Tax World Reacts

With all the actions now on the table it also easier to see how they are mutually supportive: this is the advantage of the package approach and a top down driven project. OECD has also been pragmatic in accepting that since different countries start from different positions it was unrealistic to expect a " one size fits all " approach. This is why most of the recommendations provide options or identify best practice or minimum standards rather than being over prescriptive.

The OECD needs to be congratulated, both for meeting its commitment towards the G20 and the quality of the technical work it has undertaken within very tight timelines. Achieving a broad consensus on the process between OECD countries and participating non OECD is no mean achievement. The main aims of the BEPS project is to change behavior by governments and MNEs and this it has already achieved.

Perhaps the biggest disappointment is that little progress is made on the issue of arbitration. Again not surprising, insofar as the OECD stayed within the existing institutional framework for arbitration and many developing countries, including India, were wary of their experience with mandatory arbitration under Bilateral Investment Agreements. The "coalition of the willing" is fine: but we need to bring in the BRICS and other economies in transition.

While developing countries are not at the center of the decision making process, at least they had an opportunity to put forward their views.

The next step in this process is to tidy up some of the technical details and to ensure that there is a consistent implementation of the recommendations.

Jeffrey Owens
Former Director of tax policy at OECD

The BEPS project needed to happen, and the OECD and G20 should be congratulated both for their hard work and for achieving high-level consensus across many issues. Moreover this high-level consensus was achieved while working to an exceptionally ambitious timetable. 

Business does still have concerns that some of the recommendations may lead to double taxation of income, and many important details remain to be worked out. We look forward to working with the OECD and G20 on those. Nevertheless, BIAC has always acknowledged that modifications were required to international tax rules in order to keep pace with rapid globalization, and we believe that the broad direction of many of the BEPS recommendations will help with this. But this next – implementation – phase will be crucial.

William Morris
BIAC Tax Committee Chair

The BEPS final package released on 5 October 2015 is expected to bring clarity, coherence and consistency in the global tax environment. This is the singular tax evolution that can  change the way we have looked at the three fundamental pillars of taxation – compliance , conflicts & complexities. Various global judicial precedence and international tax practices have highlighted that more than double taxation,  double non-taxation as well as dissemination of information leading to uniformity and transparency have been major issues that have affected the world of taxation. The OECD BEPS project as expected have tried to address each of these aspects clearly. The BEPS outcome is a start and how countries and the international tax community implement the recommendations will go a long way in determining the future of the tax community.

The final BEPS reports  include various proposals in addressing tax and transfer pricing outcomes. From the tax treatment of digital economies to arbitration in disputes, the BEPS project has tried to address tax controversy issues head-on. This is welcome. For example, recommendations including new minimum standards on Country-by-country reporting , which for the first time will give tax administrations a global picture of the operations of multinational enterprises. Consistency and transparency will therefore be important in how companies report transfer pricing data worldwide. India is committed to implement CbC requirements shortly and this provides an opportunity for Indian multinationals as well as global players with operations in India to have a relook at their tax reporting structure and ensure that risks are adequately addressed. While this transparency is welcome, what is important to note is whether taxpayers are prepared for this level of transparency. Consistency in transfer pricing documentation and global reporting therefore will be an important criteria going forward.

Besides this, actions 8-10 speak on ensuring  that transfer pricing outcomes are in line with value creation. It will interesting to see how Indian jurisprudence align with this OECD objective in ensuring that Indian MNEs face a consistent transfer pricing position in India and around the world. This is a significant development as it help tax authorities gain a view of issues such as risk and recharacterisation, hard to value intangibles and intra-group services.

Recommendations have also been made to countries to include anti-abuse provisions in their tax treaties, including a minimum standard to counter treaty shopping and the proposal to redefines the term ‘permanent establishment’ in order to put an end to the use of conduit companies to channel investments . The need for an effective mutual agreement procedures has been reiterated , to ensure that the fight against double non-taxation does not result in double taxation. This is an important aspect practically to consider and  the BEPS project needs to balance a thin line between double taxation and non-taxation. Legitimate structures supportable with a business case should not be called under questions purely because of the project recommendations. One needs to strike a balance between these two aspect.

One aspect of this project which is important to consider from an Indian perspective is that the implementation of BEPS would involve amendments being undertaken to the domestic tax laws and tax treaties. It is important to considerwhile deciding which aspect of BEPS needs to be localised and adopted. As a member of the G20 and an active participant in the BEPS project, India is committed to its outcome. Indian authorities believe that structural changes and mechanisms may need to be adopted as the BEPS project outcome will result in an increased flow of information and exchange of information.

For the BEPS actions to be implemented consistently, the multilateral  Instrument is a practical way to address treaty related measures and each country’s will thrive to balance the government quest to increase the tax revenue along with creating a friendly and a certain business environment. India is no exception to this. The BEPS project outcome will assist in bringing more tax certainty to the world and iron out differences in approach that currently exist. However, initial pains and discord in implementation may be expected. It will be interesting to  look forward to the change that India will bring in tax rules and outcome to ensure that this global project is appropriately adopted locally and in the end help Indian taxpayers in ensuring tax certainty.

The OECD BEPS project is a global project. While implementation, particularly in India may take time in coming, India has unequivocally stated that it is committed to this project & will make the  necessary legislative & administrative changes for the same. Further, what is important is that  this is a first step in a global tax evolution. The implementation outcome will determine whether these changes are here to stay or perceived as being temporary.

Vipul R Jhaveri
Partner, Deloitte Haskins & Sells LLP

The release of the final package of measures under the BEPS report within the aggressive timeframe announced in 2013 is indeed a remarkable development. The sheer breadth of issues addressed coupled with the complexity involved in each of them makes this all the more commendable. At many levels, the final package of measures has tried to strike a fine balance between addressing the legitimate needs of governments to target tax avoidance and the need to provide certainty to global businesses. Its recommendations on areas such as treaty abuse and artificial avoidance of PE in particular represent a significant overhaul of the existing regime and could require businesses to revisit many aspects of their cross-border business structures. In an Indian context particularly, the reports are likely to have a significant impact on cross-border investment (especially those involving use of holding companies in low tax jurisdictions), digital and e-commerce businesses, and transfer pricing policies. It may also be relevant in the context of outbound investments, especially in cases where substantial intra-group debt is used to fund subsidiaries. 

Dinesh Kanabar
CEO, Dhruva Advisors LLP

Clearly, out of the 15 Action Points (“AP”), the ones that are most crucial to India include:

Action 1 - Addressing the Tax Challenges of the Digital Economy

Action 5 - Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance

Action 6 - Preventing the Granting of Treaty Benefits in Inappropriate Circumstances

Actions 8-10 - Aligning Transfer Pricing Outcomes with Value Creation

Action 12 - Mandatory Disclosure Rules

Action 13 - Transfer Pricing Documentation and Country-by-Country Reporting

Action 14 - Making Dispute Resolution Mechanisms More Effective

Interestingly, India’s tax policy and jurisprudence has evolved over the years to deal with several contentious issues, outlined in various APAs. Action Points (AP) above.

A case in point is what constitute PE in the context of digital economy.  Though the dust has not settled on this subject, the objective of Indian administration to apply strict source based rules of taxation is clear.  Having said that, AP1 has not articulated rules for digital economy taxation, particularly intended actions of certain emerging economies to levy withholding tax or some form of tax under the nexus approach. As a matter of fact, AP1 caution nations to respect existing treaty obligations, should they decide to impose additional safeguards in their domestic law for levying any form of tax.

On AP 5, dealing with transparency and highlighting substance test, BEPS action point suggestion on ‘Nexus approach’ is interesting, particularly in light of R&D expenditure in jurisdiction which undertakes such activities. India will particularly keep a close watch on AP5 given its focus on R&D.

AP 6 dealing with conditions for grant of treaty benefits, particularly introduction of limitation benefits (LOB rule) will be music to several emerging markets, who are recipients of Foreign Direct Investments (FDI). Implementation of AP 6 signals an end to treaty shopping and other treaty abuse strategies. AP 6 essentially highlights,’ Principle purposes of test’ (“PPT”) which largely aligns with the views expressed by Indian courts, though substance shall assume greater significance in the future.

AP 7 on artificial avoidance of PE shall further restrict definition of ‘preparatory and auxiliary’ activities, suggesting stricter source based taxation regime, which has been controversial issue in India in the context of liaison offices of MNC’s.

AP 8-10 aligning TP outcomes with value creation will again auger in favour of government’s representing large emerging markets. The guidance clarifies allocation of return of high value intellectual property factoring location savings and local market features. Simultaneously, AP 8-10 highlights importance of beneficial ownership of IP/intangibles.On both aspects of locational savings and intangibles, several multinational enterprises have ongoing disputes, which are lying in various dispute forums.

AP 12 dealing with mandatory disclosure norms is interesting from an Indian standpoint, given India’s timing to introduce GAAR from April 1, 2016.  AP 12 recommends framework for countries to seek information from tax payers on potentially aggressive or abusive tax planning schemes. Countries such as India grappling with disclosure requirements are likely to implement at this AP.

AP 13 dealing with TP documentation on CBC reporting has been debated at length. What would be interesting is to see how countries such as India, who are net capital importers shall supplement their domestic law on TP documentation.

AP 14 dealing with effective dispute resolution mechanism will test endurance of emerging economies, particularly India, China & Brazil who have huge back log of unresolved MAP cases. AP 14 envisage a minimum standards by G20 to resolve MAP in timely manner and implement best practice to streamline administrative process. Though, India has put out a stiff opposition to provide mandatory binding MAP arbitration, most countries are moving to seek finality of international tax disputes via the arbitration process.

In summary, besides announcements in 2016 budget of the government, subordinate legislation by way of administrative circular and rules shall guide Indian government’s actions towards BEPS recommendations.

There is greater need for evolving a consultative approach with business representatives to put in place series of action points such that India will implement as it enters the new world tax order – with clarity, consistency and certainty. 

Mukesh Butani
Managing Partner, BMR Legal

Two years ago, many were skeptical  about whether the OECD would be able to meet the targets it had set to itself with respect to one of the most ambitious projects to reform the rules on international taxation (the BEPS project),firstly  with respect to the self imposed time line but more importantly with respect to the breadth and depth of the project.  It is quite extra-ordinary that we have all reached there in addressing significant issues such as treaty shopping, curbing harmful tax practice, improving transparency with country by country reporting tackling double non-taxation.

The face of the world economy has changed in the last 50 years especially with the way business.  It seems that a page in history is being turned now!  I pause here to refer also to the working paper of the UN Tax Committee on the role of MNCs in the economic growth of developing countries.  But as Secretary-General Angel Gurria has said, it is when fully implemented, that the announced measures will render undesirable BEPS behavior BEPS tax planning – structures ineffective.  The challenge will now definitely lie in the domestication of the BEPS package by Governments into changes of the law.  With the dialogue that the OECD has engaged with stake holders from the start of the BEPs consultation process involving both OECD and non-OECD countries, there is no reason why the development of the multilateral instrument will not come to fruition in 2016.

Rajesh Ramloll
ASG, Attorney-General’s chambers, Mauritius

On 5 October 2015, the OECD released final reports on all 15 focus areas in its Action Plan on BEPS. In an accompanying explanatory statement, the OECD described the next steps in its work on BEPS, including additional work on technical matters and plans for monitoring with respect to the implementation of the BEPS recommendations. These final reports represent the culmination of work on the BEPS project. These reports include recommendations for significant changes in key elements of the international tax architecture.

There is much to think about in the final reports. The OECD needs to be commended on its speedy effort. One would also wholeheartedly agree with the need for concertedgovernmental action in this areato implement the output from the reports because the current environment is a patchwork of disparate but aggressive enforcement activities by tax authorities which put businesses at risk for both the cost of unrelieved double taxation and the very significant cost and distractionof tax controversy. One would expect that the outcome from the BEPS project would result in a clear set of rules that companies can understand and comply withand going back to an environment where compliance with the law involves following an accepted standard, not vague notions of discerning the spirit of the law (or what the spirit might have been if there were a spirit) or predictingever-changing tax authority interpretations of ‘‘appropriate’’tax planning. Inaction on the part of the OECD/ G20 could lead to emergence of competing sets of international rules which in turn could lead to “global chaos’’ marked by massive emergence of unrelieved double taxation.

The reports clearly reflect the complexity of the issues in the areas that are of concern to policymakers with respect to the BEPS topic. Underlying the themes in the reports include reiteration of support for the existing global international tax framework of the arm’s-length standard for transfer pricing and the specific rejection of formulary methods, respect for existing bilateral tax treaty obligations but with the view that treaty abuse should be avoided, and emphasis on the need for more information, including potentially global tax and business information, to be provided to tax authorities to better enable them to identify and address BEPS abuse. The reports reflect laudable outcomes involving verycomplex issues and very challenging topics on which to achieve consensus.

Rajendra Nayak
Partner, International Tax Services, Ernst & Young LLP, India

Widespread public concerns that MNEs are not paying enough tax on their profits lead to public debates on "tax morality".  The wide networks of bi-lateral tax treaties, particularly with “tax havens”, were perceived as instruments for double non taxation. In this backdrop, it is commendable that OECD has released the final reports on all the 15 Action Plans to prevent Base Erosion and Profit Shifting ("BEPS"). The recommendations are very in parts. 

Global trade substantially is between associated enterprises.Use of transfer pricing methodologies was leading to distortions in the distribution of profits by MNEs. Profits are generated through pursuit of economic activities rather than through mere contracting. Hence, the emphasis on value creation in Actions 8-10 is most appealing. 

The transfer pricing documentation requirements in Action 13 are onerous and it will inevitably enhance the cost of compliance.  More importantly, it will enhance litigation. The tax administrations the world over are not prepared to provide efficient dispute resolution mechanisms including through MAP. Uncertainty caused by transfer pricing disputes will adversely impact global trade.

The confusion in respect of taxation of digital economy (Action 1) remains.  Indirect taxation in the country of consumption is practical and that would have sufficed. The recommendations for direct taxation are likely to lead to double taxation, which will adversely impact digital economy.

MNEs gain global footprint using Regional Holding Companies in low tax jurisdictions, which serve a business purpose.  The post-tax profits from active business generated in one country get channelized through the low tax jurisdiction to another country for making investments and carrying on active business.  A routing should not be misunderstood as a mechanism for tax avoidance.  In this context, adoption of CFC regulations (Action 3) without granting credit for underlying taxes would result in double taxation. 

The recommendations on interest deduction and other financial payments (Action 4) follow an income approach. Traditionally, countries have used the balance sheet approach to restrict financial gearing.   Having taken an income approach, OECD could have considered a recommendation for allowing a "deemed deduction" for equity capital.  The source of raising finance ought not to make a difference in arriving at the tax base.

PV Srinivasan
Corporate Advisor

With exponential growth in cross border trade and the business models used to carry out trade in today’s times, the existing tax and transfer pricing laws were getting a bit dated and the BEPS project provided a platform to enable significant changes to the overall international corporate tax landscape since the first bilateral tax treaty was proposed in 1928. The OECD estimates that global revenue losses from BEPS are up to USD 240 billion annually and they hoped that the BEPS proposals released on October 5 will go some way to address this tax gap. 

At this juncture, it would be pertinent to understand some of the key proposals from an India perspective:

·        No special tax regime has been proposed for the digital economy as it is believed that the existing measures on CFC, Permanent Establishment (PE) and Transfer Pricing are sufficient to address the same. Though currently, CFC regulations do not exist in India, it is expected that the Indian Tax regulations will be updated on the basis of proposals provided in Action 3 on CFCs.

·        Linking rules have been introduced to curb hybrid mismatches involving combination of primary rules and secondary defensive rules.

·        Fixed ratio rule has been recommended to limit net deduction on interest to percentage of earnings (10 - 30%)

·        Changes have been proposed to Article 5 of OECD model tax convention dealing with PE, to prevent abuse using commissionaire arrangements & similar strategies.

·        Under Transfer Pricing measures, the objective is to align transfer pricing outcomes to value creation. The actual conduct of the parties will override contractual terms and it has been stated that contractual allocations of risk should be respected only when they are supported by actual decision-making i.e. exercising control over these risks coupled with financial capacity to assume such risks.

·        For intangibles, the guidance clarifies that legal ownership alone does not necessarily generate a right to return that is generated by the exploitation of the intangible. The return has to be provided to entities which carry out the DEMPE functions ie development, enhancement, management, protection and exploitation pertaining to that intangible.

·        Pure funding of activities without any control of the financial risks associated with its funding for example non evaluation of credit worthiness will be entitled to no more than a risk-free return, or less

·        Three- tier Transfer Pricing Documentation including Country by Country Reporting will enable a consistent disclosure of relevant information and is to be implemented by 2016 in domestic regimes

Framework for implementation and monitoring of the BEPS recommendations is being developed by the BEPS working committee. 

In this new BEPS world, Multinationals will need to fundamentally rethink their tax strategies  and the revenue authorities in each jurisdiction has a challenge to create a balance between attracting companies to do more business in their jurisdiction vis-à-vis the need to keep a more level global playing field. 

India has been an active participant in the BEPS project and in various forums indicated that the final BEPS proposals will be studied and a call on various action whether legislative or administrative will be taken soon. To my mind, as far as India in concerned, the direction of BEPS is clear and one may expect changes to be brought in tax and transfer pricing regulations as early as fiscal year beginning April 01, 2016.

Rohan K Phatarphekar
Partner & National Head, Global Transfer Pricing Services, KPMG

The release of the final BEPS package clearly marks a new beginning in the world of taxes. It will have significant repercussions on the ways and means of doing business around the globe by multinational corporations. 

While the BEPS prescription calls for a consistent approach, the reality is that some jurisdictions may introduce unilateral measures leading to higher compliance costs and increased disputes, especially in the short to medium term. 

For an emerging economy like India, which is trying to come out of its aggressive tax approach of the recent past and attract foreign capital, it is important not to go overboard while implementing BEPS measures; rather, a cautious and calibrated approach will help the country to remain competitive.

Subhankar Sinha
Senior Vice President, Head of Tax South Asia & Middle East, Siemens