The main focus of the BEPS Action Plan 5 issues in October 2015 was on agreeing and applying a methodology to define the substantial activity requirement to assess preferential regimes, looking first at intellectual property (IP) regimes and then other preferential regimes. The work has also focused on improving transparency through the compulsory spontaneous exchange of certain rulings that could give rise to BEPS concerns in the absence of such exchanges.
Action 5 of the BEPS Action Plan commits the Forum on Harmful Tax Practices (FHTP) to the following:
“Revamp the work on harmful tax practices with a priority on improving transparency, including compulsory spontaneous exchange on rulings related to preferential regimes, and on requiring substantial activity for any preferential regime. It will take a holistic approach to evaluate preferential tax regimes in the BEPS context. It will engage with non-OECD members on the basis of the existing framework and consider revisions or additions to the existing framework.” (OECD, 2013a)
The minimum standard of the Action 5 Report consists of two parts. One part relates to preferential tax regimes, where a peer review is undertaken to identify features of such regimes that can facilitate base erosion and profit shifting, and therefore have the potential to unfairly impact the tax base of other jurisdictions. The second part includes a commitment to transparency through the compulsory spontaneous exchange of relevant information on taxpayer-specific rulings which, in the absence of such information exchange, could give rise to BEPS concerns.
As a part of this Transparency Framework, India is receiving templates containing information in respect of taxpayer specific rulings. In this regards, recently CBDT has issues a circular outlining the methodology to be followed by the field officer who are in receipt of templates containing information in respect of certain taxpayer specific rulings, specifically on following issues:
1. Rulings relating to preferential regimes
2. Unilateral APAs or other cross-border unilateral rulings in respect of transfer pricing
3. Cross border rulings providing for downward adjustment of taxable profits
4. Permanent Establishment (PE) rulings
5. Related party conduit rulings
6. Other miscellaneous rulings
CBDT has widened the scope of identification of possible cases of tax evasion by issuing guiding principles for the Indian tax officers to use the information available through the rulings delivered by international tax court in taxpayer-specific cases. The recommendations also throw light on certain issues where Indian Counterparts of MNCs will have to be more vigilant while carrying out their businesses globally.
This circular lays down the approach recommended to deal with each type of ruling exchanged under BEPS Action Plan 5. Circular gives the required guidance to the tax officers dealing with such cases. Since these are taxpayer-specific rulings, the tax officers shall have a reasonable basis of taking action during the assessment of such taxpayers. Further, if any additional information is required to take necessary action, the tax officers are free to use the Exchange of Information channels available under the tax treaty.
However, the tax officers shall be required to maintain confidentiality as per the requirements of confidentiality agreed under the tax treaties with the respective jurisdictions. Further, all the tax officers who handle the information contained in these templates that are received under BEPS Action 5, have been instructed to strictly follow the detailed guidelines on maintaining confidentiality provided in Chapter-VII of Manual of Exchange of Information. This shall ensure that taxpayer data is given the due confidentiality, which is a legal requirement as well as international obligation of the Indian tax authorities.
Impact analysis for Indian Companies:
In order to ensure that taxable profits are not artificially shifted away from the jurisdictions where value is created, the tax officers shall now have access to the international rulings on preferential regime wherein the ultimate/ immediate parent of the taxpayer receiving the ruling or the related party with which the foreign entity enters into a transaction for which the preferential treatment is granted, is an India resident. The tax officers have been instructed to assess the extent of economic activity actually reported in India and ensure that the income reported is commensurate to the same. Information obtained through these ruling delivered by the international court, shall come handy to the Indian tax authorities in this analysis. The companies engaged in shipping, finance and leasing, banking and insurance, fund managing shall be effected and shall have to be more careful while reporting their income and shall have to make sure that income offered in India matches the extent of economic activity in India
Unilateral APAs or other cross-border unilateral rulings in respect of transfer pricing
Signing of unilateral APAs may lead to shifting of profits resulting into base erosion. The tax officers have been instructed to ensure that there are no mismatches in how two ends of a transaction are priced and no profits go untaxed resulting in base erosion or profit shifting. The resident Indian companies i.e. ultimate parent / immediate parent / related party with which the foreign counterpart enters into a transaction that is covered by APAs shall be analyzed by the Indian tax officers on the basis of the international ruling delivered. The tax officer shall take into consideration the adjustments pursuant to unilateral APAs, on the foreign counterpart of the Indian resident. Such ruling can be used to identify fair pricing of the transaction in India. This shall encourage the signing of bilateral APAs and thereby reduce the risk of litigation in both the jurisdictions.
Cross-border ruling providing for downward adjustment of the profits
The Indian resident companies i.e. the ultimate parent / immediate parent / related party with which foreign entity enters into transaction that is covered by the cross border ruling resulting in downward adjustment shall be under the Indian taxman’s scanner. In view of this transparent and spontaneous exchange of international rulings, now the taxpayers shall be required to ensure arm length pricing in both the jurisdictions, as the failure may bring attention of the Indian tax officer.
Permanent Establishment (PE)
The Indian resident parent / ultimate parent / head office or the entity whose PE is established in India, may come under the scanner of the tax officers if a ruling determining the constitution of permanent establishment or attribution of profits is issued for its foreign counterparts. Such rulings can be used by the Indian tax officers in determining the global profits the Indian resident. Profit attribution to PE is a subjective matter leading to extensive litigation and this transparent exchange of international rulings shall act as an important tool in the hands of the Indian tax authorities.
(Conduit rulings essentially cover arrangements involving cross-border flows of funds or income through an entity in the jurisdiction giving the ruling, whether those funds or income flow to another jurisdiction directly or indirectly. In the case of conduit rulings, certain arrangements/structuring are ruled upon wherein, using transparent entities, deduction on interest paid is claimed however, corresponding income on interest received goes untaxed in resident entities or non-resident partners.)
This transparent and spontaneous exchange of rulings shall bring to tax the income that goes untaxed in resident entities using certain arrangement/ structuring / transparent entities. Sharing of conduit rulings shall ensure that the Indian tax authorities have the required information to appropriately asses to tax the profits of the Indian resident that is the immediate parent / ultimate parent / is a related party making payment to such conduit / is the ultimate beneficial owner of the payment made to conduit.
It is also interesting to note that recently, on 13 November 2018, the Inclusive Framework on BEPS approved updates to the results of reviews of preferential tax regimes conducted in connection with BEPS Action 5. Based on the review of the preferential regimes reviewed since October 2015, as of 13 November 2018, it has been concluded that India’s IP regime i.e. ‘Tax on income from Patent’ is ‘Not harmful’.