Base Erosion and Profit Shifting

Introduction

• It refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations. 
• It is crucial for developing countries since they rely heavily on corporate income tax, especially from multinational corporations. 
• In recent times, MNCs are developing sophisticated tax planning practices to avoid tax by shifting their incomes/profits across the borders by exploiting loopholes and mismatches in tax regulations, to take advantage of lower tax rates and, thus, avoiding tax payments in the country where the profit is actually made. 

India and BEPS

• India has been heavily involved in the BEPS effort. India has participated actively in the development of action plans and is  a member of a number of committees,  working groups, and task-forces tasked  with assessing various parts of these plans.
• The Union Budget 2016 announced an  equalization levy of 6 per cent on payments  exceeding over Rs. 1 lakh to online ad  services from non-resident entities.
• This affected multinational companies with Indian subsidiaries, like Google and  Facebook.
• India is the first country to levy such tax, post the OECD action plan.
• A tax panel has also recommended expanding the ambit of this levy to cover a  wide range of transactions including cloud  computing, online marketing, website  designing, hosting and maintenance,  platforms for the sale of goods and services,  and online use of or download of software  and applications.

Important Notes

• Under the BEPS initiative, the OECD has studied methods to amend tax treaties, tighten standards, and exchange more government tax information, and has developed action plans under the authority of the G20 countries. 
• The BEPS Package includes 15 Action Points that give governments domestic and international tools to combat tax evasion.