Chapter 25: Fundamentals of Base Erosion and Profit Shifting (BEPS)
1. Master Table of the 15 BEPS Action Plans
| Action Plan | Title / Core Objective | Indian Legislative Implementation |
|---|---|---|
| Action 1 | Tax Challenges of the Digital Economy | Equalisation Levy, Section 194-O, Significant Economic Presence (SEP). |
| Action 2 | Neutralise Effects of Hybrid Mismatch | Anti-hybrid rules, Section 90 amendments. |
| Action 3 | Controlled Foreign Company (CFC) Rules | CFC recommendations under discussion. |
| Action 4 | Limitation on Interest Deductions | Section 94B (30% EBITDA cap on AE debt). |
| Action 5 | Counter Harmful Tax Practices | Patent Box regime (Section 115BBF 10% tax). |
| Action 6 | Prevent Treaty Shopping | Principal Purpose Test (PPT) & LOB in DTAAs via MLI. |
| Action 7 | Prevent Artificial Avoidance of PE | SEP provisions & widening dependent agent PE scope. |
| Actions 8-10 | Align TP Outcomes with Value Creation | Transfer pricing guidelines for intangibles, risk, capital. |
| Action 13 | CbCR & TP Documentation | Section 286 (Master File & Country-by-Country Reporting). |
| Action 14 | Effective Dispute Resolution Mechanisms | Mutual Agreement Procedure (MAP) timebound resolution. |
| Action 15 | Multilateral Instrument (MLI) | Signing of MLI to modify 90+ bilateral DTAAs swiftly. |
2. Multilateral Instrument (MLI) Operating Mechanics
• Purpose: Modifies thousands of bilateral tax treaties worldwide without requiring renegotiation of each treaty individually.
• Covered Tax Agreement (CTA): An existing bilateral DTAA where both treaty partners notify each other and deposit their instrument of ratification with OECD.
• Reservations & Options: Countries can make reservations (opt-out) of non-mandatory provisions, but must accept the Minimum Standards (Action 6 treaty abuse & Action 14 dispute resolution).
• Covered Tax Agreement (CTA): An existing bilateral DTAA where both treaty partners notify each other and deposit their instrument of ratification with OECD.
• Reservations & Options: Countries can make reservations (opt-out) of non-mandatory provisions, but must accept the Minimum Standards (Action 6 treaty abuse & Action 14 dispute resolution).
3. Principal Purpose Test (PPT - Action 6 Minimum Standard)
Treaty benefit shall be denied if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that tax benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit.
PPT Safe Harbor / Rebuttal:
Treaty benefit is saved ONLY IF the taxpayer establishes that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the DTAA!
Treaty benefit is saved ONLY IF the taxpayer establishes that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the DTAA!
4. Anti-Avoidance of Permanent Establishment (Action 7)
| Avoidance Technique | BEPS Counter-Measure |
|---|---|
| Commissionaire Arrangements | Agent habitually playing principal role leading to conclusion of contracts without formal signing is treated as a Dependent Agent PE. |
| Specific Activity Exemptions | Storage, display, delivery, and purchasing are exempt ONLY IF they are of a preparatory or auxiliary character. |
| Anti-Fragmentation Rule | Prevents MNEs from breaking down a cohesive business operation into multiple small activities across group entities to claim preparatory/auxiliary exemption. |
5. High-Frequency Exam Traps
Trap 1: PPT applies even if domestic GAAR is not invoked!
Under the MLI, PPT operates at the treaty level. A treaty benefit can be denied under PPT even if the domestic GAAR threshold (₹ 3 Crores) has not been crossed!
Under the MLI, PPT operates at the treaty level. A treaty benefit can be denied under PPT even if the domestic GAAR threshold (₹ 3 Crores) has not been crossed!
Trap 2: Action 4 interest cap applies to third-party bank debt!
Section 94B applies not only to loans directly from an AE, but also to loans from unrelated banks if an AE provides an explicit or implicit guarantee!
Section 94B applies not only to loans directly from an AE, but also to loans from unrelated banks if an AE provides an explicit or implicit guarantee!