What is BEPS? - Base Erosion and Profit Shifting (BEPS) refers to tax planning strategies
- That exploit gaps and mismatches in tax rules to make profits ‘erode' for tax purposes or
- To shift profits to locations where there is little or no real activity but the taxes are low resulting in little or no overall corporate tax being paid.
What causes BEPS?
- The interaction of domestic tax systems in cross border transactions may result in double taxation of same income / leave gaps, resulting in double non taxation of income. BEPS strategies take advantage of these gaps between tax systems in order to achieve double non-taxation.
- Global corporate income tax (CIT) revenue losses estimated between 4% and 10% of global CIT revenues, i.e. USD 100 to 240 billion annually. Given developing countries’ greater reliance on CIT revenues, estimates of the impact on developing countries, as a percentage of GDP, are higher than for developed countries.
India not a member of OECD, but actively engaged in taxation work of OECD. Since 2006, accorded the status of “Participant” / “Observer”. OECD and G20 countries working on equal footing on the BEPS project. Recommendations under BEPS Project made on basis of consensus arrived by 34 OECD Countries and 8 non-OECD G20 countries. India as an non-OECD G20 country, is an active participant in the BEPS project and as member of “Bureau Plus”, participated in the decision making process. India obliged to act on BEPS recommendations.
BEPS Action Plans:
The BEPS Project aims to provide governments with clear international solutions for fighting corporate tax planning strategies that exploit gaps and loopholes of the current system to artificially shift profits to locations where they are subject to more favourable tax treatment. The OECD work is based on a BEPS Action Plan endorsed by the G20, which identified 15 key areas/action plans.
With the adoption of the BEPS package, OECD and G20 countries, as well as all developing countries that have participated in its development, will lay the foundations of a modern international tax framework under which profits are taxed where economic activity and value creation occurs. It is now time to focus on the upcoming challenges, which include supporting the implementation of the recommended changes in a consistent and coherent manner, monitoring the impact on double non-taxation and on double taxation, and designing a more inclusive framework to support implementation and carry out monitoring.
Impact/Implication on the Business of MNC’s:
- Identify the aspects of the Plan that have the greatest potential impact on their business models.
- Stay informed about ongoing developments in the OECD and in the countries where they operate or invest.
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An approach to hard-to-value intangibles was agreed to by the OECD and G20 and published in the Action 8-10 final report on of Base Erosion Profit Shifting (BEPS) plan in October 2015. The approach was then set out in Chapter VI of the OECD Transfer Pricing Guidelines.
HTVI - Implementation guidance on hard-to-value intangibles:
On 23 May 2017, the Organisation for Economic Co-operation and Development (OECD) released a discussion draft (the Discussion Draft or Draft) on the implementation guidance on hard-to-value intangibles (HTVI) in connection with Base Erosion and Profit Shifting (BEPS) Action 8. The Discussion Draft provides guidance on the implementation of the approach to HTVI.
The HTVI approach is stipulated in the final report on transfer pricing under BEPS Actions 8-10 and formally incorporated into the OECD Transfer Pricing Guidelines.The Discussion Draft contains three sections that present
- The principles that should underlie the implementation of the HTVI approach,
- Three examples to clarify the implementation of the HTVI approach in different scenarios, and
(iii)The interaction between the HTVI approach and the access to the mutual agreement procedure (MAP) under the applicable treaty. The guidance included in the Draft is aimed at reaching a common understanding and practice among tax administrations on how to apply adjustments resulting from the application of the HTVI approach.
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BEPS - HTVI (Hard to Value Intangibles) - Implementation guidance |
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The proposals included in the Discussion Draft do not represent a consensus view of the OECD’s Committee on Fiscal Affairs, but were released in draft form in order to provide an opportunity for public comments, to be submitted by 30 June 2017.
Principles that should underlie the implementation of the HTVI approach
The HTVI approach authorizes tax administrations to use ex post evidence on the financial outcomes of an HTVI transaction (i.e., information gathered in hindsight about how valuable an intangible has turned out to be) as presumptive evidence on the appropriateness of the pricing arrangements. The Actions 8-10 Report also describes certain circumstances or safe harbors where such presumptive evidence may not be used. The ex post outcomes provide information on the determination of the valuation at the time of the transaction, but a potential revised valuation should not be based on actual income or cash flow without also taking into account the probability of such income or cash flow at the time of the transfer of the HTVI.
The Discussion Draft discusses the impact of timing issues on the HTVI approach. In this respect, tax administrations should apply audit practices to identify and act upon HTVI transactions as early as possible. However, inherent to this approach, ex post outcomes relating to the transfer of the intangible may not be available shortly after the transaction. It is recognized that the elapsed time between the transaction and the moment the ex post outcomes become available to tax administrations may not always correspond with the audit cycles or administrative and statutory time periods, in particular for intangibles that will not be exploited commercially until years after the transaction.
The guidance set forth in the Draft should not be used to delay or bypass a country’s normal audit procedures. Some countries may encounter difficulties in implementing the HTVI approach due to for example short audit cycles or statute of limitations. Such countries may consider targeted changes to procedures or legislation to counter these implementation difficulties, such as mandatory prompt notifications in the case of a HTVI transfer or an amendment of the normal statute of limitations.
HTVI and the mutual agreement procedure
The Actions 8-10 Report stresses the importance of permitting the resolution of cases of double taxation arising from the application of the HTVI approach through access to the MAP under the applicable treaty. The Discussion Draft should therefore be read in conjunction with the final report on BEPS Action 14 (Making Dispute Resolution Mechanisms More Effective).
