What President Donald Trump will do with the OECD agenda on tackling Base Erosion and Profit Shifting (BEPS) by multinational enterprises (MNEs) will only be clear going ahead. But for developing countries, especially India, the challenge is to attune their taxation systems and policies with the agreed norms at this global co-operation platform to gain as much as possible—both in terms of revenue and growth. Considering the fact that tax authorities often favour the cause of revenue that ends up hurting larger growth perspective, there is an urgent need to take the discourse to a level where the government gains from the views and suggestions of the researchers, independent tax experts and tax practitioners in developing a balanced strategy that marries revenue needs with growth drivers.
While it is up to the government to take note of the views expressed by the experts, Bengaluru-based International Tax Research and Analysis Foundation (ITRAF) has brought out a compilation of critical BEPS agenda aspects relevant to India, in the form of a book “Base Erosion and Profit Shifting: The Global Taxation Agenda”, published by Wolters Kluwer (India). Further, the articles are edited by the former adviser to the finance minister and chairman of the Tax Administration Reform Commission, Parthasarathi Shome.
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The essence of the book is its coverage of the technicalities related to the new-age tax milieu in a simple language that can be understood even by a layman. To give an example, Mukesh Butani, managing partner, BMR Legal, while dealing with ‘Alternative Mechanisms to Make Dispute Resolution Effective’, has candidly brought out the point that India’s position of eschewing mandatory arbitration in tax disputes has been a contrarian one, as it has a comprehensive arbitration legislation to deal with domestic and international arbitration. So, the task before India is to evolve MAP (mutual agreement procedure) as a more effective dispute resolution mechanism—which it has done in the case of transfer pricing disputes with the US IT and ITeS firms. There is no doubt, though, that the ultimate solution is to mandatorily keep the arbitration in tax dispute part of the bilateral agreements. It doesn’t serve any purpose in terms of investment and growth, not even revenue, if cases like Vodafone and Cairn linger for a longer period.
It is the strong divergence of the sovereign interest with that of an international cooperation to ensure tax certainty and justice to all stakeholders, which has made the BEPS agenda (15 action points) a tough balancing act—it is a work in progress and countries like India have to play an active role in finding a sustainable global working model of international taxation.
The basic problem in the whole BEPS debate is that of the taxation domain shifting from an exclusive domain to a conjunctive domain due to the complex operations of MNEs to minimise their tax outgo and maximise profit. The reactions of individual countries based on where they stand, have led to aberrations, and the success of the BEPS initiative would depend on how far the OECD model gets acceptance across the board. Different chapters in the book have brought out the background and the challenges, even going to the extent of raising concerns over the usefulness and implementability of the BEPS agenda.
Among the takeaways from the book for the policy-makers, is the possibility that at least a few of the 15 BEPS actions, like Action 5 linking the accrual of intellectual property rights and associated income to the taxation rights of the jurisdiction where research and development takes place, will become clear. Ditto with Action 6, which targets limiting of treaty abuse and controlling treaty shopping, but Action 1 related to the taxation of digital economy that relies on the existing double Tax Avoidance Treaties to deal with the taxation of emerging trends, has failed to capture ground realities.
In the end, even though the significance of information sharing at the domestic, and also bilateral and multilateral levels, can’t be undermined, it is the avoidance of tax disputes through instruments like advance pricing agreements, which will play a critical role in the MNE taxation going ahead.
India has gained from the BEPS agenda, but not to the extent it can, and the tax authorities can benefit from the ITRAF-led independent analysis of the BEPS framework.