1. BASE EROSION & PROFIT SHIFTING

2. BEPS :DEFINITION
It refers to corporate tax planning strategies used by multinational companies that artificially “shift” profits from higher-tax locations, to lower-tax locations, thus “eroding” the tax base of the high tax locations. These structures are known as BEPS tools or BEPS schemes.
While BEPS strategies move profits to lower rate locations, they also try to move expenses to where they are relieved from higher tax rates.

3. WHY THERE IS NEED TO COUNTER BEPS:
Before the launch of the Base Erosion and Profit Shifting (BEPS) project, the Organisation for Economic Cooperation and Development (OECD) estimated that global corporate income tax (CIT) revenue losses were somewhere between 4% to 10% of global CIT revenues, i.e., USD 100 to 240 billion annually. As per the OECD, these statistics confirmed the magnitude of the problem, and established the need for and criticality of the BEPS project.

4. Reasons which give birth to BEPS:
International mismatches in the way entities and instruments are characterised by different jurisdictions; the greatest examples are the double Irish (exploits gaps in the way that the Irish and U.S. tax- codes define the residency of a company), and Dutch Sandwich (exploits gaps in EU withholding tax regimes to move untaxed EU funds to tax heavens).
Digital delivery and payment of goods and services, and how this relates to tax treaty rules; this is an area of focus that how bi-lateral treaties should be amended; focuses on the concept that tax is due where the product is consumed versus where it is made.
Using loan interest from intergroup loans (used in U.S. corporate), or more recently, using securitisation SPVs (the , called Debt based BEPS tools).
Transfer Pricing in particular in relation to the shifting of risks and intangibles, the artificial splitting of ownership of assets between legal entities within a group.

5. The 15 Action points under BEPS are as follows:
Action 1: Addressing the Tax Challenges of the Digital Economy
  Action 2: Neutralising the Effects of Hybrid Mismatch Arrangements
Action 3: Designing Effective Controlled Foreign Company Rules
Action 4: Limiting Base Erosion Involving Interest Deductions and Other Financial Payments
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
Action 7: Preventing the Artificial Avoidance of Permanent Establishment Status
Actions 8–10: Aligning Transfer Pricing Outcomes with Value Creation
Action 11: Measuring and Monitoring BEPS
Action 12: Mandatory Disclosure Rules
Action 13: Transfer Pricing Documentation and Country-by-Country Reporting
Action 14: Making Dispute Resolution Mechanisms More Effective
Action 15: Developing a Multilateral Instrument to Modify Bilateral Tax Treaties: the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting

6. Action Plan 1: TAX CHALLENGES IN DIGITAL ECONOMY
OECD under its BEPS Action Plan 1 addressed the tax challenges in a digital economy wherein it has discussed several options to tackle the direct tax challenges arising in digital businesses. One such option is a new nexus rule based on “significant economic presence”. New Explanation 2A in clause (i) of sub-section (1) of section 9 provide that the significant economic presence of a non-resident in India shall constitute “business connection” of the non-resident in India and the “significant economic presence” for this purpose, shall mean- (a) any transaction in respect of any goods, services or property carried out by a non-resident in India including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds such amount as may be prescribed; or

7. Action Plan 1: TAX CHALLENGES IN DIGITAL ECONOMY
(b) systematic and continuous soliciting of its business activities or engaging in interaction with such number of users as may be prescribed, in India through digital means. These amendments will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year and subsequent years

8. EQUALISATION LEVY – Chapter VIII of Finance Act, 2016
Applicability:
If consideration exceeds Rs. 1 Lakh for specified services received or receivable by a non-resident not having permanent establishment (‘PE’) in India, from a resident in India who carries out business or profession, or from a non-resident having permanent establishment in India.
Applicable Rate: 6 % of the amount of consideration
Specified Services: It means
online advertisement,
any provision for digital advertising space or any other facility or service for the purpose of online advertisement and
includes any other service as may be notified by the Central Government in this behalf

9. Introduction of CBCR Reporting
In keeping with India’s commitment to implement the recommendations of 2015 Final Report on Action 13, titled “Transfer Pricing Documentation and Country-by-Country Reporting”, identified under the OECD Base Erosion and Profit Shifting (BEPS) Project, section 286 of the Income-tax Act, 1961 (‘the Act’) was inserted vide Finance Act, 2016, providing for furnishing of a Country-by-Country report in respect of an international group by its constituent or parent entity.
Section 92D of the Act was also amended vide Finance Act, to provide for keeping and maintaining of Master File by every constituent entity of an international group, which was to be furnished as per rules prescribed in this regard.

10. Salient features of the Country-By-Country Report and Master File rules
The threshold for the Country-By-Country Report is total consolidated group revenue of Rs. 5,500 crore or more.
The threshold for the Master File is consolidated group revenue exceeding Rs. 500 crore and either the aggregate value of international transactions as per the books of accounts exceeding Rs. 50 crore or aggregate value of international transactions in respect of intangible property exceeding Rs. 10 crore.
Report of Master File has to be submitted in Form 3CEAA and the Country-by-Country Report in Form 3CEAD.

11. Salient features of the Country-By-Country Report and Master File rules
An international group having multiple Indian constituent entities may designate one constituent entity to file the Master File.
Part A of Form 3CEAA is to be filled by every constituent entity of an international group regardless of whether it qualifies under the threshold for furnishing Master File. However, to reduce the compliance burden, such international group having multiple Indian constituent entities can designate one constituent entity to file Part A on its behalf.
Form 3CEAD for furnishing Country-by-Country Report follows OECD template.

12. Salient features of the Country-By-Country Report and Master File rules
Contents of Form 3CEAA :
PART A requires information such as
Details of taxpayer :-Permanent Account Number (PAN)
Details of Group :-Name and address of groups
Details of all Indian entities of group:- Name ,address and PAN of each entity
PART B of Form 3CEAA:
Exhaustive and Descriptive Information of Group like
organizational structure ,schedule of Intangibles , financials
and Tax position and Intercompany financial activities.

13. Salient features of the Country-By-Country Report and Master File rules
Key Aspect
Particulars
Due Date of Filing
Master File - On or before Due date of filing ROI i.e. November 30th of Assessment Year (Extended to March 31, 2018 for FY ) Notification – 30 days prior to due date of filing Master File ( i.e. by March 1, 2018 for FY )
Mode of Filing
Electronic
Signing Person
Person competent to verify the ITR i.e. Managing Director or any other Director or person holding a valid Power of Attorney
Penalty
Failure to Furnish Master File – INR 500,000 (approx. US$ 7,700)
Conversion Rate (for computing INR value of Group Revenue)
Telegraphic transfer (‘TT’) buying rate on last day of accounting year, as quoted by State Bank of India (‘SBI’)
Meaning of Accounting Year
In case of resident entity - FY In case of foreign entity – 12-month period for which financial statements are prepared pursuant to the law of country of residence of such foreign entity

14. Contents of CbC Reporting– Form 3CEAD
Salient features of the Country-By-Country Report and Master File rules
Contents of CbC Reporting– Form 3CEAD
CbC reporting form is divided in three Parts:
PART A: Overview of Allocation of Income, Taxes and Business Activities by Tax jurisdiction
PART B: List of all Constituent Entities included in aggregation by tax jurisdiction
PART C : Additional Information

15. Contents of CbC Reporting– Form 3CEAD
Salient features of the Country-By-Country Report and Master File rules
Contents of CbC Reporting– Form 3CEAD
CbC reporting form is divided in three Parts:
PART A: Overview of Allocation of Income, Taxes and Business Activities by Tax jurisdiction
PART B: List of all Constituent Entities included in aggregation by tax jurisdiction
PART C : Additional Information

16. Penalty for Non-compliance of Form 3CEAD
Nature of Default
Delay Penalty
Non-furnishing of CbC Report
Less than a month from due date
INR 5,000 (approx. US$ 77) per day
Beyond a month from due date
INR 15,000 (approx. US$230)
per day for period exceeding a month
Continuing Default beyond service of penalty order
INR 50,000 (approx. US$ 780)
per day from date of service of penalty order
Non-submission of information called by Officer
Upon service of penalty order
Furnishing inaccurate particulars in CbC Report
INR 500,000 (approx. US$ 7,700)

17. Section 94B – Interest paid to Foreign Associate Company
India by Finance Act 2017 has inserted a new section 94B, in line with the recommendations of OECD BEPS Action plan 4 ,to provide that interest expenses claimed by an entity paid to its associated enterprises shall be restricted to 30% of it’s earning before interest ,taxes, depreciation and amortization (EBITDA) or interest paid or payable to associated enterprise, whichever is less.

18. Section 94B – Interest paid to Foreign Associate Company
The most common practice of shifting profit out of India without tax or by suffering lower tax is by charging interest expense to it’s Associated enterprise (AE). This results in reduction in profit of AE and resultant effect is low tax burden on AE due to reduced profits and interest shifted to non resident AE in the form of interest may not be taxed or maybe taxed at a lower rate. This leads to Base erosion in India.
“Associated enterprise" shall have the meaning assigned to it in sub-section (1) and sub-section (2) of section 92A;

19. Section 94B – Interest paid to Foreign Associate Company
The most common practice of shifting profit out of India without tax or by suffering lower tax is by charging interest expense to it’s Associated enterprise (AE). This results in reduction in profit of AE and resultant effect is low tax burden on AE due to reduced profits and interest shifted to non resident AE in the form of interest may not be taxed or maybe taxed at a lower rate. This leads to Base erosion in India.
“Associated enterprise" shall have the meaning assigned to it in sub-section (1) and sub-section (2) of section 92A;

20. Section 92CE - Secondary adjustment to Transfer Price
Section 92CE. Secondary adjustment in certain cases.—
Where a primary adjustment to transfer price,
has been made suo motu by the assessee in his return of income;
made by the Assessing Officer has been accepted by the assessee;
is determined by an advance pricing agreement entered into by the assessee under section 92CC;
is made as per the safe harbour rules framed under section 92CB; or
is arising as a result of resolution of an assessment by way of the mutual agreement procedure under an agreement entered into under section 90 or section 90A for avoidance of double taxation
the assessee shall make a secondary adjustment
Provided that nothing contained in this section shall apply, if,—
the amount of primary adjustment made in any previous year does not exceed one crore rupees
The primary adjustment is made in respect of an assessment year commencing on or before the 1st day of April, 2016

21. Section 92CE - Secondary adjustment to Transfer Price
(2) Where, as a result of primary adjustment to the transfer price, there is an increase in the total income or reduction in the loss, as the case may be, of the assessee, the excess money which is available with its associated enterprise, if not repatriated to India within the time as may be prescribed, shall be deemed to be an advance made by the assessee to such associated enterprise and the interest on such advance, shall be computed in such manner as may be prescribed.
(3) For the purposes of this section,—
"associated enterprise" shall have the meaning assigned to it in sub-section (1) and sub-section (2) of section 92A;
"arm's length price" shall have the meaning assigned to it in clause (ii) of section 92F;

22. Section 92CE - Secondary adjustment to Transfer Price
"excess money" means the difference between the arm's length price determined in primary adjustment and the price at which the international transaction has actually been undertaken;
"primary adjustment" to a transfer price, means the determination of transfer price in accordance with the arm's length principle resulting in an increase in the total income or reduction in the loss, as the case may be, of the assessee;
"secondary adjustment" means an adjustment in the books of account of the assessee and its associated enterprise to reflect that the actual allocation of profits between the assessee and its associated enterprise are consistent with the transfer price determined as a result of primary adjustment, thereby removing the imbalance between cash account and actual profit of the assessee.

23. Section 115BBF-concessional tax on royalty earned from patents registered in India
(1) Where the total income of an eligible assessee includes any income by way of royalty in respect of a patent developed and registered in India, the income-tax payable shall be the aggregate of—
the amount of income-tax calculated on the income by way of royalty in respect of the patent at the rate of ten per cent; and
the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the income referred to in clause (a).
(2) Notwithstanding anything contained in this Act, no deduction in respect of any expenditure or allowance shall be allowed to the eligible assessee under any provision of this Act in computing his income referred to in clause (a) of sub-section (1).

24. Section 115BBF-concessional tax on royalty earned from patents registered in India
(3) The eligible assessee may exercise the option for taxation of income by way of royalty in respect of a patent developed and registered in India in accordance with the provisions of this section, in the prescribed manner, on or before the due date specified under sub-section (1) of section 139 for furnishing the return of income for the relevant previous year.
(4) Where an eligible assessee opts for taxation of income by way of royalty in respect of a patent developed and registered in India for any previous year in accordance with the provisions of this section and the assessee offers the income for taxation for any of the five assessment years relevant to the previous year succeeding the previous year not in accordance with the provisions of sub-section (1), then, the assessee shall not be eligible to claim the benefit of the provisions of this section for five assessment years subsequent to the assessment year relevant to the previous year in which such income has not been offered to tax in accordance with the provisions of sub- section (1).

25. Section 115BBF-concessional tax on royalty earned from patents registered in India
Explanation.—For the purposes of this section,—
"developed" means at least seventy-five per cent of the expenditure incurred in India by the eligible assessee for any invention in respect of which patent is granted under the Patents Act, 1970 (39 of 1970) (herein referred to as the Patents Act);
"eligible assessee" means a person resident in India and who is a patentee;
"invention" shall have the meaning assigned to it in clause (j) of sub-section (1) of section 2 of the Patents Act;
"lump sum" includes an advance payment on account of such royalties which is not returnable;
"patent" shall have the meaning assigned to it in clause (m) of sub-section (1) of section 2 of the Patents Act;

26. Section 115BBF-concessional tax on royalty earned from patents registered in India
Explanation.—For the purposes of this section,—
"patentee" means the person, being the true and first inventor of the invention, whose name is entered on the patent register as the patentee, in accordance with the Patents Act, and includes every such person, being the true and first inventor of the invention, where more than one person is registered as patentee under that Act in respect of that patent;
"patented article" and "patented process" shall have the meanings respectively assigned to them in clause (o) of sub- section (1) of section 2 of the Patents Act

27. Section 115BBF-concessional tax on royalty earned from patents registered in India
Explanation.—For the purposes of this section,—
"royalty", in respect of a patent, means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains" or consideration for sale of product manufactured with the use of patented process or the patented article for commercial use) for the—
 (i)  transfer of all or any rights (including the granting of a licence) in respect of a patent; or
(ii)  imparting of any information concerning the working of, or the use of, a patent; or
(iii) use of any patent; or
(iv) rendering of any services in connection with the activities referred to in sub-clauses (i) to (iii);
 (i) "true and first inventor" shall have the meaning assigned to it in clause (y) of sub-section (1) of section 2 of the Patents Act.