The Expert Explains: Will the OECD’s BEPS package affect the Mauritius-India tax treaty?
Announcing the final package of measures under the OECD/G20 Base Erosion and Profit Shifting (BEPS) project on 5 October, the OECD’s Secretary General Angel Gurría proclaimed that these represent “the most fundamental changes to international tax rules in almost a century”. So will they really have an impact in the region, particularly in the conclusion of negotiations on the Mauritius-India tax treaty, and if so how?For those who wish to dig deeper, here’s the explanation, straight from the desk of our expert guest contributor, Samantha Seewoosurrun, a reputed professional consultant in the financial services sector.
Announcing the final package of measures under the OECD/G20 Base Erosion and Profit Shifting (BEPS) project on 5 October, the OECD’s Secretary General Angel Gurría proclaimed that these represent “the most fundamental changes to international tax rules in almost a century”. So will they really have an impact in the region, particularly in the conclusion of negotiations on the Mauritius-India tax treaty, and if so how?
The OECD claims that the measures it has put forward, to be formally presented to G20 Heads of State and Government in November, will put an end to double non-taxation, facilitate a better alignment of taxation with economic activity and value creation and, once fully implemented, will render BEPS-inspired tax planning structures “ineffective”.
The OECD suggests that current revenue losses from BEPS, under conservative estimates, are in the region of USD 100-240 billion annually, or anywhere from 4-10% of global corporate income tax (CIT) revenues. It argues that the impact of BEPS upon developing countries is “particularly significant”.
Initial reactions to the measures have been rather predictable, with EU Commissioner and former French Finance Minister Pierre Moscovici applauding the OECD’s “impressive work”, while the NGO Action Aid claimed that the global tax system got a “sticking plaster” rather than the “major surgery” it needed.
So if we look at the details of the key measures, announced at a time when the Mauritius-India tax treaty still remains to be finalised, which will be the most critical, and what impact will they have?
Firstly, the package introduces a new minimum standard on preventing abuse including through “treaty shopping”, which involves strategies through which a person who is not a resident of a State attempts to obtain the benefits of a tax treaty concluded by that State. The OECD says that this will aim to put an end to the use of conduit companies to channel investments and curbing harmful tax practices, in particular in the area of intellectual property and through automatic exchange of tax rulings. The report also contains policy considerations to be taken into account when entering into tax treaties with certain “low or no-tax” jurisdictions.
Secondly, there will be new minimum standards on Country-by-Country reporting, as part of a new three-tiered standardised approach to transfer pricing documentation which, for the first time, will give all relevant tax administrations a global picture of the operations of multinational enterprises set out in a “master file”, while detailed transactional transfer pricing documentation is to be provided in a “local file” specific to each country. Large multinationals will also be required to file a Country-by-Country report that will provide annually, and for each tax jurisdiction in which they do business, the amount of revenue, profit before income tax and income tax paid and accrued and other indicators of economic activities.
Third, there will be greater emphasis on proving “substantial activity” with the revision of guidance on the application of transfer pricing rules to ensure that outcomes are in line with value creation, to prevent taxpayers from using so-called “cash box” entities to shelter profits in “low or no-tax” jurisdictions. It also redefines the key concept of “Permanent Establishment”, to curb arrangements which avoid the creation of a taxable presence in a country by reliance on an outdated definition.
Fourth, on dispute resolution, there is also a strong political commitment to the effective and timely resolution of disputes through the mutual agreement procedure, with a new monitoring mechanism to be set up, and large group of countries has committed to quickly adopting mandatory and binding arbitration in their bilateral tax treaties.
Beyond these points, there is a catalogue of other new measures to be implemented by governments through domestic law changes, for example on strengthened rules on Controlled Foreign Corporations, a common approach to limiting base erosion through interest deductibility and new rules to prevent hybrid mismatch arrangements from making profits disappear for tax purposes through the use of complex financial instruments. The OECD highlights that nearly 90 countries are now working together on the development of a multilateral instrument which would be capable of incorporating the tax treaty-related BEPS measures into the existing network of bilateral treaties. The instrument will be open for signature by all interested countries in 2016.
So if we come back to the Mauritius-India tax treaty, what difference will it make in the final stages of the negotiations? Undoubtedly some of the measures in the OECD’s package will have a bearing on the thorny issue of “limitation of benefits” to genuine residents of the countries concerned, which the Indian Government might consider strengthens its hand. At the same time, India will need to step up its own game in some areas, such as the resolution of tax disputes, where it has a poor track record. Overall, negotiators on both sides of the table are likely to be poring over the finer details of the OECD’s package to seek any additional leverage before the text of the treaty is finally signed.