BASE EROSION & PROFIT SHIFTING
Emerging trends and proposed Action Plans
Shefali Goradia
January 8, 2014
CONTENT
Background
 What is BEPS?
 BEPS Concerns
BEPS Action Plans
 Timelines and Deliverables
 Objective
 Action Plans
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 Formulation of Action Plans
BACKGROUND
Globalization and technological advances have increased the pace of integration of national
economies as well as evolved new business models in which Multinational Enterprise
(MNEs) operate
Shift from country specific business models to global models
Domestic laws of countries do not consider tax systems of other countries. Further, gaps
Tax planners are continuously identifying and exploiting the legal arbitrage opportunities
and boundaries of acceptable tax planning to minimize tax burden (say Double Irish Dutch
Sandwich)
In doing so, BEPS concern arises. BEPS relates chiefly to instances where the interaction
of different tax rules leads to double non taxation or less than single taxation. It also relates
to arrangements that achieve no or low taxation by shifting profits away from jurisdictions
where the activities creating those profits take place.
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remain in international standards (say in bilateral agreements)
WHAT IS BEPS?
What is BEPS?
Shifting of profits /income to low-tax jurisdictions or other locations enabling a more
favorable tax treatment
Arrangements involving double non-taxation or less than single taxation
Transfer of intangibles to favorable tax jurisdictions
Stripping legal entities of business functions, assets and risks
Use of intermediary companies/ jurisdictions in investment and financing structures
Use of hybrid arrangements to exploit mismatches in tax treatment
BEPS – Causes
Existence of loopholes, gaps or mismatches in the interaction of domestic tax laws of
countries
Inadequacy of current treaty provisions to effectively deal with innovative business models
Ineffectiveness or lack of anti-abuse measures in some tax jurisdictions
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Use of “tax attributes” such as tax credits, loss-carry forwards, etc
BEPS – CONCERNS
Harm to Governments
 Loss of substantial corporate tax revenues
 High cost of tax administration
 Undermines integrity of tax system
 Tax fairness issue
Harm to individual tax payers
 To bear a greater share of tax burden
Harm to business
 Significant reputational risk for MNEs whose effective tax rate is low
 Competitive disadvantage for domestic businesses
 Risk of unilateral actions by certain tax jurisdictions
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 Critical under-funding of public investment
BEPS ACTION PLANS
BEPS – FORMULATION OF ACTION PLANS
BEPS debate received political attention - G20 summits in 2012 and 2013
G20 countries realized the need of preventing BEPS and approached OECD to address the issue
related to BEPS and incorporate a transparent and inclusive consultation process involving
stakeholders
On 19 July 2013, OECD released an Action Plan which was presented to the meeting of G20
Finance Ministers in Moscow
taxation associated with practices that artificially segregate taxable income from activities that
generate it.”
The report indicates that “no or low taxation is not per se a cause for concern, but it becomes so
when it is associated with practices that artificially segregate taxable income from the activities
that generate it.”
The Action Plan covers 15 specific Actions which are broadly to be achieved within a two year
time frame (ie by the end of 2015)
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The purpose of the Action Plan is “to prevent double non-taxation, as well as cases of no or low
ACTION PLAN
DELIVERABLES
DEADLINE
1 – Address the tax challenges of the
digital economy
Report issued for identifying
issues and possible actions to
address the same.
September 2014
Supplementary report
December 2015
2 – Neutralize the effects of hybrid
mismatch arrangements
Report issued for
recommendations regarding
design of domestic rules and
revise OECD model tax
convention
September 2014
3 – Strengthen CFC Rules
Recommendations regarding
design of domestic rules
September 2015
4 – Limit base erosion via interest
deductions and other financial
payments
Recommendations on design
of domestic rules
September 2015
Changes to transfer pricing
guidelines
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ACTION PLANS – TIMELINES
2/4
ACTION PLAN
DELIVERABLES
DEADLINE
5 – Counter harmful tax practices
more effectively, taking into account
transparency and substance
- Report issued on member
country regimes
- Expand participation to nonmember
- Revision of existing criteria
for preferential regimes
September 2014
6 – Prevent treaty abuse
Report issued for changes to
OECD model tax convention
and recommendations
regarding domestic rules
September 2014
7 – Prevent the artificial avoidance of
PE status
Recommendations on
changes to OECD model tax
convention
September 2015
8 – Assure that transfer pricing
outcomes are in line with value
creation- Intangibles
Report issued for changes to
the transfer pricing guidelines
and possibly to the model tax
convention
September 2014
Supplementary report
September 2015
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September 2015
December 2015
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ACTION PLANS – TIMELINES
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ACTION PLAN
DELIVERABLES
DEADLINE
9 – Assure that transfer pricing outcomes
are in line with value creation- Risks and
capital
Report on changes to the
transfer pricing guidelines and
possibly to the model tax
convention
September 2015
10 – Assure that transfer pricing
outcomes are in line with value creationOther high risk transactions
Report on changes to the
transfer pricing guidelines and
possibly to the model tax
convention
September 2015
11 – Establish methodologies to collect
and analyze data on BEPS and the
actions to address it
Recommendations on data to be
collected and methodologies to
analyse the same.
September 2015
12 – Require taxpayers to disclose their
aggressive tax planning arrangements
Recommendations regarding
design of domestic rules
September 2015
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ACTION PLANS – TIMELINES
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ACTION PLAN
DELIVERABLES
DEADLINE
13 – Re-examine transfer pricing
documentation
Report issued on changes to
transfer pricing guidelines and
recommendations regarding
design of domestic rules.
September 2014
14 – Make dispute resolution mechanism
more effective
Recommendations for changes
to model tax conventions
September 2015
15 – Develop a multilateral instrument
Report issued on identifying
relevant public international law
and tax issues
September 2014
Develop a multilateral instrument
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ACTION PLANS – TIMELINES
ACTION 1 – DIGITAL ECONOMY
Challenges in the digital economy – Example
Transfer of IP
Development of
algorithms (IP) for
targeted display of
advertising through use
of data
Data
B Co.
(outside India)
Users of
free
online
services
Marketing
Support
India Co
Online Advertising
Fees
Indian Advertisers
Where is the value created?
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Significant
challenges:
1.
2.
3.
Nexus
Characterization
Value Attribution
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A Co.
(outside India)
ACTION 1 – DIGITAL ECONOMY
Challenges posed by digital economy
Digital economy raises 4 main tax challenges:
 Nexus- Reduced need for physical presence
 Characterisation- new digital products or means of delivery
 Data- Possibility to gather and use information from various sources is a primary input into process of value
creation in digital economy. How to attribute value to such data?
Ring fencing the digital economy from rest of the economy would be difficult
High mobility of intangibles, users, business functions – adds to the difficulty to identify the
location of business
Avoiding a taxable presence – increasing reliance on automated process (eg websites or
fragmentation of activities to qualify for exemption from Permanent Establishment (‘PE’) status)
Minimising functions, assets and risks in market jurisdictions – assets (particularly intangibles)
and risks may be allocated to other group entities in low tax jurisdiction
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 Collection of VAT- Exemption for imports of low value goods in countries and cross border B2C transactions
ACTION 1 – DIGITAL ECONOMY
Challenges posed by digital economy
Maximising deductions in market jurisdictions – hence, camouflaging the taxable profits (eg use of
intangibles)
Profit extraction - Reduced or no withholding tax on royalties/ interest by locating entities in low
tax jurisdiction
Eliminating or reducing tax in intermediate country and/or in the country of residence of the
Administrative challenges-Identification, determining extent of activities, etc
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ultimate parent
ACTION 1 – DIGITAL ECONOMY
Potential Options
Changes to the definition of PE
Modification to the exemption of the PE status (eg eliminate the listed exemptions or making such
exemptions subject to an overall condition of being preparatory or auxiliary in nature)
New ‘nexus rule’ for enterprises engaged in ‘fully dematerialized digital activities’ based on
significant digital presence. For instance, a significant digital presence be deemed to exist when:
 Digital products are widely used or consumed in the country
 Substantial payments are received as part of enterprise’s core business or
 Existing branch in the country offering secondary functions (marketing, consulting functions etc) are strongly
related to the core business of the enterprise
Virtual PE (say websites-fixed place PE, online contracts-agency PE, etc)
Imposing withholding tax at source on digital transactions
Consumption tax options – Review threshold exemptions, simplified registrations, etc
Coordination with work on other Action Plans
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 Significant number of contracts for provision of digital products are remotely signed
ACTION 1 – DIGITAL ECONOMY
ICAI Recommendations
Provide criteria to distinguish core and preparatory and auxiliary activities; withholding taxbeyond threshold and not to apply on ‘B2C’ transactions; presumptive tax regime; simplified
single VAT registration in all states; defer VAT on B2C transaction till GST is introduced; etc
Few Questions
E-commerce business models likely to be subjected to increased scrutiny in India on
Is a final WHT an equitable solution?
Practicality of registration for consumption tax?
Tracking attribution of profits in highly mobile digital businesses-challenge the already
challenge transfer pricing?
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withholding tax, attribution of value to data, characterization, etc?
ACTION 2 – HYBRID MISMATCH
ARRANGEMENTS
What is Hybrid Mismatch Arrangements?
An arrangement that exploits the different tax treatment in two jurisdictions to produce a
mismatch in tax outcomes
Mismatch is either double deductions for the same payment or a deductible payment that is not
included in income by the recipient
What Action 2 is trying to achieve?
hybrids ie to develop model treaty provisions and design domestic rules to neutralize the effect of
hybrid instruments / entities by not permitting:

Multiple deductions for a single expense

Deduction in one country without corresponding taxation in another

Generation of multiple foreign tax credits for one amount of foreign tax paid
Clear, automatic and comprehensive rules that neutralize the tax mismatch without disturbing the
commercial or regulatory consequences
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Recommendations for changes to domestic law and OECD Model Convention to deal with
ACTION 2 – HYBRID MISMATCH
ARRANGEMENTS
Changes to Domestic tax rules:
Specific changes: (i) Denial of dividend exemption (ii) proportionate limitation on withholding tax
credits (iii) improvements to Controlled foreign corporations (‘CFC’) and other regimes; and
imposition of information requirements and (iv) rules restricting tax transparency of reverse
hybrids
Hybrid Mismatch rules: To adjust the tax outcomes in one jurisdiction to align them with tax
consequences in another through ‘primary rule’ and ‘defensive rule’. It targets 2 types of
payments:

Duplicate deductions for the same payment
Further, to avoid risk of double taxation it calls for guidance on coordination or tie breaker rules, if
more than one country seeks to apply the rules
Changes to OECD model conventions:
Examine issues of dual resident entities
Examine issues related to transparent entities
Interactions between recommendations in Part 1 and provisions of OECD model conventions
Limited applications of situations covered in report in Indian context due to regulatory
restrictions
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 Payments deductible under payer jurisdiction - Not includible in ordinary income of the payee
ACTION 2 – Overview of proposed rules
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Instruments /
entities
Indirect D/NI
Instruments /
entities
DD
Entities only
General rule:
deny deduction
Rule order
Primary rule & defensive rule
Scope
Controlled groups and structured arrangements
Related parties for instruments
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Linking rules
D/NI
Special rule on
dividend exemption for
instruments
ACTION 2 – HYBRID MISMATCH
ARRANGEMENTS (Example)
A Co
Interest
(ie equity
injection for
Country A and
debt for
Country B for
tax purposes)
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B Co issues a hybrid financial
instrument to A Co, which shall be
characterized as debt in Country B
and as equity in Country A

Country A treats the payment as
‘dividend’, which is entitled to
participation exemption

Country B allows deduction to B Co
for interest payments made on the
instrument
Country A
Country B
Hybrid
Financial
instrument

B Co
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BEPS Recommendations:

Country B to deny deduction to
Payer (B Co)

Defensive rule: Country A to treat
receipt as ordinary income of A Co
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DEDUCTION IN ONE COUNTRY
WITHOUT TAXATION IN ANOTHER:
ACTION 3 – CFC RULES
Need for Action 3
Creation of affiliated non-resident taxpayers and routing income of a resident enterprise through
the non-resident affiliate
Objective of Action 3
CFC rules already prevalent in many countries. Need to strengthen the same
Develop recommendations regarding the design of CFC rules
ultimate parent
A positive spillover effect in source countries as taxpayers have no (or much less) incentive to
shift profits into a third, low-tax jurisdiction
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CFC rules lead to inclusions of passive undistributed income in the residence country of the
ACTION 4 – LIMIT INTEREST DEDUCTIONS
Limit base erosion via interest deductions and other financial payments
To address base erosion and profit shifting using deductible payments such as interest or such
other equivalent payments that can give rise to double non-taxation
From an inbound perspective, concern regarding interest expense deduction wrt lending from a
related entity in a low-tax regime
From an outbound perspective, a company may use debt to finance the production of exempt or
Plan
Develop recommendations regarding best practices to prevent base erosion through use of
interest expense
Transfer pricing guidance for pricing of related party financial transactions such as financial and
performance guarantees, derivatives, and captive and other insurance arrangements
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deferred income while claiming a current deduction for interest expense
ACTION 4 – LIMIT INTEREST DEDUCTIONS
Proposed Option - Group-wide test
Proposed Option - Fixed ratio test
A fixed ratio test operates by applying a fixed benchmark ratio to an entity’s earnings or asset
value
Relatively inflexible, applying the same benchmark ratio to all entities irrespective of the level of
third party gearing
Difficult to establish the “correct” benchmark ratio, for example current fixed interest/EBITDA
ratios are often in excess of groups’ actual ratios
More straight-forward for groups and tax authorities to apply
A combined approach would allow lower risk companies to apply a simple fixed ratio test, while more
highly geared companies could claim higher deductions by applying a group-wide test
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A group-wide test would limit a company’s net interest deductions to a proportion of its group’s
actual net third party interest expense, based on a measure of economic activity such as earnings
or asset value
Aims to allow groups to claim tax relief for their real cost of funds, while protecting countries from
excessive deductions
Groups can continue to centralise third party borrowings in the entity/country which is most
efficient for non-tax purposes, while tax relief for interest is matched with economic activity
A best practice recommendation could include an agreed approach to be applied consistently by
all countries or provide flexibility for a country to incorporate existing tax principles within its rule
No country currently applies a group-wide test as a main rule
ACTION 5 – HARMFUL TAX PRACTICES
Counter harmful tax practices
Current concerns on a “race to the bottom” approach – Trend of across the board corporate tax rate
reductions on particular types of income (such as income from financial activities or from the provision
of intangibles)
Plans
Revamp the
work on harmful
tax practices with
a priority on
improving
transparency
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Compulsory
spontaneous
exchange on
rulings related
to preferential
regimes
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Rules that
require
substantial
activity for any
preferential
regime
Holistic approach
to evaluate
preferential tax
regimes
Engage with
non-OECD
members to
consider
revisions or
additions to the
existing
framework
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PLANS
ACTION 5 – HARMFUL TAX PRACTICES
Forum on Harmful Tax Practices (‘FHTP’) to deliver 3 outputs:
 Finalization of review of member country preferential regimes
 Strategy to expand participation to non-OECD member countries and
 Consideration of revisions or additions to the existing framework
For review of the existing preferential regimes, emphasis put on:
regimes
Countries have agreed to strengthen the substantial activity requirement for realigning taxation
of profits with substantial activity - This will affect IP holding companies
 Improving transparency through compulsory spontaneous exchange on rulings related to
preferential regimes
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 Elaborating a methodology to define the substantial activity requirement in the context of IP
ACTION 6 – TREATY ABUSE
Prevent treaty abuse
Treaty abuse, in particular treaty shopping, identified as one of the most important sources of BEPS
concerns
Issues identified
Use of low taxed branches of a foreign company
Use of conduit companies/ regimes to channel investments and for intra-group financing
Artificial shifting of income through transfer pricing arrangements
Plan
Recommendations regarding the design of domestic rules to prevent the granting of treaty
benefits in inappropriate circumstances
Clarify that tax treaties are not intended to be used to generate double non-taxation
Identify the tax policy considerations that countries should consider before deciding to enter into a
tax treaty with another country
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Use of multiple layers of legal entities
ACTION 6 – TREATY ABUSE
Design rules to prevent granting of treaty benefits in inappropriate
circumstances
Cases where person tries to circumvent limitations provided by treaty
 Clear statement that treaties intend to avoid creating opportunities for non-taxation or
reduced taxation through tax evasion or avoidance (including treaty shopping)
 Specific treaty anti-abuse rules (SAAR) which are:
• Minimum shareholding period to prevent dividend transfer transactions
• Changes to Article to prevent transactions that circumvent the application of that rule
dealing with capital gains on sale of shares of companies deriving value from
immovable property
• Residence under tie-breaker rule determined through Mutual Agreement Procedure
(‘MAP’) proceedings (having regard to factors such as place of effective management
(‘POEM’), place of incorporation, etc)
• Anti-abuse rule for permanent establishments situated in third States
 General treaty anti-abuse rule (GAAR) aimed at arrangements as one of the principal
purposes of which is to obtain treaty benefits (conduit financial arrangements)
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• Limitation-on-benefits (LOB) rule to address a large number of treaty shopping
situations based on the legal nature, ownership in, and general activities of, residents
of a Contracting State
ACTION 6 – TREATY ABUSE
Cases where person tries to abuse provisions of domestic law using treaty benefits
 Savings Clause - Treaty does not restrict a right of contracting state to tax its own residents
 Departure or Exit Taxes - Liability to tax certain types of income accrued for the benefit of
resident is triggered in the event resident of a particular country ceases to be resident of that
country
LOB Rule
attributes of various categories of persons)
Active business connection tests
Derivative benefits - Allow certain entities owned by resident of other states to obtain treaty
benefits that these resident would have obtained, if directly invested
Competent authority to grant treaty benefits, if other provisions deny the same
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Residents entities to get benefit of treaty only if Qualified person (by reference to nature or
ACTION 6 – TREATY ABUSE
Identification of tax policy consideration – required before entering into a tax treaty
Policy considerations would help countries to explain not to enter into tax treaties with certain no
or low tax jurisdiction
Modify a treaty previously concluded in event that change of circumstances raises BEPS concern
related to that treaty
Protect sovereign right of nations to enter into treaties considering other issues (taxation rights,
Follow up Work
Model provisions and related Commentary included in the report, in particular the LOB rule, are in
draft form and need to be refined
Further work is also needed with respect to:
 the implementation of the minimum standard adopted to address treaty shopping and
 the treaty entitlement of various investment funds
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foster economic ties, etc) besides potential BEPS risks
ACTION 6 – TREATY ABUSE
ICAI recommendations
LOB Rule - May lead to inappropriately restrictive outcome impacting genuine cases; TRC a
prima facie evidence be acceptable
Treaty Abuse provisions - No clarity in interplay with domestic GAAR. Further, if treaty GAAR
introduced then domestic GAAR only for determination of income under the domestic law;
grandfathering framework needs to be put in place; practical administration challenges
Questions
Is tax planning dead?
Too much discretion left with competent authorities?
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Tie Breaker test- current rule based framework can continue; MAP resort anyways available
ACTION 7 – PE AVOIDANCE
Objective of Action 7
Prevent the artificial avoidance of PE status by developing changes to the definition of PE:
 Use of commissionaire arrangements instead of traditional distributor models
 Use of preparatory and auxiliary exemptions - artificial fragmentation of operations among
multiple group entities
 Splitting up of contracts
Commissionaire arrangements
A commissionaire arrangement may be loosely defined as an arrangement through which a
person sells products in a given State in its own name but on behalf of a foreign enterprise that
is the owner of these products. The debate has been focussed on legal interpretation of phrase
‘authority to conclude contracts in name of’ which is found in Article 5(5)
Four alternative options to ensure that there will be a PE where the activities that an intermediary
(other than independent agent) exercises in a country result in the regular conclusion of contracts
to be performed by a foreign enterprise
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Address related profit attribution issues
ACTION 7 – PE AVOIDANCE
Preparatory and Auxiliary activities exemption
Art 5(4) of the OECD Model deems a PE not to exist where a place of business is used solely for
activities that are listed in that paragraph
First option: only activities that are preparatory or auxiliary would be covered
 Removal of the reference to ‘delivery’ (which will catch situations where an enterprise
maintains a warehouse, unless purely preparatory or auxiliary).
 Removal of the exception for ‘purchasing offices’ or for both ‘purchasing offices’ and ‘places
maintained for the ‘collection of information’
Proposal to address the abuse of Art 5(4) through fragmentation of activities between related
parties
 Art 5(4) will not apply with respect to a specific place of business if taxable activities that
constitute “complementary functions that are part of a cohesive business operation” are
carried on in the country by the same enterprise or by associated enterprises
Splitting of contracts between related entities
To be addressed by GAAR (PPT rule) or ‘Automatic Rule’
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Second option: more targeted changes
ACTION 7 – PE AVOIDANCE
Questions
How will jurisdictions overcome challenge of distinguishing genuine marketing support provider
entities from those who tacitly negotiate and conclude contracts for MNEs?
Will this lead to unreasonable attribution although the local subsidiary is adequately
compensated?
While the Action Plan 7 mentions subsidiaries and commissionaire arrangements, whether
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employee secondments or visits to customer premises / locations could be impacted?
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ACTIONS 8, 9 AND 10 – TRANSFER PRICING
Assure that TP outcomes are in line with value creation
Develop rules to prevent BEPS by moving intangibles among group members. This will:

adopt a broad and clearly delineated definition of intangibles
 ensure that profits associated with the transfer and use of intangibles are appropriately
allocated in accordance with (rather than divorced from) value creation
 develop TP rules or special measures for transfers of hard-to-value intangibles and
Develop rules to prevent BEPS by transferring risks among, or allocating excessive capital to
group members. This will involve:
 Ensuring that inappropriate returns will not accrue to an entity solely because it has
contractually assumed risks and has provided capital
 Alignment of returns with value creation
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 update the guidance on Cost Compensation Agreements (CCAs)
ACTIONS 8, 9 AND 10 – TRANSFER PRICING
Develop rules to prevent BEPS from other high risk transactions - transactions which would not,
or very rarely, occur between 3rd parties:
 clarify the circumstances in which transactions can be re-characterized
 clarify the application of TP methods, in particular profit splits, in the context of global value
chains and
The Action Plans would consider the application of both the principles (i) Arm’s Length Price (ALP)
principle and (ii) Potential special measures required to address concerns identified in Action Plan.
Guidance for Applying ALP Principle
 Identifying the commercial and financial relations
(Contractual terms; FAR analysis of the transaction, {if activities fragmented, determine the
interdependency and how commercial activity is coordinated}; Characteristics of property
transferred or services provided; economic circumstances of parties and market in which
parties operate; and Business strategies pursued by parties)
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 provide protection against common types of base eroding payments, such as management
fees and head office expenses
ACTIONS 8, 9 AND 10 – TRANSFER PRICING
 Identifying risks in commercial and financial relations (nature and sources of risks, allocation
of risks in contract, how risks assumed, potential impact of risks (value created), risks
management, actual conduct, transfer pricing consequences)
 Non recognition- If transaction does not have the economic attributes of arrangements
between unrelated parties, the same would be disregarded for transfer pricing purposes.
Accordingly, each party to have a reasonable expectation to enhance or protect commercial or
financial relations on risk adjusted basis compared to other opportunities realistically available
to them at the time arrangement was entered into
 Specific considerations like losses, effect of government policies, use of custom valuations
 Locations savings and other local market features
 Assembled work force
 MNE’s group synergies
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 Interpretation- Determine pricing for the actual transaction as accurately delineated under the
ALP principle
ACTIONS 8, 9 AND 10 – TRANSFER PRICING
Potential Special Measures -To address the residual risks unidentified by ALP principle. They
mainly relate to information asymmetries between tax payers and tax administrations and relative
ease with which MNE group can allocate capital to lowly taxed Minimal functional entities (MFE)
Action- Target circumstances where (i) taxpayer fixes price on basis of projections without any
further contingent payment mechanism (ii) does not contemporaneously document projections
and make them available to tax administration
Tax administrations may rebase calculations based on actual outcome, imputing a
contingent payment mechanism
 Independent investor - Circumstances where capital rich-asset owning company depends on
another group company to generate a return from asset
 Thick Capitalization - to determine the amount of capital in excess of pre-determined capital
ratio and then to deem interest deductions which would reduce the profitability of capital rich
company and produce deemed interest income in the company providing excess capital
Constraint - determining level of thick capitalization ratio a challenge?
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 Hard to value intangibles - Concerns- (i) potential for systematic mispricing, if no comparable
exists (ii) assumptions used are speculative (fixed price agreed years before intangibles
generates income) (iii) information asymmetries between taxpayer & tax administration are
acute
ACTIONS 8, 9 AND 10 – TRANSFER PRICING
 MFE- Transactions between related parties, especially transactions transferring key business
risks or intangibles, that one of the parties has minimal functions. The action plan would
determine thresholds of functionality based on qualitative or quantitative attributes
 Ensuring appropriate taxation of excess returns- This option entails application of primary
rule in form of CFC and a secondary rule to prevent non taxation. Under this, if CFC earns
excess return and average tax rate is below threshold percentage, the excess returns
subjected to tax at that rate under primary rule. A secondary rule would apply, if primary rule
not applied.
Locations Savings
Cost savings applicable on account of operating in a particular market. Actions include (i) determining
whether location savings exist, (ii) amount, (iii) extent to which savings are retained or passed by MNE
(iv) if not passed then manner of allocation
Challenge- Quantifying benefit derived from location savings
Questions- Approach to be adopted for quantifying location savings? Approach to be adopted for
allocated retained savings amongst various group companies? Does use of local comparable factor
return for location savings?
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The effect of falling beneath threshold would require entity’s profit to be reallocated based on
profit split, reallocate to ultimate parent (not a MFE), relocate to company providing functional
capacity
ACTIONS 8, 9 AND 10 – TRANSFER PRICING
Cross Border Commodity Transactions
Transfer pricing issues- (i) Use of pricing date conventions which enable tax payer to adopt
advantageous quoted price (ii) significant adjustments/ charging significant fees in supply chain
(processing, transportation, etc) (iii) involvement of MFE located in low tax jurisdictions
Options
 Deemed pricing date for commodity transactions (Firstly, use specified date selected by
parties. If pricing date is inconsistent with other facts, tax administrations impute pricing date
based on evidence provided by facts of case. If no evidence- date of shipment)
 Potential additional guidance on comparability adjustments
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 The use of the CUP method for pricing commodity transactions and use of quoted prices in
applying CUP method
ACTIONS 8, 9 AND 10 – TRANSFER PRICING
Low value adding intra-group services (Action Plan 10)
Services performed by one member or more than one member of MNE group on behalf of one or
more members of MNE group which (i) are of a supportive nature (ii) not a part of core business
activities (iii) do not require use of or lead to creation of unique or valuable intangibles (iv) do not
involve assumption or control or (creation) of (to) substantial or significant risks
Examples of Services that would qualify as low value added intra-group services:
payable; Human Resources activities, General services of an administrative or clerical nature,etc
Simplified Method for determination of Arm’s Length charges in case of low value added services
 Determination of cost pools
 Identify and remove those costs that are attributable to the services performed by one group
member solely on behalf of another group member
 Allocation of low value added service costs to group members based on some allocation key
(depending on nature of services)
 Profit mark up- Same mark up for all the low value added intra group services (range of 2 to 5
percent)
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Accounting and auditing; Processing and management of accounts receivable and accounts
ACTIONS 8, 9 AND 10 – TRANSFER PRICING
Low value adding intra-group services (Action Plan 10)
 Charge of low value added services - this would be sum of specific cost plus profit mark up
(step 2) & pooled cost plus profit mark up
 Application of the benefits tests to the low value adding intra group services
Documentation and reporting
 Written contracts or agreements for provision of services
 Calculation showing determination of cost pool and costs solely to one group member
 Calculations showing application of specified allocation keys
Questions
Tax authorities could challenge characterization and mark up of 2 to 5 percent for such services?
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 Documents to be maintained: description of the categories of low value adding services
provided, reasons justifying the same, rationale for provision of such services, benefits or
expected benefits, etc
ACTION 11 – MONITORING BEPS
Establish methodologies to collect and analyze data on BEPS and the actions to
address it
Several studies undertaken and data available identifying disconnect between location of value
creating activities and reporting of profits for tax purposes. Further, work to be done to evaluate
such studies
Develop outcome based techniques which seeks to allocate income across jurisdictions relative
Develop recommendations regarding indicators of the scale and economic impact of BEPS
Ensure that tools are available to monitor and evaluate the effectiveness and economic impact of
the actions taken to address BEPS on an ongoing basis
Assess a range of existing data sources, identifying new types of data that should be collected by
tax administrators and developing methodologies to analyse the same-based on both aggregate
(eg FDI and balance of payments) and micro-level data (eg financial statements and tax returns)
Balance the above objectives with taxpayer confidentiality and administrative costs
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to value creating activities
ACTION 12 – ENHANCED DISCLOSURE
Need for Action Plan 12
Comprehensive and relevant information on tax planning strategies often unavailable
Audit suffers from number of constraints as tool for early detection of aggressive tax planning
techniques
Objective of Action Plan 12
Develop recommendations regarding the design of mandatory disclosure rules for aggressive or
country specific needs and risks, etc
Focus will be international tax schemes - explore a wide definition of “tax benefit” in order to
capture such transactions
Design and put in place enhanced models of information sharing for international tax schemes
between tax administrations
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abusive transactions, considering administrative costs, current experiences in different countries,
ACTION 13 – TP DOCUMENTATION
Re-examine TP documentation
Develop rules regarding TP documentation to enhance transparency for tax administration, by
providing them with adequate information and also considering the compliance costs for business
The rules to be developed will include a requirement that MNE’s provide all relevant governments
with needed information on their global allocation of the income, economic activity and taxes paid
or accrued among countries according to a common country by country template
Provide tax administration information to conduct informed TP risks assessment and thorough TP
Audit
Tax payers assessment of its compliance with ALP principle
The information will make it easier for tax administrators to identify whether companies have
engaged in transfer pricing and other practices that have effect of artificially shifting substantial
amounts of income into tax advantaged environments
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Objectives
ACTION 13 – TP DOCUMENTATION
A three tiered approach to TP Documentation
Organizational
Structure of MNE
Description of MNE’s
major business lines
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CBC Reporting TemplateInformation required country
wise in draft template.
Following are the major
heads of CBC: Constituent entities
organized in country

POEM
Intangibles- Strategy
for development,
ownership, important
related party
agreements

Important business
activities along with
revenue and EBIT

Tax paid on cash and
accrued basis
Intercompany
financial transactions

Stated capital and
accumulated earnings
Financial and tax
positions-MNE’s
consolidated
accounts; APA’s and
Advance rulings, etc

No of employees

Tangible assets

Royalties/service fees/
interest paid or
received to/from
constituent entities
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Local File-Aimed at providing
local country transactional
information
Local entityManagement structure,
effective place of
operations, business
restructuring of
intangible transfer in 2
years
Details of controlled
transactionsidentification,
description and value,
FAR of entities; transfer
pricing methods
Financial informationAudited financial
accounts and allocation
schedule
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Master File- Aimed at
providing a clear
understanding of MNE’s
global operations.
ACTION 13 – TP DOCUMENTATION
Significant criticism and recommendations received by OECD
Approach and objective only suits the tax administration
Compliance cost and burden
Confidentiality concerns
Mechanism for sharing of information
All information vs Need based information
Need for materiality and de minimis thresholds
Exemption/simplification for SMEs
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Flexibility in reporting – entity-wise or business wise
ICAI Recommendations
ICAI Recommendations – TP Documentation
India should engage with OECD and the other countries for improving, standardizing and
simplifying TP documentation requirements and converge TP documentation in line with
international standards
Taxpayers should be given sufficient time to understand and obtain clarity in respect of the
proposed documentation requirements and develop systems
Specific guidance to be provided for standard forms developed for risk assessment, sharing of
‘general risk assessment policies’, releasing of FAQ’s by tax administrator
CBC reporting template is to be used by tax authorities for purposes of initial high level risk
assessment only aimed at determining whether and where to devote resources to conduct a
detailed examination. In this regard, necessary training to be imparted to the tax authorities to
facilitate the process of implementation. It should be clarified that CBC Reporting template
should not be considered as evidence at all
Information that is only relevant for ‘single’ or ‘group’ of entities can be included in Local file or
can be shared through treaty mechanism to maintain confidentiality and prevent ‘fishing’
inquiries. Eg: APAs / MAPs between 2 countries
Further, one tax administration should be responsible for enforcing compliance with respect to
Master file/CBC reporting, in particular the country of ultimate parent company
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Safe harbour rules, exemption from TP documentation, etc
ACTION 14 – DISPUTE RESOLUTION
Make dispute resolution mechanisms more effective
Actions to counter BEPS must be complemented with actions that ensure certainty and
predictability for the business
Develop solutions to address obstacles that prevent countries from solving treaty-related disputes
under MAP
Consideration for supplementing MAP with mandatory and binding arbitration provisions
Consist in political commitments to effectively eliminate taxation not in accordance with the
Convention
Provide new measures to improve access to the MAP and improved procedures
Establish a monitoring mechanism to check the proper implementation of the political commitment
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Three pronged approach
ACTION 14 – DISPUTE RESOLUTION
4 principles shall guide the political commitments and the measures
To ensure that treaty obligations related to the MAP are fully implemented in good faith
To ensure that administrative process promotes the prevention and resolution of treaty related
disputes
To ensure that taxpayers can access the MAP when eligible
To ensure that cases are resolved once they are in mutual agreement procedure
Put an obligation to resolve cases (not endeavor)
Ensure independence of a competent authority
Provide sufficient resources and performance indicators to a competent authority
To ensure that audit settlements (eg no penalties, if MAP right waived) do not block access to the
MAP
To implement bilateral APA programme and recurring (multiple year issues) and roll back
provisions
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Options proposed
ACTION 14 – DISPUTE RESOLUTION
To provide additional guidance on the minimum contents of a request for MAP assistance (avoid
onerous documentation) and improve transparency and simplicity of procedures
To clarify the availability of MAP access where an anti-abuse provision is applied
To ensure the taxpayer’s objection is justified and evaluated prima facie by both competent
authorities and not unilaterally
To clarify the relationship between MAP and domestic law remedies
foreign adjustments in MAP
To ensure principled approach to MAP resolution, improve competent authority co-operation,
transparency and working relationships
To increase transparency with respect to MAP arbitration
To clarify the co-ordination of MAP arbitration and domestic legal remedies
To provide guidance on consideration of interest and penalties in MAP
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To clarify issues connected with collection of taxes, time limits to access MAP and self-initiated
ACTION 15 – MULTILATERAL INSTRUMENT
Need for Multilateral instrument
Updating of the current tax treaty network highly burdensome, time consuming and will require
substantial resources due to multiple number of bilateral treaties
Without mechanism to swiftly implement them, changes to model only makes gap between
content of model and content of actual tax treaties wider. This contradicts the political objective
Develop a Multilateral Instrument
Plan
Objective of Action 15
Analyze the tax and international law issues for development of a multilateral instrument to enable
jurisdictions (that wish to) to implement measures and provide a foundation for amendment of
bilateral tax treaties
Develop a multilateral instrument to provide an innovative approach to international tax mattersreflecting rapidly evolving nature of global economy and adapt quickly to it
Streamline the implementation of tax treaty related BEPS measure
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To ensure effective and innovative implementation of measures resulting from the BEPS Action
ACTION 15 – MULTILATERAL INSTRUMENT
Key Conclusions
Multilateral instrument is desirable and feasible
Innovative approach with no exact precedent in tax world
Drawing on the expertise in other areas of public international law (other than tax) and tax
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experts
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Thank you