tax. Today, businesses operate globally, so all respective governments must act together to restore the trust in domestic as well as international tax systems for ensuring fair competition. For this, OECD identifies specific actions that are needed for government to address all the hurdles. There are 15 Action Plans which have been implemented in three phases: Why this concept introduced? For the government, the tax base is the income or profit earned by companies. In recent times, MNCs are developing such tax planning’s which help in eroding tax base. Such practices are done by shifting their incomes/profits to other countries (say tax havens). To cope with such practices, Government launched a concept BEPS projected by the Organization for Economic Co-operation and Development (OECD). OECD has designed a 15-point action plan for tackling this problem of shifting profits. Introduction to BEPS Action Plans

Action Plan 1: Address the tax challenges of the digital economy

Action Plan 2: Neutralize the effects of hybrid mismatch arrangements

Action Plan 3: Strengthen CFC rules

Action Plan 4: Limiting Base Erosion involving Interest Deductions and Other Financial Payments

deductions

Action Plan 5: Counter harmful tax practices more effectively, taking into account transparency and substance

Action Plan 6: Prevent treaty abuse

a (simplified) limitation-on-benefits (LOB) provision in combination with a principal purposes test (PPT),
a PPT alone or,
a LOB provision supplemented by provisions that would deny treaty benefits to conduit financing arrangements.

Action Plan 7: Prevent the artificial avoidance of Permanent Establishment status

Action 8, 9 and 10: Aligning transfer pricing outcomes with value creation

Action Plan 11: Measuring and monitoring BEPS

Following are the six specific indicators in measuring and monitoring BEPS:

Concentration of high levels of foreign direct investment (FDI) relative to GDP
Differential profit rates compared to effective tax rates
Differential profit rates between low-tax locations and worldwide MNE operations
Effective tax rates of large MNE affiliates relative to non-MNE entities with similar characteristics
Concentration of high levels of royalty receipts relative to research and development (R&D) spending
Interest expense to income ratios of MNE affiliates in high-tax locations

Action Plan 12: Require taxpayers to disclose their aggressive tax planning arrangements

Action Plan 13: Re-examine Transfer Pricing Documentation

First, the guidance on transfer pricing documentation

"Master file"

Secondly, it requires that detailed transactional transfer pricing documentation is provided in a ”Local file” specific to each country,

Thirdly, the newly introduced Country-by-Country Report

business

Action Plan 14: Make dispute resolution mechanisms more effective

Action Plan 15: Develop a multilateral instrument

"/> International Taxation – G. K. Kedia

International Taxation

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International Taxation

June 9th, 2021

Base Erosion and Profit Shifting (BEPS)

What is BEPS? Base Erosion and Profit Shifting is the strategy which is implemented under the OECD/G20 Inclusive Framework on BEPS, over 135 countries are collaborating to…