BEPS: The India Story

The G20-OECD project on Base Erosion and Profit Shifting (BEPS) was initiated in light of the concern that multinational enterprises (MNEs) are not paying their fair share of taxes, and the final reports on the 15 BEPS actions were issued in October 2015. India, as part of the G20, has proposed to implement a few of the BEPS actions in the recent Budget. Let’s take a quick look at the impact of such proposals.

Country-by-Country Reporting
The key proposal is in relation to country-by-country reporting and transfer pricing documentation, which involves significant disclosure requirements in relation to global operations of MNEs. The biggest concern of taxpayers in India is in relation to the manner in which such information will be utilised. As long as this is used as a risk-based assessment tool, it is fine. However, if such information will be utilised to make adjustments during the course of transfer pricing assessments, without analysing the rationale for the results thrown up by the data, it will lead to complications and prolonged litigation.

From the perspective of the revenue authorities, the proposed rules will ensure significant transparency and the authorities will have access to a significant amount of data that was never available to them in the past.

The danger from the revenue’s perspective could be that with the abundance of data and limited resources to analyse it, some key information could slip through the cracks.

It is also to be noted that with the kind of data available to the authorities, the nature of disputes with the transfer pricing authorities may also change in the future — from the existing adjustments based on comparables and mark-ups, the discussion will move to value creation, risks, etc.

Special Regime for Patent Income
India is taking a bold step and going against the tide when it comes to having a concessional regime for taxation of income from patents developed and registered in India at 10 per cent. Globally, IP regimes are recognised as potentially giving rise to BEPS concerns. The BEPS action on harmful tax practices has looked at the IP regimes of 15 countries in light of the nexus approach/ substantial activity test and concluded that all the regimes are inconsistent, either in whole or in part, with the nexus approach. Such IP regimes of countries like the UK, France, Netherlands, Luxembourg and China will now have to be reviewed with possible amendments of the relevant features of their regimes.

India has taken a cue from this global development and proposed the special IP regime to encourage R&D in India. The government wants to encourage companies to locate the high-value jobs associated with the development, manufacture and exploitation of patents in India. This may encourage Indian MNEs to register patents in India, and wherever feasible, to bring back IP that was developed in India but registered overseas. As far as overseas MNEs is concerned, they are likely to first examine the Indian legal framework and IP protection laws, before registering patents in India.

It may be noted that India’s IP regime may also be examined in terms of the nexus approach/substantial activity test under the BEPS action dealing with harmful tax practices. This is however a major reform from an Indian perspective, and its success will lead to India being a global R&D hub with high-value R&D work being carried out in India.

Equalisation Levy
India has proposed an equalisation levy of 6 per cent on non-residents that do not have a permanent establishment in India, in relation to income from online advertisement and related facilities/services. It is interesting to note that the BEPS final report on the digital economy concludes that other actions will generally address BEPS concerns in relation to the digital economy; it however states that countries may take additional safeguards against BEPS (including an equalisation levy), provided existing treaty obligations are respected.

It is pertinent to note that the equalisation levy is not a part of the Indian Income-tax Act, 1961. At this juncture, it is interesting to note that the Indian Tax Tribunals have generally taken a position that no withholding tax applies on payments for online advertising. Pursuant to introduction of the levy, non-residents may find themselves unable to claim tax treaty benefits in relation to income from online advertisement, and the equalisation levy may be a cost for them if no credit is available for the levy in their home country.

Lastly, it is important to note that the government has retained the power to specify additional services on which the equalisation levy could apply. This appears to indicate that the government may be testing the waters with the equalisation levy on online advertisement, and may extend it to other digital transactions.

It is heartening to note that India is implementing BEPS in a phased manner. One needs to bear in mind that on one hand India is trying to woo foreign investors, whereas on the other it is seeking to protect its tax base and garner additional tax revenues — this is a challenge and the government will have to maintain a delicate balance to achieve both objectives.

The author is partner, Deloitte Haskins & Sells LLP