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Base Erosion and Profit Sharing (BEPS)

Posted on : 21 Feb 2020

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  • OECD has proposed a new multilateral framework on taxation of new-age companies such as Netflix, Uber, Google and Facebook, which have a large customer base in developing countries like India as well as the EU.
  • The OECD tax proposal aims to prevent digital Multinational Enterprises (MNEs) artificially showing profits in low-tax countries instead of where deal happens.
  • The proposal requires them to pay tax wherever they have significant consumer-facing activities (market) and where they generate their profits, and not based on jurisdiction of their physical presence.
  • The idea of the proposal is to address the tax challenges arising from digitalisation of the economy and the rise of complex, global corporate tax structures.
  • Changing nature of work, including automation, artificial intelligence and the rise of the gig economy, can erode tax revenues so severely that it may difficult to provide essential state services by 2040.
  • India had sought changes in the OECD proposal on digital taxation, saying it would deny the country its proper share of taxes from multinationals.
  • The proposed OECD formulation meant India getting little revenue despite the large digital and business presence of companies. This is because only “residual profit” will be apportioned among the countries where a company has its markets.
  • Government is of the view that MNEs derive large revenues from countries such as India via their digital presence, without having a physical one, and has questioned the distinction between “routine profits”— which accrue due to physical presence — and “residual profits”.
  • For example, a cab aggregator (like Uber) operating via a mobile app has its core technology base in one country and software base in another but makes money in countries such as India. Hence the Indian method focuses on place of revenue generation.

Article Related Questions

  1. The new OECD tax proposal is based on the earlier OECD framework on Base Erosion and Profit Sharing (BEPS). India sought the new OECD tax to be based on which of the following?

  2. 1.Place of digital presence

    2.Transfer pricing rules

    3.Place of revenue generation

    4.Residual Profits

    Right Ans : Place of revenue generation

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