Base Erosion and Profit Shifting | 18 Jun 2024

Source: OECD

Why in News?

Recently, the Organisation for Economic Co-operation and Development (OECD) welcomed the commitment of the 147 Members of the Inclusive Framework on Base Erosion and Profit-Shifting (BEPS) to keep working to resolve any remaining issues in the signing process of the Multilateral Convention (MLC).

What is Base Erosion and Profit Shifting (BEPS)?

• About
  • The BEPS initiative is an OECD initiative, approved by the G20, to identify ways of providing more standardised tax rules globally.
  • BEPS refers to tax strategies exploiting differences in tax rules across countries to minimise overall corporate tax payments.
• Aim:
  • This strategy aims to reduce overall corporate tax liability by making profits seem to vanish or by moving them to low-tax regions with minimal real economic activity.
    • While often not illegal, BEPS tactics capitalise on variations in international tax regulations.
  • Developing countries are particularly vulnerable to BEPS due to their strong dependence on corporate income tax, especially from multinational corporations.
• Inclusive Framework on BEPS:
  • Inclusive Framework was established by the OECD and G20 in 2016.
  • It unites 147 countries and jurisdictions, to combat tax avoidance and promote equitable tax practices, and comprises two pillars.
    • First Pillar:
      • It addresses cross-border profit shifting by multinational and digital companies.
      • It aims to ensure these large enterprises pay taxes where they generate profits, potentially reallocating over USD 100 billion annually to market jurisdictions.
    • Second Pillar:
      • It proposes a global minimum corporate tax rate, currently suggested at 15%, to prevent harmful tax competition among countries.
      • It will raise significant revenues of up to USD 192 billion per year for developed and developing countries.

What is the Significance of BEPS?

• Equitable Tax Contributions: It ensures multinational enterprises (MNEs) pay their fair share where they do business. For example, A global coffee chain would pay taxes in each country where it sells, not just where it's headquartered.
• Fiscal Healing: It helps governments raise crucial funds to mend public finances strained by various unforeseen conditions (Man-made or Natural disasters).
  • A country can use additional tax revenue to reduce pandemic-induced debt. Increased tax income allows for upgrading healthcare facilities or expanding broadband access.
• Competitive Balance: It reduces the tax advantages of larger corporations over smaller, domestic businesses.
• Digital-Era Readiness: This tax systems catch up with online commerce. Like, An e-commerce platform pays taxes where customers shop, even without physical stores.
• Worldwide Teamwork: It emphasises an international commitment to solving cross-border tax challenges.

What is India's Position on Global Tax Reform?

• Signing Global Tax Reform: Indian multinational enterprises will have to start reviewing and accounting for any additional tax liability as per the global tax reform signed by India.
  • For Example, India joined the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information in 2015.
  • It is to exchange a wide range of financial information after collecting the same from financial institutions in their country/jurisdictions
• Consensus-Driven Solution: The country supports a consensus-driven solution that's easy to implement and comply with.
  • India advocates for broader implementation of the new tax law to ensure it doesn't collect less than its current equalisation levy revenue.
• Abiding Market Jurisdiction: India emphasises that the solution should allocate substantial and sustainable revenue to market jurisdictions, especially developing and emerging economies.
  • The Two-Pillar Plan aligns with India's stance on granting markets a larger profit share and factoring in demand-side elements in profit allocation.
  • India has ratified the Multilateral Convention to Implement tax treaty-Related Measures to Prevent Base Erosion and Profit Shifting.

What are the Concerns Related to Global Tax Reform?

• Sovereignty Issues: The reform may infringe upon a nation's sovereign right to determine its own tax policies.
  • A global minimum tax rate could deprive countries of a policy instrument used to promote their individual interests.
• Limiting Tax Competition: Some argue that the fear of tax competition restrains governments from imposing excessive taxes on citizens to finance extravagant spending.
• Effectiveness: Critics, including organisations like Oxfam, question the reform's potency, suggesting it may not eliminate tax havens as multinational companies continue to engage in aggressive tax planning strategies that exploit regulatory gaps and inconsistencies.
  • Such as a multinational tech might sell intellectual property rights (such as patents or trademarks) to a subsidiary located in a low-tax jurisdiction at a price that undervalues these assets.

Way Forward

• Flexible Implementation: Allow countries to adapt the rules to their specific economic contexts while maintaining the spirit of the agreement.
  • For example, a developing country might be permitted a grace period before fully implementing the minimum tax rate.
• Strengthen International Cooperation: Enhance information sharing and joint audits to tackle complex cross-border tax issues.
  • Such as the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Accounts.
• Public Transparency: Encourage or mandate public country-by-country reporting by large multinationals.
  • Like, a tech giant publicly disclosing how much revenue it earned and tax it paid in each country of operation.