Globalisation has multiple merits and
diverse demerits. Large companies with units in several countries have tended
to take advantage of their multiple locations to reduce their tax liabilities
by shifting their profit centres cleverly to those jurisdictions where tax
rates are low. This has adversely affected many economies.
BEPS (Base Erosion and Profit
Shifting) is an infelicitous acronym that refers to the adverse impact of tax
avoidance strategies adopted usually by multinational enterprises, on national
tax bases. BEPS is achieved very often by adoption of devious, though not
unlawful, transfer pricing models. Sequentially, profits get shifted and
therefore tax base gets eroded. For instance, in 2013 the US Senate
investigated the case of Apple which had a registered, highly profitable unit
in Ireland, controlled from America and lawfully avoiding taxes in both
countries. Companies like Starbucks, Amazon and Fiat Chrysler have similarly
benefitted from benign tax laws in Netherlands and Luxembourg. Thus instances
of tax jurisdiction-shopping are legion.
OECD (Organisation for Economic Co-operation
and Development) observes that the profit rates reported by MNE (Multinational
Enterprises) affiliates located in lower-tax countries are twice as high as
their group’s worldwide profit rate on average; the effective tax rates paid by
large MNE entities are estimated to be 4 to 8½ percentage points lower than
similar enterprises with domestic-only operations.
Such aggressive tax management (which
is no doubt in accordance with extant tax laws and treaties) results in annual loss
of tax revenue to the extent of US$ 114 bn for developing economies, according
to estimates of Oxfam, a leading international aid agency. Developing economies
are more dependent on corporate tax than advanced economies. Global loss in tax
revenue is estimated at $240 bn a year which is 10% of global corporate income
tax receipt. In the US, though the nominal corporate income tax rate is 35%,
actual rate paid is around 15% thanks to BEPS.
Different countries have tried to
tackle this unintended menace in different ways. For example, Britain recently
introduced “Diverted Profits Tax” (DPT) which imposes a levy on profits routed
to tax havens through ‘contrived arrangements’.
In early October this year, OECD, at
the request of G20 countries (India is a member of G20) released BEPS proposals
which aim at curbing these corporate sleights of hand and ensuring that MNEs
are taxed where economic activities take place and value-creation is done. A
comprehensive, coherent and coordinated reform of international tax rules is
attempted. It is claimed that these proposals are a game-changer, being the
most drastic modification in multinational taxation framework since the 1920s.
OECD’s Secretary-General has euphorically claimed that these proposals expected
to be approved by G20 governments at a summit in November will put an end to
‘double non-taxation’. However, it is wise not to go overboard in our
enthusiasm since the increasing digitalization of the economy makes
identification of location of profits more difficult. It is a sobering thought
that business metamorphoses faster than the development of regulator’s skill.
BEPS proposals are likely to impact
about 9,000 companies world-wide. 155 Indian companies, apart from subsidiaries
of MNEs, will be covered under these guidelines. The Model Tax Convention and
the Revised Transfer Pricing Guidelines are likely to be released by OECD in
2017. The Action Plan has identified 15 actions, along three fundamental
pillars: introducing coherence in the domestic rules that affect cross-border
activities, reinforcing substance requirements in the existing international
standards and improving transparency, as well as certainty for businesses that
do not take aggressive positions.
One of the main actions relates to
the requirement of provision of Country-by-Country details, annually and for
each tax jurisdiction in which they do business, by all MNEs with annual
consolidated group revenue above Euro 750million (approximately Rs.6,000
crore). These details include the amount of revenue, PBIT, income tax paid and
accrued, number of employees, capital allocated, Retained Earnings, tangible
assets, each entity within the group and each one’s business activity. The
details are to be furnished from the fiscal year beginning on or after January
1, 2016.
Various measures contemplated in the proposals range
from new minimum standards to revision of existing standards, common approaches
which will facilitate the convergence of national practices and guidance drawing
on best practices.
Critics have
already pointed out that BEPS proposals are likely to generate more disputes
among countries with each one fighting for a higher share of MNE’s profits in
order to boost its tax revenues. Agreement on BEPS proposals is only the first
step in the long journey for streamlining international tax administration.
Successful implementation may take a long time. Meantime it is proposed that
following the G20 and OECD call for even increased inclusiveness, a new
framework for monitoring BEPS will be conceived and put in place, with all
interested countries participating on an equal footing. Are we on the threshold
of a paradigm shift in international tax practices?
