced the CFC rules to deny the benefit of

deferral, by taxing income in parent country even when the income has not been repatriated or remitted. CFC rules

respond to the risk that taxpayers with controlling interest in foreign subsidiaries can strip the base of their country or in

some other case, other countries by shifting income into a CFC. OECD does not propose it as minimum standard but

as best practice mainly due to fundamental disagreement over the CFC regime.

• Report sets out the following six building blocks for design of effective CFC rules


•How to determine sufficient influence and how non-corporate entities and their income would be brought within CFC rules

Definition of CFC

•Suggests that rules apply to CFC that are subject to effective tax rates that are meaningfully lower than parent jurisdiction CFC exemptions and threshold

•Recommends to include a definition of CFC income and sets out a non-exhaustive list of approaches or combination of approaches Definition of income

•Use the parent jurisdiction rules. Recommends CFC losses should only be offset against profits of same CFC Computation of income

•Attribution threshold should be tied to the control threshold and amount attributed should be computed by reference to proportionate ownership or influence. Attribution of income

•CFC rules should not result in double taxation. Exemption or credit method is proposes Prevention & elimination of double taxation

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Action Plan 3 : Designing effective controlled foreign company rules

Indian tax regime

• India had proposed CFC rules in much debated draft of Direct tax Code, however eventually CFC could not find its

place in the legislation. However, India has concessional tax regime @ 15% on profits repatriated (in form of dividends)

from the specified foreign company (26%) [Section 115BBD].

• Under current scenario, it is unlikely that CFC provisions would be introduced soon. Though India is mindful of the

situation of deferment of distribution, inspite of concessional tax regime @ 15%. It is yet to be seen whether, India

would implement the BEPS recommendations on CFC rules and in what form.


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Action Plan 4 : Interest deductions and other financial payments

• MNEs may achieve favourable tax results by adjusting the amount of debt in a group entity. Financial instrument can

also be used to make payments which are economically equivalent to interest but having different legal form. BEPS

risks in this area arises in three basic scenarios:

• Placing higher levels of third party debt in high tax countries

• Using intra-group loans to generate interest deductions in excess of the group’s actual third party interest

expenses

• Using third party or intra-group financing to fund the generation of tax exempt income.

Fixed ratio rule

• The recommended approach is based on the fixed ratio rule which limits the entity’s net deduction for interest to a

percentage of its earnings before interest, taxes depreciation and amortisation (EBITDA). The recommended approach

includes a corridor of possible ratios of between 10% to 30%. The approach is supplemented by a group ratio rule.

Group ratio rule

• This ratio would allow an entity with net interest expense above a country’s fixed ratio to deduct interest up to the level

of the net interest/EBIDTA ratio of its worldwide group.

• The recommended approach may be supplemented with other provisions that reduce the impact of rules on

entities/situations which poses less BEPS risk

• A de minimis threshold which carves out the entities having low level of net interest expense.

• Exclusion of interest paid to third party lenders on loans used to fund public benefit projects

• Carry forward of disallowed or unused interest

• The report also recommends the target rules to tackle specific BEPS risk

• Updation of BEPS Action 4 : In December 2016, the OECD released an updated version of report which includes

further guidance on two areas: the design and operation of group ratio rule and approaches to deal with risks posed by

the banking and insurance sectors.


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Action Plan 4 : Interest deductions and other financial payments

Indian tax regime

• In line with the recommendations of OECD BEPS Action Plan 4,, India vide Finance Act, 2017 introduced a new section

94B in the Act, to provide that interest expense paid by an entity to its associated enterprises (AE) shall be restricted to

30% of its EBIDTA or interest paid/payable to AE, whichever is less.

• The provisions are applicable to an Indian company or permanent establishment of foreign company in India.

Further debt shall be deemed to be treated as issued by AE where it provides an implicit or explicit guarantee to lender

or deposits a corresponding and matching amount of funds with lender.

• In order to target only large interest payments, it is proposed to provide a threshold of interest expenditure of one crore

rupees. Further, provisions allow for carry forward of disallowed interest expense to 8 assessment years to the extent

of maximum allowable interest expenditure.

• Banks and insurance companies have been excluded from the ambit of said provisions in view of special nature of

these businesses.


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Action Plan 5 : Countering harmful tax practices

• Current concerns are primarily about preferential regime that being used for artificial profit shifting and about lack of

transparency in connection with certain rulings. The main focus has been on agreeing and applying a methodology to

define the substantial activity requirement to assess preferential regime, looking first at intellectual property regimes

and then other preferential regimes.

Substantial activity for preferential regimes

• Countries agreed that the substantial activity requirement used to assess preferential regimes should be strengthened

in order to realign taxation of profits with the substantial activities that generate them. ‘Nexus approach’ was

developed in the context of IP regimes, and it allows a taxpayer to benefit from an IP regime only to the extent that the

taxpayer itself incurred qualifying research and development (R&D) expenditures that gave rise to the IP income.

Improving transparency

• A framework covering all rulings that could give rise to BEPS concerns in the absence of compulsory spontaneous

exchange has been agreed. The framework covers six categories of rulings:

• (i) rulings related to preferential regimes;

• (ii) cross border unilateral advance pricing arrangements (APAs) or other unilateral transfer pricing rulings;

• (iii) rulings giving a downward adjustment to profits;

• (iv) permanent establishment (PE) rulings;

• (v) conduit rulings; and

• (vi) any other type of ruling where the FHTP agrees in the future that the absence of exchange would give rise to

BEPS concerns

Indian tax regime

• Finance Act, 2016 has introduced a concessional tax regime @ 10% for royalty income from patents in order to

promote in-house research and development and making India a hub for R&D [Section 115BBF]. The new provision is

in line with the nexus approach recommended by BEPS Action 5. For the purpose of this section atleast 75% of R&D

expenditure for development of patent should be incurred in India by the eligible assessee for any invention in respect

of which patent is granted under Patents Act, 1970.


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Action Plan 6 : Preventing treaty abuse

• BEPS project identifies treaty abuse, and in particular treaty shopping, as one of the most import source of BEPS

concerns. This report includes new treaty anti-abuse rules that provides safeguards against the abuse of treaty

provisions and offer a certain degree of flexibility.

• The new treaty anti-abuse rules first address treaty shopping, which involves strategies through which a person who

is not a resident of a state attempts to obtain benefits that are conferred on resident of that state eg. Establishing

letterbox company in that state. The following approaches are recommended to deal with these strategies:

• Intent : A clear statement that contracting states intent to avoid creating opportunities for non-taxation or

reduced taxation through tax evasion or avoidance, including through treaty shopping to be included in tax

treaties

• Limitation on benefits (LOB) : that limits the availability of treaty benefits to entities that meet certain

conditions. These conditions are based on legal nature, ownership in and general activities seek to ensure

sufficient link between entity and its state of residence.

• Principal purpose test (PPT) : to address other forms of treaty abuse, including treaty shopping a more general

anti-abuse rule based on principal purposes of transactions or arrangement will be included.

Developments in India

• The Government of India has amended few treaties with the aim of avoiding treaty abuse and curbing evasion of tax.

Year 2016 witnessed the conclusion of much talked about treaty negotiation with Mauritius, Singapore and Cyprus.

• As regards the LOB, India amended its treaty with Singapore by inclusion of LOB clause way back in 2005. Thus

OECD has now been recommending as BEPS measure, which India has been doing long back. Recently LOB clause

has also been inserted in treaty with Mauritius and taxing rights of capital gains on alienation of shares have been given

to source country on shares acquired on or after 01.04.2017. Further, tax rate on such capital gains arising during the

period 01.04.2017 to 31.03.2019 would, not exceed 50% of tax rate applicable on such capital gains in India, subject to

fulfilment of conditions of LOB clause. A shell or conduit company (not meeting the purpose and expenditure test) shall

not be entitled to this benefit.


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Action Plan 7 : Preventing artificial avoidance of PE status

• Tax treaties generally provides that business profits of a foreign enterprise are taxable in a state only to the extent that

the enterprise has in that state a permanent establishment to which profits are attributable. Therefore, definition of PE

in tax treaty are crucial.

• OECD called for a review of PE definition to prevent the use of certain common tax avoidance strategies used to

circumvent the existing PE definition. Changes to PE definition are also necessary to prevent the exploitation of the

specific exceptions to the PE definition currently provided in Article 5(4).

Commissionaire arrangement

• Commissionaire arrangement may be loosely defined as an arrangement through which a person sells products in a

state in its own name but on behalf of a foreign enterprise that is the owner of these products. Through such

arrangement, a foreign enterprise is able to sell its products in a state without technically having a PE. Since Article 5(5)

relies on the formal conclusion of contracts in the name of foreign enterprise, it is possible to avoid the application of

rule by changing the terms of contracts without material changes in functions performed.

• Similar strategies also involves, situations where contracts which are substantially negotiated in a state are not formally

concluded in that state as they are finalised or authorised abroad, or where the person that habitually exercises an

authority to conclude contracts constitutes an “independent agent” to which the exception of Article 5(6) applies even

though it is closely related to the foreign enterprise on behalf of which it is acting.

• Report suggests that where the activities that an intermediary exercises in a country are intended to result in the

regular conclusion of contracts to be performed by a foreign enterprise, that enterprise should be considered to have

a taxable presence in that country unless the intermediary is performing these activities in the course of an independent

business.

Preparatory or auxiliary activities

• While introducing the exceptions to definition of PE in Article 5(4), activities of preparatory and auxiliary nature were

considered as exceptions.


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Action Plan 7 : Preventing artificial avoidance of PE status

• Since introduction of these exceptions, there have been dramatic changes in the way that business is conducted.

Activities previously considered to be merely preparatory or auxiliary in nature may now days correspond to core

business activities. In order to ensure that profits derived from core activities performed in a country can be taxed in

that country, Article 5(4) is modified to ensure that each of the exceptions included therein is restricted to activities that

are otherwise of a “preparatory or auxiliary” character. Eg. Warehouse facility, purchasing office particularly in e-

commerce scenario, Liaison Offices ? (PPT).

• Further anti-fragmentation rules are proposed to counter the avoidance of PE status by fragmenting a cohesive

business into several small operations in order to artificially designate each part merely preparatory or auxiliary.

Construction PE

• The exception in Article 5(3), which applies to construction sites, has given rise to abuses through the practice of

splitting-up contracts between closely related enterprises. The Principal Purposes Test (PPT) rule that will be added to

the OECD Model Tax Convention as a result of the adoption of the Report on Action 6 (Preventing the Granting of

Treaty Benefits in Inappropriate Circumstances) will address the BEPS concerns related to such abuses.

• The Changes to the definition of PE included in this report will be among the changes proposed for inclusion in

multilateral instrument.

• Indian perspective

• India has endorsed the view taken in this report. Infact it states that this is something which the India has been saying

for long. Indian courts have examined the PE issues particularly in context of ‘preparatory or auxiliary’ activities and

have been on the similar views. The changes proposed may invite a greater scrutiny of subsidiaries of foreign

companies operating in India and undertaking marketing and sales support activities. Further in many cases, such

subsidiaries habitually plays principal role in concluding the contracts, which would expose them to PE establishment of

foreign entity. Similar impact would be seen on EPC and turnkey contracts performed by the foreign companies in India.


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Action Plan 8-10 : Aligning TP outcomes with value creation

• OECD identified that existing standards for transfer pricing rules can be misapplied resulting in outcomes in which the

allocation of profits is not aligned with the economic activity that produced the profits. The work under Actions 8-10 of

the BEPS Action Plan has targeted this issue, to ensure that transfer pricing outcomes are aligned with value creation.

• This report on transfer pricing has focused on three key areas.

• Action 8 : involving intangibles, since misallocation of profits generated by valuable intangibles has resulted in

BEPS

• Action 9 : Contractual allocation of risks, and resulting allocation of profits to those risk which may not

correspond with activities actually carried out. It also address the level of returns to funding provided by capital

rich MNE group member.

• Action 10 : focused on other high risk areas, including

• (i) profits allocation from transactions which are not commercially rational,

• (ii) targeting the use of TP methods which result in diverting profits from most economically important

activities, and

• (iii) neutralising the use of certain payments between MNE (management fee & HO expenses)

Intangibles:

• For intangibles, guidance clarifies that legal ownership alone does not necessarily generate a right to all of return that is

generated by the exploitation of the intangible. The group companies performing important functions, controlling

economically significant risks and contributing assets, as determined through the accurate delineation of the actual

transaction, will be entitled to an appropriate return reflecting the value of their contributions.

Contractual relations and conduct of parties:

• The revised guidance requires analysing the contractual relations between the parties in combination with the conduct

of the parties. The conduct will supplement or replace the contractual arrangements if the contracts are incomplete

or are not supported by the conduct. In circumstances where the transaction between associated enterprises lacks

commercial rationality, the guidance continues to authorise the disregarding of the arrangement for transfer pricing

purposes.


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Risk and return

• In order to address this, the Report determines that risks contractually assumed by a party that cannot in fact exercise

meaningful and specifically defined control over the risks, or does not have the financial capacity to assume the

risks, will be allocated to the party that does exercise such control and does have the financial capacity to assume the

risks.

Contractual relations and conduct of parties

• The revised guidance requires analysing the contractual relations between the parties in combination with the conduct

of the parties. The conduct will supplement or replace the contractual arrangements if the contracts are incomplete or

are not supported by the conduct. In circumstances where the transaction between associated enterprises lacks

commercial rationality, the guidance continues to authorise the disregarding of the arrangement for transfer pricing

purposes

Transfer pricing method to ensure allocation of profits

• Finally, the guidance ensures that pricing methods will allocate profits to the most important economic activities, thus

advocating the profit split method to provide additional guidance. In respect of low value adding intra-group services,

the guidance provides for an elective approach with limited mark up on costs (Standard mark-up of 5% on cost).

Linkages with other Actions

• The guidance under these Actions is linked in a holistic way with other Actions. This holistic approach to tackling BEPS

behaviour is supported by the transparency requirements agreed under Action 13. Transfer pricing analysis depends on

access to relevant information. The access to the transfer pricing documentation provided by Action 13 will enable the

guidance provided in this Report to be applied in practice, based on relevant information on global and local operations

in the master file and local file. In addition, the Country-by-Country Report will enable better risk assessment practices

by providing information about the global allocation of the MNE group’s revenues, profits, taxes, and economic activity.


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Indian perspective

• Indian authorities believe that excessive intra-group service payments in form of management fee, technical fee,

royalty, interest etc have been major source of base erosion and thus one of the high risk area. These intra-group

payments are also the one of the most litigated issue in India. The Indian courts have delivered judgement both in

favour of taxpayer and revenue authorities on case to case basis. Indian government though believes that many

recommendations of reports are already being followed by the tax authorities and they are sort of endorsement or give

support to the approach already being followed.

• On intangibles, India endorses the emphasis of substance, that mere capital does not attract income unless it does

something to enhance the value. It also expressed that reports does not specifically comment on marketing intangible

and for which it need to find solution locally.

• On recharacterisation or disregarding a transaction as articulated in Action 8-10, Government has stated that GAAR

provisions will take into account the concepts.

• On low-value adding services, the India has recently introduced the revised safe harbour rules which also

incorporates the low value adding services. The safe harbour rules specifies the mark-up of 5% on cost, thus broadly

aligning the treatment recommended by the OECD BEPS Action 8-10 for receipt of low-value adding services.


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Action Plan 11 : Measuring and monitoring BEPS

• Measuring the scale of BEPS proves challenging given the complexity of BEPS and the serious data limitations, today

we know that the fiscal effects of BEPS are significant-eg Corporate income-tax revenue loss ranges between USD 100

to 240 billion annually. In addition to significant tax revenue losses, BEPS causes other adverse economic effects,

including tilting the playing field in favour of tax-aggressive MNEs, exacerbating the corporate debt bias, misdirecting

foreign direct investment, and reducing the financing of needed public infrastructure.

• Six indicators of BEPS activity highlight BEPS behaviours using different sources of data, employing different metrics,

and examining different BEPS channels.

• The focus of the report is on improved access to and enhanced analysis of existing data, and new data proposed to be

collected under Actions 5, 13 and, where implemented, Action 12 of the BEPS Project.


S.No Indicators

1. The profit rates of MNE affiliates located in lower-tax countries are higher than their group’s average

worldwide profit rate

2. The effective tax rates paid by large MNE entities are estimated to be lower (4 to 8½ percentage

points ) than similar enterprises with domestic-only operations

3. Foreign direct investment (FDI) is increasingly concentrated

4. The separation of taxable profits from the location of the value creating activity is particularly clear

with respect to intangible assets

5. Royalties received by entities located in low-tax countries accounted for 3% of total royalties

6. Debt from both related and third-parties is more concentrated in MNE affiliates in higher statutory

tax-rate countries

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Action Plan 12 : Mandatory disclosure rules

• The lack of timely, comprehensive and relevant information on aggressive tax planning strategies is one of the main

challenges faced by tax authorities worldwide. The main objective of mandatory disclosure regimes is to increase

transparency by providing the tax administration with early information regarding potentially aggressive or abusive tax

planning schemes and to identify the promoters and users of those schemes. Another objective of mandatory

disclosure regimes is deterrence: taxpayers may think twice about entering into a scheme if it has to be disclosed.

• Design principles of mandatory disclosure regime:

• clear and easy to understand,

• should balance additional compliance costs to taxpayers with the benefits obtained by the tax administration,

• should be effective in achieving their objectives,

• should accurately identify the schemes to be disclosed,

• should be flexible and dynamic enough to allow the tax administration to adjust the system to respond to new

risks, and

• should ensure that information collected is used effectively.

• Basic design questions:

• Who has to report?

• What has to be reported ?

• When information is to be reported?

• What other obligation to be placed on promoters?

• What are the consequences of non-compliances?

• What are the consequences of disclosure?

• How to use information collected?


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Action Plan 13 : Transfer pricing documentation and CbCR

• Action 13 of the Action Plan on BEPS requires the development of rules regarding transfer pricing documentation to

enhance transparency for tax administration, taking into consideration the compliance costs for business. The rules

developed will include a requirement that MNEs provide all relevant governments with needed information on their

global allocation of the income, economic activity and taxes paid among countries according to a common template”.

• In response to this requirement, a three-tiered standardised approach to transfer pricing documentation has been

developed.

• Taken together, these three documents (master file, local file and Country-by-Country Report) will require taxpayers to

articulate consistent transfer pricing positions and will provide tax administrations with useful information to assess

transfer pricing risks, make determinations about where audit resources can most effectively be deployed, and, in the

event audits are called for, provide information to commence and target audit enquiries.


Master file Provides tax administrations with high-level information regarding global business

operations and transfer pricing policies in a “master file” that is to be available to

all relevant tax administrations

Local file Detailed transactional transfer pricing documentation specific to each country,

identifying material related party transactions, the amounts involved in those

transactions, and the company’s analysis of the transfer pricing determinations

they have made with regard to those transactions

Country by country

report (CbCR)

Provides annually and for each tax jurisdiction in which they do business the

amount of revenue, profit before income tax and income tax paid and accrued. It

also requires MNEs to report their number of employees, stated capital, retained

earnings and tangible assets in each tax jurisdiction. Finally, it requires MNEs to

identify each entity within the group doing business in a particular tax jurisdiction

and to provide an indication of the business activities each entity engages in

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Indian tax regime

• For the purpose of implementing the international consensus on Action 13, Finance Act, 2016 introduced w.e.f.

Assessment year 2017-18 the requirement of

• Maintenance and filing of Master file [Proviso to section 92D(1)]

• Filing of Country by country reporting [Section 286]

Further Government notified the final rules on Master file and CbCR on 31st October, 2017 as detailed hereunder:

• Keeping, maintenance and e-filing of Master file by each Indian entity as under: (Form No.3CEAA)

(a) Certain basic details about the group - PART A of Form No. 3CEAA to be furnished by every Indian constituent

entity of the international group; and

(b) Complete Master file detailing all the particulars about the group – PART B of Form No. 3CEAA to be furnished

if the following conditions are satisfied:

(i) Consolidated revenue of the group during the accounting/previous year exceeds INR 500 crores ($ 78.9

Million) and

(ii) Value of international transactions during the relevant year exceeds INR 50 Crores ($7.89 million) (or INR 10

crores-$1.58 Million in case of transactions involving intangibles).

The above form should be filed on or before the due date of return. For FY 2016-17, the due date has been

extended to 31st March, 2018.

• Country by Country report (‘CbCR’): (Form No.3CEAC and 3CEAD)

Further, every constituent entity has to notify the Tax authority (Director General of Income Tax-Risk Assessment)

two months prior to the due date, whether it is the alternate reporting entity or details of parent entity or alternate

reporting entity in Form No. 3CEAC. (Since the due date for FY 2016-17 is 31st March, 2018, the date by which

such notice should be filed by X ltd. would be 31st January, 2018).

The threshold of turnover for applicability of CbCR is INR 5,500 crores (equivalent to $867.9 million) of group

revenue in the immediately preceding previous year. CbCR need to be filed in form no. 3CEAD on or before due

date.


23


Table 1 : Criteria for applicability of CbCR and Master File


Rule Description Criteria Evaluation

Period

Threshold

exceeding

Rs.

Time

Limit

10DA -

Master

File

Information and

Documents (Master

File / Master File) to be

kept, maintained and

furnished by a

constituent entity /

parent entity / alternate

reporting

entity of an

International group as

per Section 92D

– Form 3CEAA

•Part A is to be filed by

every constituent entity

•In addition Part B is to

be filed if given criteria

is fulfilled.

(i) Consolidated

revenue of the

international group

Accounting/

previous year

500 Crores

($ 78.9

Million)

31 March

2018

AND

(ii) A. Aggregate value

of international

transactions of the

constituent entity

Year under

consideration

50 Crores

($7.89

million)

OR

(ii) B. Aggregate value

of international

transactions involving

intangibles of the

constituent entity

Year under

consideration

10 Crores

($1.58

Million)

10DB - CbCR Furnishing of CbC

Report by a constituent

entity / parent entity /

alternate reporting

entity of an

International group

Total consolidated

group revenue of the

international group

Immediately

preceding

previous year

5,500

Crores

($867.9

million)

31 March

2018

24


Table : Rules for Master File


Rule Information to be filed Forms –FY

2016-17

Due Date –FY

2016-17

Remarks

Rules for Master File

10DA(2) Master file to be filed by a

constituent entity of an international

group, satisfying the criteria laid

down in Table 1 above

3CEAA 31 March 2018 To be furnished on or before due

date as specified under section

139(1) i.e. 30 November 2017

However, for FY 2016–17, the due

date has been extended to 31 March

2018.

Master File consists of:

Part A – to be filed by all the

constituent entities

Part B – to be filed by entities

satisfying the criteria laid down in

Table 1 above

10DA(4) Intimation to the authorities

concerned in respect of the

constituent entity that would be

filing the Master File, where there

are more than 1 constituent entity in

India

3CEAB 01 March 2018 To be furnished at least 30 days

before due date as specified under

section 139(1) i.e. 31 October 2017.


date has been extended to 01 March

2018.

25


Table : Rules CbCR


Rules for CbCR

10DB(2) Constituent entity to notify as to

whether it is the alternate

reporting entity or furnish the

particulars of Parent entity/

alternate reporting entity

3CEAC 31 January

2018

To be furnished at least 2 months

prior to due date as specified under

section 139(1) i.e. 30 September

2017. However, for FY 2016–17,

the due date has been extended to

31 January 2018.

10DB(3) Parent entity / alternate reporting

entity resident in India to file

CbCR information

3CEAD 31 March 2018 To be furnished on or before due

date as specified under section

139(1) i.e. 30 November 2017.


date has been extended to 31

March 2018.

10DB(4) If more than one constituent entity

in India of an international group,

other than the entity referred to in

Rule 10DB(3), then the Indian

constituent entity nominated by

the Parent entity in this behalf has

to notify in Form No. 3CEAE –

Section 286(4)

3CEAE 31 March 2018

Rule Information to be filed Forms –FY

2016-17

Due Date –FY

2016-17

Remarks

26

Action Plan 14 : Making dispute resolution more effective

• The measures developed under Action 14 of the BEPS Action Plan aim to strengthen the effectiveness and efficiency of

the MAP process. They aim to minimise the risks of uncertainty and unintended double taxation by ensuring the

consistent and proper implementation of tax treaties, including the effective and timely resolution of disputes regarding

their interpretation or application through the mutual agreement procedure.

• Minimum standard : will ensure

• that treaty obligations related to the mutual agreement procedure are fully implemented in good faith and that

MAP cases are resolved in a timely manner

• the implementation of administrative processes that promote the prevention and timely resolution of treaty-

related disputes; and

• that taxpayers can access the MAP when eligible.

Indian perspective

• India continues to be reluctant to accept mandatory arbitration. It tend to rely on appellate mechanism and court to deal

with the disputes. It believes in strengthening the effectiveness and efficiency of MAP process under tax treaties and

feels mandatory arbitration as addition complication rather than an additional solution. Being a minimum standard, India

has opted for bilateral notification or consultation. Indian has also been unwilling to adopt the Chapter VI of MLI dealing

with mandatory arbitration.

• APAs and MAP are tools of alternative tax dispute resolution mechanism in matters involving transfer pricing. Recently,

India has relaxed the norms and decided to accept Transfer Pricing MAP and bilateral APA applications regardless of

the presence or otherwise of Paragraph 2 of Article 9 (or its relevant equivalent Article) in the DTAAs viz ‘corresponding

adjustment’ (Press release dt. 27.11.2017). India has concluded around 189 APAs which includes 173 unilateral APAs

and 16 Bilateral APAs. Out of which maximum APAs (more than110) concluded from service sector (IT, Finance &

Banking). India signed its first Bilateral APA with Japan in December 2014. Recently India signed first ever bilateral APA

with USA covering IT/ITeS transactions; India has already signed 16 bilateral APAs with countries like Japan, UK,

Netherlands etc. Similarly, India has been actively resolving MAP cases for two years and more than 180 cases have

been resolved.


27

Action Plan 15 : Developing multilateral instrument

• Globalisation has exacerbated the impact of gaps and frictions among different countries’ tax systems. As a result,

some features of the current bilateral tax treaty system facilitate base erosion and profit shifting (BEPS) and need to be

addressed. Further, sheer number of bilateral treaties makes updating the current tax treaty network highly

burdensome.

• The goal of Action 15 is to streamline the implementation of the tax treaty-related BEPS measures. This is an

innovative approach with no exact precedent in the tax world. The treaty measures that will be included in the

multilateral includes those of hybrid mismatches, treaty abuse, permanent establishment and MAP.

• In line with this Action, an ad-hoc group was formed with pre-defined purpose of development of MLIs. On 7th June,

2017, 68 countries and jurisdictions including India, signed the MLI. Indian has signed MLI with certain reservations.

• The convention would not functional in the same way as an amending protocol to a single treaty. Instead, it will be exist

and applied alongside the existing tax treaties, modifying their application in order to implement the BEPS measures.


Conclusion

The Indian Union Budget 2017 – Highlights

OCED initiatives on BEPS projects have received a significant participation and involvement from the countries across the

globe. For successful implementation of BEPS project continuous consensus and coherence among counties is vital. Some

of the actions are immediately applicable, while other requires changes in domestic law and in tax treaties and hence may

take time for implementation.

As far as India is concerned, it has been an active participant and contributor in the BEPS project since initiation. India has

been committed to the implement the minimum standards to tackle the BEPS issue. Recently, India has made several

amendments in its domestic laws and treaties to bring them in line with the BEPS recommendations. Further a developing

country like India, it is vital to balance the implementation of BEPS recommendations, while continues to be a attractive

investment destination for foreign investors.

S.R. Dinodia & Co. LLP – Your Intelligent Connect

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Contact us at [email protected] or visit us at www.srdinodia.com

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the circumstances of any particular individual or entity. No one should act on such information without appropriate professional advice after a thorough

examination of the particular situation. This publication is not a substitute for detailed research and opinion. Before acting on any matters contained

herein, reference should be made to subject matter experts and professional judgment needs to be exercised. S.R. Dinodia & CO. LLP cannot accept

any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication.

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