Q. The term ‘Base Erosion and Profit Shifting’ is sometimes seen in the news in the context of
- mining operation by multinational companies in resource-rich but backward areas
- curbing of the tax evasion by multinational companies
- exploitation of genetic resources of a country by multinational companies
- lack of consideration of environmental planning and developmental costs in the implementation of projects
Answer: (b) curbing of the tax evasion by multinational companies
Base erosion and profit shifting:
- Base erosion and profit shifting refers to the practice of businesses moving their earnings to other tax jurisdictions where the tax rates are lower.
- BEPS is a method of tax evasion employed by several multinational firms to artificially move earnings to low- or no-tax jurisdictions.
- The integrity and credibility of tax systems are impacted because multinational corporations can use BEPS to gain a competitive advantage over domestic firms. It has weakened India’s tax base in the process.
- For example, it involves the transfer of earnings from nations with high tax burdens (such the United States and European nations) to nations with low (or no) tax burdens (so-called tax havens), like Bahamas & Cayman Islands.
- To address this, the OECD and G20 nations created the BEPS Action Plan in 2013.
- Steps taken by government:
- International Level:
- India has signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“Multilateral Instrument” or “MLI”) to swiftly implement a series of tax treaty measures to update international tax rules and lessen the opportunity for tax avoidance by multinational enterprises. The MLI entered into force on 1st July 2018.
- The convention will modify India’s treaties to curb revenue loss through treaty abuse and BEPS strategies by ensuring that profits are taxed where substantive economic activities generating the profits are carried out.
- India has also signed the Inter-Government Agreement (IGA) on Foreign Account Tax Compliance Act (FATCA) with United States.
- India also has become a signatory of the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information in 2015.
- India and the US signed an agreement for exchange of country-by-country report to enable the two countries to automatically exchange the reports filed by the ultimate parent entities of the multinational enterprises in the respective jurisdictions pertaining to the years commencing on or after January 1, 2016.
- India has signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“Multilateral Instrument” or “MLI”) to swiftly implement a series of tax treaty measures to update international tax rules and lessen the opportunity for tax avoidance by multinational enterprises. The MLI entered into force on 1st July 2018.
- National level:
- In Union Budget 2016 an ‘equalisation levy’ of 6 per cent on payments exceeding over Rs 1 lakh to online ad services from non-resident entities was introduced. Prominent companies affected would be new economy multinationals with Indian subsidiaries, like Facebook and Google.
- India is the first country to impose such a levy, post the OECD action plans.
- A tax panel has recommended expanding the ambit of this levy to cover a wide gamut of transactions including online marketing, cloud computing, website designing, hosting and maintenance, platforms for sale of goods and services, and online use of or download of software and applications.
- India introduced core elements of the Country-by-Country reporting requirement in the Indian Income Tax Act, 196 through Finance Act 2016, effective from 1 April 2016.
- International Level: