Clearly, out of the 15 Action Points (“AP”), the ones that are most crucial to India include:
Action 1 – Addressing the Tax Challenges of the Digital Economy
Action 5 – Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance
Action 6 – Preventing the Granting of Treaty Benefits in Inappropriate Circumstances
Actions 8-10 – Aligning Transfer Pricing Outcomes with Value Creation
Action 12 – Mandatory Disclosure Rules
Action 13 – Transfer Pricing Documentation and Country-by-Country Reporting
Action 14 – Making Dispute Resolution Mechanisms More Effective
Interestingly, India’s tax policy and jurisprudence has evolved over the years to deal with several contentious issues, outlined in various APAs. Action Points (AP) above.
A case in point is what constitute PE in the context of digital economy. Though the dust has not settled on this subject, the objective of Indian administration to apply strict source based rules of taxation is clear. Having said that, AP1 has not articulated rules for digital economy taxation, particularly intended actions of certain emerging economies to levy withholding tax or some form of tax under the nexus approach. As a matter of fact, AP1 caution nations to respect existing treaty obligations, should they decide to impose additional safeguards in their domestic law for levying any form of tax.
On AP 5, dealing with transparency and highlighting substance test, BEPS action point suggestion on ‘Nexus approach’ is interesting, particularly in light of R&D expenditure in jurisdiction which undertakes such activities. India will particularly keep a close watch on AP 5 given its focus on R&D.
AP 6 dealing with conditions for grant of treaty benefits, particularly introduction of limitation benefits (LOB rule) will be music to several emerging markets, who are recipients of Foreign Direct Investments (FDI). Implementation of AP 6 signals an end to treaty shopping and other treaty abuse strategies. AP 6 essentially highlights,’ Principle purposes of test’ (“PPT”) which largely aligns with the views expressed by Indian courts, though substance shall assume greater significance in the future.
AP 7 on artificial avoidance of PE shall further restrict definition of ‘preparatory and auxiliary’ activities, suggesting stricter source based taxation regime, which has been controversial issue in India in the context of liaison offices of MNC’s.
AP 8-10 aligning TP outcomes with value creation will again auger in favour of government’s representing large emerging markets. The guidance clarifies allocation of return of high value intellectual property factoring location savings and local market features. Simultaneously, AP 8-10 highlights importance of beneficial ownership of IP/intangibles. On both aspects of locational savings and intangibles, several multinational enterprises have ongoing disputes, which are lying in various dispute forums.
AP 12 dealing with mandatory disclosure norms is interesting from an Indian standpoint, given India’s timing to introduce GAAR from April 1, 2016. AP 12 recommends framework for countries to seek information from tax payers on potentially aggressive or abusive tax planning schemes. Countries such as India grappling with disclosure requirements are likely to implement at this AP.
AP 13 dealing with TP documentation on CBC reporting has been debated at length. What would be interesting is to see how countries such as India, who are net capital importers shall supplement their domestic law on TP documentation.
AP 14 dealing with effective dispute resolution mechanism will test endurance of emerging economies, particularly India, China & Brazil who have huge back log of unresolved MAP cases. AP 14 envisage a minimum standards by G20 to resolve MAP in timely manner and implement best practice to streamline administrative process. Though, India has put out a stiff opposition to provide mandatory binding MAP arbitration, most countries are moving to seek finality of international tax disputes via the arbitration process.
In summary, besides announcements in 2016 budget of the government, subordinate legislation by way of administrative circular and rules shall guide Indian government’s actions towards BEPS recommendations.
There is greater need for evolving a consultative approach with business representatives to put in place series of action points such that India will implement as it enters the new world tax order – with clarity, consistency and certainty.