Column: Tackling profit-shifting

Apr 26 2014, 05:58 IST
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SummaryOECD’s action plan to counter base erosion and profit-shifting may be a game-changer for cross-border trade

After years of failing efforts to spur the economy through spending and tax hikes, the developed countries tightened their belts against the perceived flaws in the international tax rules. These countries, which earlier supported globalisation, soon echoed the cries, of the developing countries, stemming from Base Erosion and Profit Shifting (BEPS) by multinational companies. BEPS is essentially tax avoidance through the shifting of a company’s activities to a low- or a no-tax jurisdiction. The Organisation for Economic Co-operation and Development (OECD), at the behest of the G20, unveiled a 15-point action plan, to combat BEPS, in July 2013.

Interestingly, India and other BRIC countries which are part of G20 are placed on an equal footing with the OECD-member nations for the BEPS project. Recently, the OECD released discussion drafts on some key aspects, including challenges in taxing the digital economy, prevention of treaty abuse and transfer pricing documentation.

Taxation of e-commerce: For e-commerce, tax authorities globally are grappling with the issue of the taxing rights of source country versus the resident country and the relevance of the Permanent Establishment (PE) definition where there is no physical presence of the entity.

The OECD’s discussion draft proposes to do away with the general exclusion of the preparatory and auxiliary activities from the definition of a fixed-place PE because many such activities constitute core activities in the digital world. A new nexus—economic presence PE—is proposed, which covers the significant digital presence of an enterprise engaged in fully dematerialised digital activity. Use of data from customers in another country or place of conclusion of contracts or consumption and payment for such digital products could be the new basis for taxation. This may be a paradigm-shift in the thinking about PE.

Concepts like a PE being created by the presence of a website or a server in another country or where conclusion of contracts is dependent on technology instead of a person are also proposed. India’s reservations against the OECD commentary and the approach of its judiciary is gaining wider acceptance.

Prevention of treaty abuse: The BEPS project addresses ‘treaty abuse’, for purposes of double non-taxation, by shell and conduit companies . The endeavour is to develop model treaty provisions and recommendations for anti-avoidance rules that can be incorporated in the domestic tax laws to restore source taxation in several situations. The discussion draft calls for three levels of checks—inclusion in the tax treaties

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