Context: The Union Cabinet has approved the ratification of the Multilateral Convention to implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting.
The Multilateral Convention is an outcome of the OECD (Organisation for Economic Co-operation and Development) / G20 Project to tackle Base Erosion and Profit Shifting (the “BEPS Project”) i.e., tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no tax being paid.
BASE EROSION AND PROFIT SHARING:
- Base Erosion and Profit Shifting (BEPS) is a technical term indicating the tax avoidance strategies of MNCs that reduce the tax bases for countries.
- The terms base erosion and profit shifting are closely related. Usually, a company has to pay tax for its profit or income. This profit is the tax base for the government as tax is imposed as a percentage of this profit.
- Once profit is shifted to other countries or to tax havens, the tax base is eroded and there is no tax payable by the company in the concerned country. In recent years, Multinational Corporations (MNCs) are innovating sophisticated tax planning practices to avoid taxes by shifting profits to other countries especially to tax havens. This has resulted in the erosion of the tax base.
- Governments hence are at the receiving end as their tax revenues are reduced. There is a growing concern with regard to the significant losses of national tax revenues because of BEPS.
It can be clearly understood from the following examples:
OECD: The Organisation for Economic Co-operation and Development is an intergovernmental economic organization founded in 1961 to stimulate economic progress and world trade. It is a forum of countries committed to democracy and the market economy, providing a platform to compare policy experiences, seek answers to common problems, identify good practices and coordinate domestic and international policies of its members. Most OECD members are high-income economies with a very high Human Development Index (HDI) and are regarded as developed countries.
BEPS PROJECT OF OECD:
The BEPS Project identified 15 actions to address base erosion and profit shifting (BEPS) in a comprehensive manner.
India was part of the Ad Hoc Group of more than 100 countries and jurisdictions from G20, OECD, BEPS associates and other interested countries, which worked on an equal footing on the finalization of the text of the Multilateral Convention. The text of the Convention was adopted by the Ad hoc Group in November 2016.
HOW WILL MULTILATERAL CONVENTION HELP?
It ensures consistency and certainty in the implementation of the BEPS Project in a multilateral context. Ratification of the Multilateral Convention will enable the application of BEPS outcomes through modification of existing tax treaties of India in a swift manner.
It enables all signatories to meet treaty-related minimum standards that were agreed as part of the final BEPS package, including the minimum standard for the prevention of treaty abuse
The Convention will operate to modify tax treaties between two or more parties to the Convention. It will not function in the same way as an amending protocol to a single existing treaty, which would directly amend the text of the Covered Tax Agreement. Instead, it will be applied alongside existing tax treaties, modifying their application in order to implement the BEPS measures.
Impact: The Convention will modify India's treaties in order to curb revenue loss through treaty abuse and base erosion and profit shifting strategies by ensuring that profits are taxed where substantive economic activities generating the profits are carried out and where value is created.