View of COUNTERMEASURES AND POLICY RESPONSES TO ADDRESS BEPS

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ACCENT JOURNAL OF ECONOMICS ECOLOGY & ENGINEERING

Peer Reviewed and Refereed Journal ISSN NO. 2456-1037 IMPACT FACTOR: 7.98 (INTERNATIONAL JOURNAL) Vol. 05, Special Issue 05, (ICET-2020)July 2020 Available Online: www.ajeee.co.in/index.php/AJEEE

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COUNTER MEASURES AND POLICY RESPONSES TO ADDRESS BEPS

1Mansi Amit More, ²Dr. Meenakshi Kaushal

1Research Scholar, ²Supervisor

1-2Department of Management (Finance Management), Arunodaya University, Distt, Itanagar, Arunachal Pradesh, India

Abstract- Base Erosion and Profit Shifting (BEPS) refers to the international tax planning strategies used by multinational enterprises to shift profits from high-tax jurisdictions to low-tax or tax haven jurisdictions, thereby eroding the tax base of the countries where economic activities take place. BEPS has become a significant concern for governments worldwide, as it undermines tax revenues, distorts competition, and erodes public trust in the fairness of the tax system. This paper explores the countermeasures and policy responses that have been developed to address BEPS. It examines initiatives taken at both the national and international levels, including changes to domestic tax laws, the development of international standards, and the establishment of collaborative frameworks for information exchange and cooperation among tax authorities. The paper also discusses the challenges and limitations associated with these measures and highlights the importance of ongoing efforts to ensure a fair and effective international tax system.

Keywords: Base Erosion and Profit Shifting, BEPS, international tax planning, multinational enterprises, tax base erosion, tax avoidance, tax evasion, countermeasures, policy responses, domestic tax laws, international standards, information exchange, cooperation, tax authorities, fairness, effective tax system.

1 INTRODUCTION

Base Erosion and Profit Shifting (BEPS) has emerged as a pressing issue in the field of international taxation. It refers to the strategies employed by multinational enterprises to shift profits away from jurisdictions where economic activities take place and towards low- tax or tax haven jurisdictions. By doing so, these enterprises erode the tax base of countries, leading to a decrease in tax revenues and potentially distorting competition in the market. The consequences of BEPS are far-reaching, affecting not only governments and their fiscal policies but also the general public's perception of the fairness and integrity of the tax system.

The global nature of BEPS necessitates a coordinated and collaborative response from governments worldwide. Recognizing the magnitude of the problem, countries and international organizations have taken steps to develop countermeasures and policy responses aimed at curbing BEPS and establishing a fairer international tax framework.

These measures encompass changes to domestic tax laws, the formulation of international standards, and the establishment of mechanisms for information exchange and cooperation among tax authorities.

This paper aims to examine the various countermeasures and policy responses that have been implemented to address BEPS. It explores both the national and international initiatives undertaken to combat profit shifting and tax avoidance practices. By analyzing these measures, we can gain insights into the effectiveness, challenges, and limitations associated with each approach. Moreover, it highlights the ongoing importance of collaborative efforts in maintaining a fair and efficient international tax system that ensures the appropriate taxation of multinational enterprises and prevents harmful tax practices.

By understanding the countermeasures and policy responses to address BEPS, policymakers, tax authorities, and stakeholders can work together to design robust and comprehensive strategies that not only combat profit shifting but also promote transparency, fairness, and sustainability in the global tax landscape.

2 INTERNATIONAL COLLABORATION AND COOPERATION:

Addressing Base Erosion and Profit Shifting (BEPS) requires strong international collaboration and cooperation among governments and tax authorities. Given the cross- border nature of BEPS, no single country can effectively tackle the issue in isolation.

International cooperation is crucial to develop common standards, share information, and implement coordinated measures to combat tax avoidance and profit shifting practices. This

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section discusses the importance of international collaboration and cooperation in addressing BEPS and highlights key initiatives in this regard.

The OECD/G20 BEPS Project: The Organisation for Economic Co-operation and Development (OECD) and the G20 countries initiated the BEPS Project in 2013. This comprehensive project aims to develop a coordinated international approach to tackle BEPS. It involves over 135 countries and jurisdictions, including both developed and developing nations. The BEPS Project has led to the formulation of 15 action items addressing various aspects of BEPS, such as transfer pricing, treaty abuse, and harmful tax practices. The project promotes cooperation among countries to implement these measures effectively.

Multilateral Convention on BEPS: As part of the BEPS Project, the Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent BEPS, also known as the Multilateral Instrument (MLI), was developed. The MLI allows countries to modify their existing bilateral tax treaties to incorporate BEPS-related measures. By signing and ratifying the MLI, countries can swiftly implement changes without renegotiating individual tax treaties. This multilateral approach enhances efficiency and consistency in implementing BEPS countermeasures.

Exchange of Information: Information exchange is a crucial element in combating BEPS.

Governments need access to relevant and accurate data to identify and address tax avoidance practices. The OECD has facilitated the development of the Common Reporting Standard (CRS), which enables automatic exchange of financial account information among participating jurisdictions. Additionally, the exchange of Country-by-Country Reports provides tax authorities with detailed information on the global allocation of income, taxes paid, and economic activities of multinational enterprises.

Joint Audits and Assessments: Collaborative audit programs and joint assessments enable tax authorities from different jurisdictions to work together in investigating and evaluating multinational enterprises' tax positions. Joint audits enhance the efficiency and effectiveness of tax audits by leveraging the expertise and resources of multiple tax administrations. They also facilitate the sharing of best practices and the alignment of enforcement efforts.

International Tax Dialogue: Various international forums and organizations facilitate dialogue and cooperation on tax matters. These include the G20, the United Nations (UN), the International Monetary Fund (IMF), and regional tax organizations. Through these platforms, countries can exchange experiences, discuss policy approaches, and coordinate their efforts to combat BEPS effectively.

The success of these collaborative efforts depends on the commitment and active participation of countries. Governments need to engage in information sharing, capacity building, and mutual assistance to combat BEPS effectively. Furthermore, ongoing evaluation and monitoring of international cooperation initiatives are essential to ensure their continued relevance and effectiveness in addressing the evolving challenges of BEPS.

By working together, countries can create a level playing field, minimize tax avoidance opportunities, and promote fairness in the international tax system. International collaboration and cooperation are vital components of a comprehensive strategy to combat BEPS and protect the integrity of national tax systems.

3 STRENGTHENING DOMESTIC TAX LAWS AND REGULATIONS:

In addition to international collaboration and cooperation, strengthening domestic tax laws and regulations is a critical component of addressing Base Erosion and Profit Shifting (BEPS). Countries need robust legislative frameworks and effective enforcement mechanisms to prevent and deter tax avoidance practices. This section explores key measures that can be implemented at the national level to strengthen domestic tax laws and regulations.

Anti-Avoidance Provisions: Countries can introduce or enhance anti-avoidance provisions in their tax laws to counteract BEPS strategies. These provisions aim to prevent taxpayers from exploiting loopholes or engaging in artificial transactions solely for the purpose of reducing their tax liabilities. Examples of anti-avoidance measures include general anti- avoidance rules (GAARs), controlled foreign corporation (CFC) rules, and specific anti-abuse provisions targeting transactions such as transfer pricing manipulations and treaty shopping.

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Transfer Pricing Rules: Transfer pricing refers to the pricing of transactions between related entities within multinational enterprises. To combat BEPS, countries can strengthen their transfer pricing rules by aligning them with international standards, such as the OECD Transfer Pricing Guidelines. This involves ensuring that transactions between related parties are conducted at arm's length prices, meaning prices that would be charged between unrelated parties in similar circumstances. Countries can enhance their transfer pricing documentation requirements, introduce country-by-country reporting, and establish robust audit and enforcement mechanisms.

Substance-Based Requirements: BEPS strategies often involve creating entities or structures in low-tax jurisdictions without genuine economic substance. To counter this, countries can introduce substance-based requirements, which focus on ensuring that entities have substantial economic activities and genuine economic substance in the jurisdictions where they are established. Substance requirements can include criteria such as minimum staffing, tangible assets, and expenditure levels to prevent the abuse of tax havens and promote tax transparency.

Strengthening Tax Administration: Effective tax administration is crucial for enforcing tax laws and detecting BEPS practices. Countries can invest in enhancing their tax administration capacity, including training and equipping tax authorities with the necessary tools and resources. This includes strengthening audit capabilities, conducting risk-based assessments, utilizing data analytics, and implementing comprehensive compliance programs. Moreover, promoting transparency and cooperation between tax authorities and other relevant agencies, such as financial intelligence units and regulatory bodies, can improve the effectiveness of tax enforcement efforts.

Promoting Tax Transparency: Enhancing tax transparency is vital for addressing BEPS.

Countries can implement measures to increase the disclosure of relevant tax information by taxpayers. This can include mandatory disclosure requirements for aggressive tax planning arrangements, beneficial ownership registers to combat anonymous or opaque structures, and public reporting of tax-related information for multinational enterprises. Increased transparency allows tax authorities to identify potential BEPS risks and take appropriate action.

Legislative Alignment with International Standards: Countries can ensure that their domestic tax laws and regulations are aligned with international standards and best practices. This includes adopting and implementing recommendations from international organizations like the OECD and ensuring consistency with relevant tax treaties.

Harmonization with international standards helps prevent mismatches and inconsistencies that can be exploited for BEPS purposes.

By strengthening domestic tax laws and regulations, countries can create a more robust and resilient tax framework that effectively addresses BEPS risks. However, it is important to strike a balance between preventing tax avoidance and maintaining a competitive business environment. Regular review and updates of tax laws and regulations are necessary to keep pace with evolving business models and emerging tax planning strategies.

It should be noted that the effectiveness of domestic measures in combating BEPS can be enhanced when coupled with international cooperation and collaboration. By aligning domestic efforts with international initiatives, countries can create a comprehensive and coordinated response to tackle BEPS on a global scale.

4 CONCLUSION

Base Erosion and Profit Shifting (BEPS) poses significant challenges to the integrity and fairness of the international tax system. It requires a multi-faceted and collaborative approach to effectively address the erosion of tax bases and the shifting of profits by multinational enterprises. This paper has explored two key dimensions of combating BEPS:

international collaboration and cooperation, and strengthening domestic tax laws and regulations.

International collaboration and cooperation play a crucial role in addressing BEPS.

Initiatives such as the OECD/G20 BEPS Project, the Multilateral Convention on BEPS, and the exchange of information mechanisms promote a coordinated global response. By working together, countries can establish common standards, share information, and implement measures to prevent tax avoidance practices. Joint audits, international tax

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dialogues, and regional tax organizations further enhance cooperation and facilitate the exchange of best practices.

At the domestic level, countries need to strengthen their tax laws and regulations to counteract BEPS. Measures such as anti-avoidance provisions, robust transfer pricing rules, substance-based requirements, and enhanced tax administration contribute to deterring tax avoidance practices. By aligning domestic legislation with international standards, promoting tax transparency, and investing in tax administration capacity, countries can create a more resilient and effective tax framework.

It is important to recognize that addressing BEPS requires an ongoing and adaptive approach. BEPS strategies evolve as businesses and tax systems evolve, necessitating continuous monitoring and updates to countermeasures. Regular evaluation of the effectiveness of measures and international cooperation initiatives is essential to identify gaps, adapt to emerging challenges, and maintain a level playing field.

The fight against BEPS is not only about protecting tax revenues but also about ensuring fairness, transparency, and public trust in the tax system. By addressing BEPS, governments can enhance fiscal sustainability, promote a competitive business environment, and foster trust between taxpayers and tax authorities. A fair and efficient international tax system benefits both countries and businesses, supporting economic growth and stability.

In conclusion, combatting BEPS requires a comprehensive strategy that encompasses both international collaboration and domestic actions. Through strong international cooperation, the formulation of common standards, and the exchange of information, countries can work together to tackle BEPS on a global scale. Strengthening domestic tax laws and regulations complements these efforts, ensuring that countries have robust frameworks to prevent and deter tax avoidance practices. By combining these approaches, policymakers, tax authorities, and stakeholders can contribute to a fair and effective international tax system that promotes transparency, fairness, and sustainability.

REFERENCES

1. http://fortune.com/2016/03/11/apple-google-taxes-eu/

2. http://www.oecd.org/ctp/policy-brief-beps-2015.pdf 3. http://www.bbc.com/news/world-41880153

4. http://www.oecd.org/ctp/oecd-presents-outputs-of-oecd-g20-beps-project-fordiscussion-at-g20-finance- ministers- meeting.htm

5. http://www.oecd.org/tax/beps/beps-about.htm

6. http://www.oecd.org/ctp/beps-explanatory-statement-2015.pdf 7. http://www.actionaid.org/sites/files/actionaid/the_beps_process_-

_failing_to_deliver_for_developing_countries_0.pdf