Tax Reforms

Centre ratifies convention to curb company profit shifting


From UPSC perspective, the following things are important :

Prelims level : Base Erosion and Profit Shifting

Mains level : Read the attached story

  • The government announced that it had ratified the international agreement to curb base erosion and profits shifting (BEPS).
  • This has been done in a bid to stop companies from moving their profits out of the country and depriving the government of tax revenue.

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.

About the convention

  • India has ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (multilateral instruments (MLI)).
  • This was signed by the Finance Minister in Paris on June 7, 2017 on behalf of India, along with representatives of more than 65 countries.
  • The MLI is a result of concerted work by the G20 countries to tackle the issue of base erosion and profit shifting, something that affects them all.
  • India was part of the Ad Hoc Group of more than 100 countries and jurisdictions from the G20, OECD and other interested countries, which worked on the finalizing the text of the Multilateral Convention.

Impact of the MLI

  • The MLI will be applied alongside existing tax treaties, modifying their application in order to implement the BEPS measures.
  • It will modify India’s tax treaties to curb revenue loss through treaty abuse and base erosion and profit shifting strategies by ensuring that profits are taxed where substantive economic activities generating the profits are carried out.
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