Budget 2016 may introduce BEPS to make tax evasion difficult for MNCs

MUMBAI: In what could lead to an increase in domestic tax liabilities of many Indian conglomerates and multinationals, the government is set to introduce a framework for Base Erosion and Profit Shifting ( BEPS), a global agreement to check tax avoidance by multinationals, in the upcoming Budget.

Industry sources expect the BEPS framework to come into being immediately after the Budget, from April 1.
So going ahead, any company or conglomerate that has an operation outside India would have to submit a detailed split of revenues, profit, operations (corresponding economic activity) and taxes paid in each country they operate.

BEPS is a guideline released by the Organisation for Economic Co-operation and Development ( OECD) that would allow country-by-country reporting — to check the various tactics multinationals play to avoid and reduce taxes they pay. While there are 15 standards under BEPS, India in the first round may not create a framework for all of those.

According to sources, the government would make it mandatory to submit a report on revenues, profit, operations and taxes paid in India in the upcoming Budget. This could come under a framework titled BEPS, whose nitty-gritty may be announced a couple of months after the Budget.

Industry trackers say that many companies that were dwelling in tax arbitrage through complicated structures would come under scrutiny and transparency could improve.

“Structures involving financing arrangements and supply chain that lack economic substance, or, are present in low tax jurisdictions, will come sharply in focus. Master file disclosure requirements will present a peek into the complete structure and supply chain of large Indian outbound conglomerates, thereby shifting the focus by jurisdictions on auditing only direct transactions to focussing on the entire value chain to assess and understand relative contributions,” said Sameer Gupta, partner and leader, financial services, tax and regulatory, at EY.

CASH BOX Many Indian companies would see their patents registered abroad being taxed in India. With a clear view to pay lower tax or have a tax arbitrage, many companies have created ‘cash box’ or shell companies in tax havens, which reap the benefits of the patents when the technologies start making revenue. Such shell companies generally are registered in Luxembourg, Ireland and the Virgin Islands.

Even the tax treaties with many countries like Mauritius, which has seen a lot of controversies in India, would be irrelevant. Under BEPS, the Indian revenue authorities would be able to check facts around the intermediary companies registered in these tax havens. While this is set to increase the transparency as far as companies are concerned, there is also a worry that this could lead to increase in litigations in India, especially around transfer pricing.

“So, you have a global law (BEPS) with municipal interpretation. The issue is not BEPS but the interpretation of the law as every country would interpret it as per their requirement,” said Rohan Shah, managing partner at law firm Economic Laws Practice.

IMPLICATION FOR POEM BEPS would also have far-reaching implications to some domestic laws. Industry experts say that if the government chooses to adopt CFC (controlled foreign company) under the BEPS, it would make the recent POEM (place of effective management) irrelevant.

“If the government decides to adopt the CFC under the BEPS guidelines, then a large part of the POEM may be irrelevant and would be replaced. Going ahead, under CFC regime, passive income of many Indian companies would be taxed on current basis and I see in some specific outlines which were under GAAR, specifically with respect to substance over form and Treaty abuse, make its way under BEPS,” said Uday Ved, a senior tax consultant.

The government had released POEM guidelines recently, which had created some fear among companies. However, most industry trackers feel that many in the government have been voicing their concerns around the way many companies have complicated tax structures. BEPS is perceived by many in the revenue department as a vindication of their stand.

Industry experts say revenue authorities have been giving importance to actual functions and conduct in India rather than the contractual arrangements. This is being reflected in the action plans under BEPS as well.

“To my mind, BEPS recommendations will now strengthen this approach during audits. Further, the three tier transfer pricing documentation including country-bycountry reporting is expected to be introduced in India in this year’s budget proposals which could cover more than 150 large India headquartered MNCs having international transactions,” said Rohan Phatarphekar, partner and national head, global transfer pricing services, KPMG.

On their part, many companies have already started preparations around BEPS. Preempting the BEPS regime, many multinationals including Indian companies have already begun impact assessments to identify and fix potential problem areas in their tax reporting.

ET VIEW
Don't change rules retrospectively

India’s move makes sense. Introducing BEPS will ensure that MNCs pay their share of taxes in markets where they make profits, and boost revenues for governments. It reinforces India’s case to lift the corporate veil in deals that trade Indian assets overseas, and collect the tax due on value created in the economy. However, any change in rules to bring domestic law in sync with global rules should be done carefully. India’s tax administration must ensure that the changes are prospective, and not retrospective. Hopefully, a crackdown on structures such as 'Double Irish with Dutch sandwich' >won't send stock markets tumbling.