What is BEPS – Everything You Need to Know

  • Blog|International Tax|
  • 4 Min Read
  • By Taxmann
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  • Last Updated on 17 June, 2022

Base Erosion and Profit Shifting:

BEPS also referred to as the Base Erosion and Profit Shifting is a term that is used for closing the gaps within international tax for organizations that tend to avoid tax or minimize taxation burden within their own country through engagement in taxation inversions or via migration of intangibles for lowering the taxation jurisdictions. 

The Organization for Economic Cooperation and Development has basically issued fifteen actionable measures for addressing the primary areas, which they feel that organizations have extensively used to accomplish this shift of profit. This has allowed the OECD to address the country’s digital economic condition, abuse of treaty and transfer pricing related documents among other areas. For instance, BEPS Action Item number 13 aims at transforming documentation of transfer pricing, forcing the MNCs to rethink the manner in which the details pertaining to transfer pricing will be reported to the local taxation authorities and globally through CbC reporting. 
In the past couple of years, a growing number of MNCs have been resorting to advanced taxation planning methods to avoid paying taxes by simply shifting their profits to other nations, particularly those countries that are regarded as tax havens. These practices have further eroded the taxation base in these countries and their governments faced losses due to such sophisticated planning & practices. Governments of different countries were of the impression that BEPS resulted in massive losses as far as the national taxation revenues were concerned. This prompted the Organization for Economic Cooperation and Development to launch the BEPS concept/project. The OECD has created 15 action points to better manage the issue of shifting profits.

More about the BEPS Project:

The Base Erosion and Profit Shifting or BEPS initiative/project has been designed by the OECD and has received the approval of the G20 (or the Group of Twenty). It aims at creating global standard rules for checking taxation avoiding practices by Multi-national corporations, thereby ensuring that the tax base does not erode in the process.  

Below discover more about the 15 action points

Action-1: It addresses the taxation problems of digital economies world-wide, while identifying the primary issues being posed by the digitally advanced economies when it comes to applying the international taxation rules. Action-1 highlights the options that governments can use for addressing these issue, while adopting an integrated approach as well as taking both indirect and direct taxes into consideration.  Action-2: This point aims at developing model provisions for treaty and recommends how domestic regulations should be designed for neutralizing the hybrid entities and instruments effect such as double tax deduction, double non-taxation etc. 

Transfer Pricing Digest 2019

Action-3: This point makes recommendations about the different ways in which the CFC (Controlled Foreign Corporations) taxation rules can be strengthened.  Action-4: This point lays down a common method by which the tax base can be prevented from erosion by using the interest expenditure. For instance, via the usage of 3rd party and related party debt for achieving additional deductions of interest or for financing the deferred or exempt income production.  Action-5: This point redesigns the adverse taxation practices, while emphasizing on enhancing transparency.    Action-6:  Action 6 designs model provisions for treaty and also offers recommendation with regard to the creation of domestic regulations for preventing the treaty from abuse. Action-7: This point consists of the alterations that can be made in the permanent establishment’s definition. For instance, using the commissionaire systems and similar other terms.    Action-8-10: These points offer guide to transfer pricing methods that further ensure that the results of transfer pricing are in accordance with the creation of value with regard to the intangibles, such as the transactions that are highly risky and the ones that are difficult to value.  Action-11: Action 11 provides different methods for collecting and analyzing data/information on Base Erosion and Profit Shifting as well as the right actions for addressing it.  It also offers recommendations with regard to the indicators of economic and scale of BEPS’s impact, while ensuring that all the tools for monitoring are available. It also measures whether the actions are economically impactful and effective when it comes to addressing BEPS on a consistent basis. Action-12: This offers recommendations around the framework of compulsory rules of disclosure for tax planning plans that are aggressive in nature, while also taking the administration costs of business and taxation administration into consideration. It also takes into account the experiences of nations that have already implemented similar rules.    Action 13: It consists of revised guide around the documentation of transfer pricing, in addition to information for CbC reporting that helps in enhancing transparency and also takes compliance related costs into account.  Action -14: Action 14 designs solutions for addressing the hindrances that restrict nations from finding adequate solutions to disputes related to treaty under Mutual Agreement Procedure, through a standard within this particular area and other acceptable practices. It also involves arbitration as one of the options for countries that are willing to address the issues.    Action- 15: This point analyzes legal problems concerning the creation of a multilateral treaty that further helps countries in developing a Multilateral Instrument to Modify Bilateral Tax Treaties.

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