Anti avoidance measures are those measures which prevents tax evasion, where these measures are put in place purely for the reduction of tax.
BEPS are helpful from erosion of profit shifting.
Case to Relate:-
Elon musk ltd. of united states of America and Reliance Ltd of India are associated companies. Elon musk ltd is a parent company while Reliance Ltd is a subsidiary company.
Reliance ltd has earned a profit in India and want to distribute a dividend amount to its parent company Elon musk ltd.
But for transferring the dividend Reliance ltd needs to pay a dividend distribution tax to the government of India.
So to avoid this tax litigation Reliance ltd. instead of paying dividend to Elon musk ltd. create a new company named Tesla ltd in India and through this Tesla ltd gives a loan to Elon musk ltd in United states of America .
in this way Reliance ltd passed a dividend amount transferred to parent company without paying a dividend tax in India. So to prevent this government of India has made some anti-avoidance measures.
In the coming paragraphs we will discuss this anti avoidance measures in detail.
What will you get?
Now we will discuss the same concepts in detail.
1. Base erosion and profit shifting (BEPS):-
BEPS is a tax planning strategies that eploits tax and mismatches rules to make profit disappear and shift profits to low tax jurisdiction or no tax jurisdiction.
Adverse effects of BEPS: –
- Government has to cope with a less tax revenue and a high compliance cost.
- In developing countries , less tax revenue leads to under funding of public investment and a slower growth rate.
- When tax laws permits businesses to reduce their tax burden by shifting their income to another country having low tax jurisdiction then in that country individual tax payer’s are required to contribute more towards tax by increasing their share of tax burden.
- Enterprises working in the domestic market finds difficulty to compete with the multi- national companies that have the ability to shift their profits across borders to avoid or reduces tax.
BEPS Action plan -1 OECD recommendation: –
OECD has recommend a several options to avoid a direct tax challenges which includes,
- Modifying the existing permanent establishment rule to provide that whether an entity engaged in fully dematerialized activity is required to constitute a PE , if it is maintained a significant presence in another country’s economy.
- Creation of a PE when an enterprise creats a website on a server of another enterprise located in a jurisdiction and carries a business through that website.
- Imposition of final with holding of tax on certain payments for digital goods or service provide by a foreign E-commerce provider or imposition of an equilisation levy on supplying specified service by a non- resident enterprise to a resident enterprise in his business or profession or a permanent establishment of such enterprise.
BEPS Action plan-2 Hybrid mismatch and branch mismatch : –
Branch mismatch: –
It arises when there is a difference between an allocation of income and expense between a branch and a head office result in a portion of a net income of a tax payer escaping the charge to taxation in both the branch and residence jurisdiction.
Hybrid mismatch: –
It means a difference of tax treatment of an entity or an instrument under the laws of two or more tax jurisdictions to achieve double non- taxation.
Hybrid mismatch arises due to,
- Creation of two deductions for a single borrower.
- Generation of deduction without income inclusions.
- Misuse of foreign tax credit.
- Participations of exemption regimes.
This action plan gives a recommendation of neutralize the effect of hybrid mismatch arrangements.
BEPS Action plan -3 Controlled foreign corporations: –
Shifting incomes to subsidiaries in low tax jurisdiction and no tax jurisdiction.
OECD has recommend a building block model for CFC.
- Computation and attribution of CFC income: –
CFC income shall be computed as per the tax law of the parent jurisdictions and attribution of such income is subject to a threshold and based on controlled ownership.
- Prevention and elimination of double taxes: –
Provide a credit for foreign tax paid on CFC income .
- Controlled foreign corporations definition:-
CFC rules applies to those countries whose parent companies having a subsidiaries in low tax jurisdiction.
- Controlled foreign corporation exemption and threshold requirments: –
Companies are exempted from CFC rules if the tax rates in other country is more than a parents jurisdictions.
- Definition of CFC income: –
CFC income should have a definition of income in which all the concerns regarding the BEPS are addressed.
BEPS Action plan -4 Interest deductions and other financial payments: –
To provide a cap on interest payments , interest paid on more than 30% of EBITDA or interest payable by an enterprise for that previous year whichever is less shall not be deductible.
Interest expense disallowed is to be carried forward for next 8 years.
If interest expense exceeds Rs.1 crore than only this provision are applicable.
Banks and insurance companies are excluded from this provisions.
BEPS Action plan -5 Counter harmful tax practices: –
The purpose of the concessional taxation regime is to encourage entities to retain and commercialize existing patents and for developing new innovative product..
6 strategies for ruling are,
- Rulings related to preferential regime.
- Cross border / unilateral APA’S
- Rulings related to downwards adjustment of profits.
- PE rulings.
- Conduit rulings.
- Any other types of rulings .
BEPS Action plan -6 Preventing treaty abuse: –
Countries can prevent treaty abuse by,
- Combined approach of principle purpose test (PPT) and limitation of benefits (LOB).
- LOB shall be supplemented by a mechanism that would be deal with conduit financing.
- Principal purpose test (PPT) rule alone.
BEPS Action plan -7 Prevent the artificial avoidance of PE status: –
Change in definition of PE will avoid companies having a taxable presence in a country under tax treaties.
This changes will ensure that when the activites that an intermediary exercises in a country are intended to result in regular conclusion of contracts to be performed by a foreign enterprise that enterprise will be deemed to have a PE in that working country.
BEPS Action plan -8 Intangibles: –
Addresses transfer pricing issues relating controlled transactions involving intangibles. Misallocation of profits generated by valuable intangibles is a significant cause of BEPS.
BEPS Action plan -9 Risk and Capital: –
Contractual allocation of risk only when they are supported by actual decision making and thus exercising control over this risks
BEPS Action plan -10 Other high risk: –
It highly addresses on,
- Addressing profit allocations resulting from controlled transactions which are not commercially rational.
- Targeting use for transfer pricing methods which resulting diverting profits from the most important activites of the MNE group.
BEPS Action plan -11 Measuring and Monitoring BEPS: –
6 indicators of BEPS activites are,
- Profit allocation of MNE’s in low tax countries is higher than their world wide profit rate.
- Effective tax rate paid by large MNE entity are effectively lower than the domestic companies.
- FDI is increasingly concentrated.
- Suppression of taxable profits from the location of the value creating activites is particularly clear with respect to intangible assets and the phenomea has been grown rapidly.
- Royalty received in low tax countries accounted for 3% of total royalty.
- Debt from related and third parties is more concentrated in high statutory tax rate countries.
BEPS Action plan -12 Disclosure of aggressive tax planning arrangements: –
- Clarity and comprehensibility.
- Additional compliance cost to tax payers.
- Flexibility and dynamism.
- Accurate identification of the schemes to be disclosed.
- Effective achievement use of information collected.
- Ensuring effectiveness of information collected.
BEPS Action plan -13 Three tier standardized approach to transfer pricing: –
- Master file.
- Local file.
- Country by country reporting.
2. General anti avoidance rules (GAAR): –
GAAR rules are only applicable to any assessee when the following two conditions are satisfied;
- When the transaction has been entered for obtaining the tax benefit and,
- It’s an impermissible avoidance arrangement.
Meaning of impermissible avoidance arrangement: –
- Creats rights or obligations on Arm’s Length Price.
- Directly or indirectly misuse or abuse of provisions.
- Lack commercial substance or is deemed to lack commercial substance.
- Not ordinarily employeed for bonafide purpose.
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Q-1 Mike Hussey ltd of Australia has acquired shares in Dhoni ltd of India by two of its subsidiaries Pointing ltd and Gilchrist ltd. Both the subsidiaries have a control of 9% share. Whether the GAAR provisions are invoked?
A-1 Yes. This transaction has been created for obtaining tax benefit and also there is no commercial substance of acquiring Dhoni ltd by two of its subsidiaries.
It has created two subsidiaries just for evading tax as both the companies individually holding was 9% which was less than 10%. Thus GAAR provisions are applicable.
Thus for reducing tax evasion and better transperency in tax collection all the anti avoidance measures are useful for the country.
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A-1 It is a concept which empowers a revenue authorities to deny the tax benefits who does not have a commercial substance of doing a business.