International agreement to curb Base Erosion and Profits Shifting 03/07/2019 – Posted in: Daily News – Tags:

INTERNATIONAL AGREEMENT TO CURB BASE EROSION AND PROFITS SHIFTING

 

For: Preliminary & Mains

Topics covered: Base Erosion and Profits Shifting, International Agreement, Background, BEPS Actions

 

News Flash

The center had ratified the international agreement to curb base erosion and profits shifting (BEPS).

The agreement is ratified in a bid to stop companies from moving their profits out of the country and depriving the government of tax revenue.

 

Highlights: International agreement to curb base erosion and profits shifting

  • India has ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (multilateral instruments (MLI)).
  • MLI was signed by the Finance Minister in Paris in 2017 on behalf of India.
  • The MLI is a result of concerted work by the G20 countries to tackle the issue of base erosion and profit shifting.
  • The MLI will modify India’s tax treaties to curb revenue loss through treaty abuse and base erosion and profit shifting strategies.
  • It will ensure that profits are taxed where substantive economic activities generating the profits are carried out.
  • The MLI will be applied alongside existing tax treaties.
  • Out of 93 tax treaties notified by India, 22 countries have already ratified the MLI so far.
  • The Double Taxation Avoidance Agreement (DTAA) with these countries will be modified by MLI.
  • The MLI will come into force for India from October 1, 2019.

 

Background

India was part of the Ad Hoc Group of more than 100 countries and jurisdictions from the G20, Organisation for Economic Co-operation and Development (OECD), and other interested countries, which worked on the finalizing the text of the Multilateral Convention.

 

Base Erosion and Profit Shifting

It refers to the phenomenon where companies shift their profits to other tax jurisdictions, which usually have lower rates, thereby eroding the tax base in India.

Concern

There have been concerns across the globe about companies making profits in a particular country but not paying taxes to the local government.

The Organization for Economic Cooperation and Development (OECD) states that BEPS is of major significance for developing countries due to their heavy reliance on corporate income tax, particularly from multinational enterprises.

 

What can be done?

The OECD, under the authority of the Group of 20 countries, has considered ways to revise tax treaties, tighten rules, and to share more government tax information under the BEPS project, and has issued action plans.

 

Base Erosions and Profit Shifting Actions

Developed in the context of the OECD/G20 BEPS Project, the 15 actions set out below:

  • Tax Challenges Arising from Digitalisation.
  • Neutralising the effects of hybrid mismatch arrangements
  • Controlled Foreign Company
  • Limitation on Interest Deduction
  • Harmful tax practices
  • Prevention of tax treaty abuse
  • Permanent establishment status
  • Transfer Pricing
  • BEPS data analysis
  • Mandatory Disclosure rules
  • Country-by-country reporting
  • Mutual Agreement Procedure
  • Multilateral Instrument

 

Source: The Hindu

 

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