Base Erosion and Profit Shifting (BEPS) project

Base Erosion and Profit Shifting (BEPS) project

• BEPS is a tax avoidance strategy used by multinational companies, wherein profits are shifted from jurisdictions that have high taxes (such as the United States and many Western European countries) to jurisdictions that have low (or no) taxes (so-called tax havens).

• The term is used in a project headed by the OECD.

• The Base Erosion and Profit Shifting (BEPS) project, a joint initiative between G20 countries and the OECD, works towards the development of a coherent global taxation system which addresses BEPS concerns.

• Project headed by the OECD’s Centre for Tax Policy and Administration to deal with the tax avoidance strategy used by multinational companies

• The main purpose of such initiative is to address the gaps in the current international tax rules relating to arrangements that achieve no or low taxation by shifting profits away from the jurisdictions where the activities creating profits takes place.

• The UN, IMF, World Bank and OECD are developing toolkits to assist “lowest income countries” in implementing the outcomes of the BEPS Project, so far as they are relevant to those countries or to address related issues

• The BEPS initiative focuses on several areas, including:

a) Reporting and transparency
b) Transfer pricing
c) Deductibility of financing costs
d) Entitlement to tax treaty benefits
e) Tax treatment of companies operating in the digital economy
f) Preferential tax regimes

• The 2016 Union Budget announced an ‘equalization levy’ of 6 per cent on payments exceeding over Rs 1 lakh to online ad services from non-resident entities. Prominent among the companies affected would be new economy multinationals with Indian subsidiaries, like Face book and Google.

• India is the first country to impose such a levy, post the OECD action plan.