Before trying to understand the Base Erosion and Profit Shifting, let us know where the need arises for the plethora of changes in the tax treaties among the countries. During the last decade, the news forum has aired the misuse of tax treaties, and the government riled up about tax treaties’ creative uses among the nations for escaping the tax nets. Be it the exotic Dutch Sandwich or the Double Irish, Single malt, and Green Jersey.
What do all these exotic names do? They are names for treaty shopping’s creative ways and enable the multinational enterprises to pay low taxes by shifting their income and profits to the low tax jurisdiction.
What is BEPS?
Base Erosion and Profit Shifting refers to the tax avoidance tactics that help exploit the gaps and mismatches in the tax laws among the countries to artificially shift profits from high tax jurisdiction to the low tax. Though ‘base erosion’ and ‘profit shifting’ are often used interchangeably, they differ due to the methodology used to avoid tax.
The country’s tax base is the income or a person on which the state has the right to levy tax. By ‘Base Erosion,’ the income or the person is manipulated to relocate to low tax jurisdiction.
‘Profit shifting’ is achieved by manipulating the transfer pricing policies, increasing intercompany costs.
The BEPS package was created by the OECD and the members of the G20 to curb tax avoidance strategies and aggressive tax planning. The package consists of 15 Action Plans that equip nations with the domestic and international instruments and guidance needed to tackle BEPS.
What are the pillars of the BEPS Action Plans?
The three fundamental pillars of BEPS ars:
- Introducing coherence in the domestic rules that affect cross-border activities
- Reinforcing substance requirements in the existing international standards
- It is improving transparency and certainty for business.
Types of recommendations in the Action Plan
The recommendations made under the BEPS Action Plans fall into three categories:
Best Practices:
‘Best Practices’ are recommendations or guidelines under the Action Plans. The countries are free to assess and pick whichever is most suited to their current tax regimes and tax competitive strategies.
Minimum standards:
‘Minimum standards’ are the recommendations to which the participating nations are committed for consistent implementation. The primary purpose of minimum standards is to ensure that the nations’ inactions should not lead to negative spillovers on to other countries.
Reinforced Standards:
‘Reinforced Standards’ are recommendations that purport to update the OECD’s existing standards and guidelines.