Base Erosion and Profit Shifting, Impact, OECD BEPS Project

Base Erosion and Profit Shifting (BEPS) has emerged as a critical global tax challenge. It leads to substantial revenue losses for governments and poses a deeper threat to developing nations like India that rely heavily on tax income for growth.

Base Erosion and Profit Shifting

Base Erosion and Profit Shifting (BEPS) refers to tax avoidance strategies used by multinational companies to exploit gaps and mismatches in tax laws. Firms generate profits in one country but deliberately shift them to low or no-tax jurisdictions, taking advantage of favorable tax rules. As a result, they avoid paying taxes in the country where the actual economic activity and value creation take place.

Base Erosion and Profit Shifting Impact

• According to OECD data, BEPS causes countries to lose between $100 billion and $240 billion annually in tax revenue. This amounts to nearly 4-10% of global corporate income tax collections. 
• The practice gives multinational corporations an unfair edge over domestic businesses, weakening the integrity and fairness of tax systems. 
• When people observe large corporations avoiding taxes legally, it erodes trust and encourages tax evasion among ordinary taxpayers. 
• For developing countries, the issue is even more critical since they rely heavily on corporate income tax, particularly from multinational enterprises.

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BEPS Project of OECD

The OECD launched the BEPS Project to curb tax avoidance, promote transparency, and create greater alignment in international tax systems. The project is structured around 15 Action Plans, adopted by over 135 countries. These action points equip governments with tools to ensure companies are taxed where profits are actually generated. They also help reduce tax-related disputes between nations.

Recent Efforts by India to Curb BEPS

India has signed the Multilateral Instrument (MLI) to prevent Base Erosion and Profit Shifting. The MLI updates international tax treaties and reduces opportunities for tax avoidance by multinational enterprises. It ensures that profits are taxed in jurisdictions where substantial economic activities take place.

India has also signed the Inter-Government Agreement (IGA) on the Foreign Account Tax Compliance Act (FATCA) with the United States. In 2015, India became a signatory to the Multilateral Competent Authority Agreement on the Automatic Exchange of Financial Account Information.

India and the US further signed an agreement for the automatic exchange of Country-by-Country (CbC) reports filed by parent entities of multinational enterprises, applicable from January 1, 2016.

The Union Budget 2016 introduced a 6% equalisation levy on payments exceeding ₹1 lakh made to non-resident online advertising service providers. India was the first country to impose such a levy after the OECD action plans. A tax panel has suggested expanding this levy to cover services like website design, hosting, cloud computing, online marketing, software downloads, and e-commerce platforms.

Through the Finance Act 2016, India introduced Country-by-Country reporting requirements into the Income Tax Act, effective April 1, 2016. India is also actively engaged in negotiations on the G7’s Framework for a Global Minimum Tax.