Base Erosion and Profit Shifting (BEPS)

Note4Students

Mains Paper 2: IR| Effect of policies and politics of developed and developing countries on India’s interests

From UPSC perspective, the following things are important:

Prelims level: CBC reports, BEPS

Mains level: India-US trade relations


News

Context

  • India and the U.S. signed an inter-government agreement for the automatic exchange of country-by-country (CbC) reports.
  • This will reduce the compliance burden for Indian subsidiary companies of U.S. parent companies.
  • This is a key step in making India compliant with the Base Erosion and Profit Shifting (BEPS) project, of which it is an active participant.

What is BEPS?

  • Base Erosion and Profit Shifting (BEPS) is a tax avoidance strategy used by multinational companies by exploiting gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations.
  • In order to combat this, many countries entered into agreements to share tax information with each other to enhance transparency and make such profit shifting that much harder.
  • Here, profits are shifted from jurisdictions that have high taxes (such as the United States and many Western European countries) to jurisdictions that have low (or no) taxes (so-called tax havens).
  • The BEPS Action Plan adopted by the OECD and G20 countries in 2013 recognised that the way forward to mitigate risk from base erosion and profit shifting was to enhance transparency.

CBC Reports

  • Against this background, a template was released in 2014, which outlined how MNEs could report the required information for each tax jurisdiction in which they do business. These are called the country-by-country reports.
  • MNEs are also required to identify each entity within the group doing business in a particular tax jurisdiction, and to provide information about the business activities each entity conducts.
  • This information is to be made available to the tax authorities in all jurisdictions in which the MNE operates.
  • This was seen as placing a huge compliance burden on the subsidiary companies of these MNEs.

Assist this newscard with:

India, US to sign pact for exchange of country-by-country reports

Foreign Policy Watch: India-United States
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