The existence of traditional international tax regulations in the modern-day digital and globalised economic landscape has been a point of contention. The recently proposed revision of the India-Mauritius tax treaty protocol indicates India’s stance on prioritising fair investment without compromising tax avoidance measures. Such a revision and stance aligns with the Base Erosion and Profit Shifting (BEPS) project as formulated by the OECD under the leadership of G20 nations.

In response to these global concerns, from 2013 to 2016, the OECD and G20 nations formulated the BEPS framework to combat tax avoidance by multinational enterprises, thereby promoting equity in the international tax regime. The framework introduced 15 Action Plans to address challenges within the global tax system and propose actionable solutions. India, as a participant in the G20, has embraced these initiatives, recalibrating its international tax and local tax policies accordingly.

Here is a progress report on BEPS Action Plans and India’s responses:

Digital Economy Taxation

• Issue: Digital economy expansion has resulted in tax revenue losses due to difficulty establishing jurisdiction-based nexus. The market jurisdiction i.e. the consumer oriented countries loose the tax revenue as business could be conducted cross border without any legal entity. For example downloading of paid applications from a global server.
• Response: India led the adoption of a Digital Tax by instituting the Equalisation Levy in 2016, taxing digital ad services and e-commerce operators at 6% and 2%, respectively. Many other countries followed.

Hybrid Mismatch Arrangements

• Issue: Multinational Enterprises (MNEs) exploit tax discrepancies in financial instruments (say, debt instrument is treated as equity in some countries and vice versa) across borders.
• Response: India was minimally impacted due to the presence of stringent foreign exchange and company law regulations.

Controlled Foreign Company (CFC) Rules

• Issue: Corporations relocating profits to low-tax regions but keeping the value intact by deploying subsidiary-based mechanisms.
• Response: While major economies have reinforced CFC regulations, India has opted for the Place of Effective Management (PoEM) guidelines, which are broader in scope than CFC rules.

Interest Deductions and Financial Payments

• Issue: MNEs manipulate inter-company debt to reduce taxable income. Strategies to use debt in a way to reduce the tax burden of the overall MNE group.
• Response: India has restricted interest deductions on debt from related parties/ associated enterprises to 30% of EBITDA.

Harmful Tax Practices

• Issue: Jurisdictions with favorable tax regimes entice profit shifting, which distorts competition and depletes tax bases.
• Response: India’s tax rate for domestically developed and registered patent royalties is 10%, with conditions to stimulate local research and development. Such a regime is not considered Harmful by the OECD. Further, there are other benefits of the manufacturing tax regime, start-up benefits and GIFT city – IFSC, which fall under genuine tax regimes.

Treaty Shopping

• Issue: MNEs leverage tax treaties to minimise tax obligations and without commercial substance.
• Response: The revision of the India-Mauritius treaty exemplifies India’s commitment to curbing treaty abuse. Similarly, most of the other India treaties have started incorporating the Principal Purpose of Test. General Anti Avoidance Rules (GAAR) as legislation have been activated in the local law since 2017.

Artificial Avoidance of Permanent Establishment

• Issue: Exploitation of treaty provisions to avoid establishing a taxable presence like a Permanent Establishment, especially through loopholes in the Agency PE clause.
• Response: India aligns with international efforts to close loopholes and strengthen anti-abuse rules in tax treaties. Agents now principally conclude contracts and shall also be covered in the definition of Agency PE.

Transfer Pricing: Intangibles, Risks & High-Risk Transactions

• Issue: Intra-group transactions and profit shifting pose substantial challenges.
• Response: India’s transfer pricing laws, updated periodically, aim to ensure arm’s length standards for intra-group dealings. Further, changes to OECD transfer pricing guidelines would have a persuasive value in the Indian courts.

BEPS Data Collection and Transparency

• BEPS recommends methods for gathering and analysing data to comprehend tax avoidance, mandatory disclosures of aggressive tax planning, and a three-tier documentation structure to boost transparency. India has adopted a three-tiered transfer pricing structure, which gives a robust framework for transfer pricing documentation.

Enhancing Dispute Resolution and Treaty Amendments

• BEPS promotes more effective tax treaty dispute mechanisms and the development of the Multilateral Instrument (MLI) for rapid and cohesive treaty revisions. India has shown its commitment to dispute resolutions by bringing in APA and Safe Habour regimes. Further, the overall litigations have come down.

India’s Proactive Role and the Continuing Challenge in adopting the BEPS Measures India has significantly influenced the international tax dialogue. The concerted effort of nations to incorporate these Action Plans underscores a unified commitment to transparency and the rejection of tax evasion strategies. The modifications to the India-Mauritius tax treaty have drawn international attention, urging MNEs to maintain comprehensive transfer pricing records and stay informed on global tax law developments. While substantial progress has been made, the journey towards a universally transparent and fair tax system continues.

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