What is BEPS?
- Typically, a company needs to pay tax for the income or profits they earn.
- Base Erosion and Profit Shifting (BEPS) is a tax avoidance strategy by which firms make profits in one country, and shift them across borders by exploiting gaps and mismatches in tax rules, to take advantage of lower tax rates.
- It results in not paying taxes in the country where the profit is made (known as Base erosion).
About OECD/G20 Inclusive Framework on BEPS
- The OECD/G20 Inclusive Framework on BEPS brings together over 130 countries (including India) and jurisdictions to collaborate on the implementation of the BEPS Package.
- The BEPS package provides 15 Actions that equip governments with the domestic and international instruments needed to tackle tax avoidance.
- The Framework on BEPS allows interested countries and jurisdictions to work with OECD and G20 members on developing standards on BEPS related issues and review and monitor the implementation of the BEPS Package.
Why in News?
- India and majority of the members OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) have adopted a statement that seeks to reform international tax rules and ensure that multinational enterprises pay their fair share wherever they operate.
- However, India will have to roll back the equalisation levy that it imposes on companies such as Google, Amazon and Facebook when the global tax regime is implemented.
- Indian Finance Ministry said significant issues including share of profit allocation and scope of subject-to-tax rules were yet to be addressed, and a ‘consensus agreement’ was expected by October.
Two pillars of framework
- The framework has two pillars, one dealing with transnational and digital companies and the other with low-tax jurisdictions to address cross-border profit shifting and treaty shopping.
- The first pillar ensures that large multinational enterprises, including digital companies, pay tax where they operate and earn profits. Most such companies have so far been paying low taxes by shifting profits to low-tax jurisdictions.
- Under Pillar One, taxing rights on more than $100 billion of profit are expected to be reallocated to market jurisdictions each year.
- The second pillar seeks to put a floor under competition among countries through a global minimum corporate tax rate, currently proposed at 15%. This is expected to generate an additional $150 billion in tax revenues.
- If implemented, countries such as the Netherlands and Luxembourg that offer lower tax rates, and so-called tax havens such as Bahamas or British Virgin Islands, could lose their sheen.
- In 2016, India imposed an equalisation levy of 6% on online advertisement services provided by non-residents. This was applicable to Google and other foreign online advertising service providers.
- The government expanded its scope from April 1, 2020, by imposing a 2% equalisation levy on digital transactions by foreign entities operating in India or having access to the local market.
- Revenue under the levy for the last financial year amounted to Rs 1,492 crore until January 30, about 30% more than the Rs 1,136.5 crore collected in FY20. This levy will have to be withdrawn under the new regime expected to be rolled out in 2023.
- Experts said India will need to evaluate the revenue expected under the new rules against what it gets from the equalisation levy, besides examining their applicability.