Context:

India with some other members of OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) adopted a high-level statement containing an outline of a consensus solution to address the tax challenges arising from the digitalization of the economy.

Base erosion and profit shifting (BEPS)

• Base erosion and profit shifting (BEPS) refers to tax planning strategies used by multinational enterprises that exploit gaps and mismatches in tax rules to avoid paying tax.
• This undermines the fairness and integrity of tax systems because businesses that operate across borders can use BEPS to gain a competitive advantage over enterprises that operate at a domestic level.
• Developing countries’ higher reliance on corporate income tax means they suffer from BEPS disproportionately.
• BEPS practices cost countries USD 100-240 billion in lost revenue annually.

About OECD/G20 Inclusive Framework on BEPS

• Working together within OECD/G20 Inclusive Framework on BEPS, 139 countries and jurisdictions are collaborating on the implementation of 15 measures to tackle tax avoidance, improve the coherence of international tax rules and ensure a more transparent tax environment.
• The tax deal: The deal consists of two components.
• Pillar One, which is about the reallocation of an additional share of profit to the market jurisdictions.
• Pillar Two, consisting of minimum tax and subject to tax rules
• Some significant issues including share of profit allocation and scope of subject to tax rules, remain open and need to be addressed.

Impact on India

• The principles underlying the solution vindicates India’s stand for a greater share of profits for the markets, consideration of demand-side factors in profit allocation, the need to seriously address the issue of cross-border profit shifting, and the need for subject to tax rule to stop treaty shopping.

Steps to be taken by India

• India is in favor of a consensus solution that is simple to implement and simple to comply with.
• The solution should result in the allocation of meaningful and sustainable revenue to market jurisdictions, particularly for developing and emerging economies.
• India will continue to be constructively engaged in reaching a consensus-based ready to implement the solution with Pillar one and Pillar two as a package and contribute positively to the advancement of the international tax agenda.