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

of a limitation of benefits (LOB) clause preventing companies from availing the benefits of tax treaties until they have fulfilled certain substance requirements, a ‘main purpose’ anti-abuse test which seeks to deny treaty benefits if one of the main purposes is to obtain tax benefits and domestic general anti-avoidance rules (GAAR).

The LOB clause may spell the death of many intermediate holding companies which lack substance and have been interposed only to avail tax benefits. Investments from countries like Mauritius, which ultimately results in double non-taxation of capital gains, is likely to be affected. The domestic GAAR rules of certain countries, including India, have a ‘dominant purpose’ test instead of a ‘main purpose’ test. While the inclusion of the LOB clause in the tax treaties may deliver greater certainty, the ‘main purpose’ anti-abuse rule is likely to impact international business. The portfolio investors, already vexed by Indian GAAR, will be dumbfounded if the ‘main purpose’ rule in the tax treaty isn’t tamed to mirror the Indian GAAR.

Transfer pricing (TP): The BEPS project also has many measures to battle TP issues, including the requirement of uniform TP documentation in order to enhance transparency of the tax administration. MNCs are required to provide information regarding global allocation of income, economic activity and taxes paid in the interest of transparency and substance. The OECD proposes hastening the implementation of these proposals , which will place a significant implementation and compliance burden on the taxpayers. Consultation with the stakeholders to gain consensus would aid MNCs on the radar of the Indian revenue.

Mutual agreement procedure (MAP): To bolster MAP, the OECD is seeking to provide more robust ways to resolve disputes. The challenge, however, remains whether the jurisdictions can be persuaded to follow them.

The final action plan of the BEPS project focuses on the development of a multilateral instrument which would override existing treaties or alter a number of them in one go, and would make it much easier for jurisdictions to implement the necessary changes. Though the idea of a multilateral instrument is novel, each country would have to undergo an adoption process which may not be straightforward, particularly if it affects the country’s sovereign right to tax.

The implementation of the action plan instigates significant changes to the OECD model convention, commentaries, tax treaties, domestic tax laws, etc. While the OECD addresses BEPS in an organised and systematic manner, it will be the

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