BEPS means “Tax Avoidance” or “Tax Planning”. G20 & OECD together have prepared a package of actions against tax planning. It contains fifteen Action Reports. By now more than a hundred countries have concluded negotiations on Multi-Lateral Convention (MLC). The MLC will be signed in June 2017. Once it comes into effect, considerable tax planning will become redundant. Some Recommendations of BEPS have been already introduced in Budget 2017. Some of the BEPS reports are briefly mentioned below.
For a detailed explanation one may view the web-cast of a presentation or BEPS. Presentation was made by our partner Mr. Rashmin Sanghvi and broadcast by Bombay Chartered Accountants’ Society (BCAS). It is available on You Tube at – https://www.youtube.com/watch?v=ZjtwH7tW1sI.
Title to the programme: “Is BEPS answer to Tax Planning?”
6. Treaty Shopping: Non-Residents of India including MNCs, FIIs & NRIs invest in India through tax havens like Mauritius, Singapore etc. Under Action Report No.6 and MLC, this planning will no longer be possible. India can deny tax treaty benefits for investors resorting to “treaty shopping”. This will be permissible under MLC and will not amount to “Treaty Override”.
7. SPV: Many Indian residents invest abroad through Special Purpose Vehicles – SPVs. These are companies etc. formed in tax havens for holding investments in other countries. For example, many Indians have incorporated companies in UAE for holding foreign investments.
Under Action Report 3 on Controlled Foreign Companies – CFCs, a Government can tax the global income of such foreign SPVs.
India has adopted a different path – Place of Effective Management or POEM. This law was passed in the year 2015 and has become effective from 1st April, 2016. CFC provisions have not been incorporated in Indian Income-tax Act. While the purpose of POEM and CFC is similar, there are some important differences between two concepts. CFC provisions are concerned more about ownership. POEM provisions are concerned more about management.
Recently, Government has released guidelines softening the harshness of the law. This has already been discussed in para 3.7 above.
8. Transfer Pricing:
Transfer Pricing is already a strong measure against Indian assessees. It has been strengthened further under Action Reports 8, 9 & 10.
9. Interest Expenditure:
Subsidiaries and branches of foreign companies may try to reduce Indian tax liability by payment of excessive interest. BEPS Action 4 makes several recommendations on curbing this tax planning. Budget 2017 has proposed S. 94B for limiting interest expenditure to such companies and permanent establishments. Refer to Para 15.
E-Commerce companies like Google, Facebook etc. avoid income-tax in the countries where they sell their goods and services. Action Report 1 under BEPS has discussed different alternatives to curb this tax avoidance. India has introduced Equalisation Levy under Section 163 – Section 180 of Finance Act, 2016. A 6% tax has been imposed on E-Commerce payments by Indian residents to non-residents.
CBDT has constituted E-Commerce Committee to make further recommendations on Equalisation Levy. The Committee’s final report is pending. Budget 2017 has no new provisions on E-Commerce taxation.
11. Avoiding PE:
Some Non-Residents avoid – their business within India – being termed as Permanent Establishment (PE). Hence they avoid Indian taxes. Action Report No.7 prevents this tax planning.
12. Treaty Abuse:
Double Tax Avoidance Agreements (DTAs) are signed to avoid double taxation of international incomes. People have used these agreements to completely avoid tax or have Double Non-Taxation. Indian judiciary had contradictory decisions. However, finally, SC has approved of Treaty Shopping.
SC decision in Azadi Bachao Andolan (it permitted Double Non-Taxation) & AAR ruling in Cyril Pereira (it did not permit Double Non-Taxation) case are illustrations.
Now BEPS Action Reports 5 & 6 propose provisions against such tax planning. Under MLC it is clearly declared that DTAs are not meant for Double Non-taxation & treaty abuse. It is clearly declared that “Substance” shall prevail - over “Form”. With this declaration, an important controversy is resolved in favour of tax department.