Globalisation has benefited our domestic economies, boosted trade and increased foreign direct

investments. Unrestricted movement of capital and labour, shift of business operations from high
cost to low cost locations, liberalisation of trade barriers has had an impact on the way cross border
activities are conducted. The pace of integration of the economies has increased manifold in the
recent times and this has had a significant impact on a country’s corporate tax regime.

The incidence of multiple domestic tax systems can lead to overlaps in the exercise of taxing rights
that can result in double taxation. Hence, domestic and international tax rules address double
taxation, by eliminating these overlaps, to minimise barriers to trade growth. This interaction
however, also provides opportunities to exploit differences in tax rules, to eliminate or significantly
reduce overall worldwide taxes, in a manner which is inconsistent with domestic and international
tax standards and rules.

Base Erosion and Profit Shifting (BEPS) refers to these tax planning strategies that exploit gaps and
mismatches in tax rules, to make profits disappear for tax purposes, or to shift profits to tax havens,
or to locations where there is no real activity but the taxes are low, resulting in little or no corporate
tax being paid.

This can take place in many ways such as treaty shopping, hybrid mismatch arrangements, related
party debt financing, transfer pricing and shifting of intangibles to low tax countries, splitting up
ownership of assets between entities within a group, amongst others.

Adverse effects of BEPS:

Governments must cope with less revenue and higher cost of compliance. Moreover, in developing
countries, the lack of tax revenue leads to significant underfunding of public investment, which could
stymie economic growth.

BEPS also leads to unfairness and undermines the integrity of the tax system of a country. When tax
laws permit businesses to reduce their tax burden, by shifting their income away from jurisdictions
where income producing activities are conducted, other taxpayers and mainly individual taxpayers in
that jurisdiction have to bear a greater share of the burden. Since multinational corporations
operating in the country make equal use of the infrastructure, individuals having to bear higher tax
burden raises tax fairness issues.

Enterprises that operate only in domestic markets, including family-owned businesses have difficulty
competing with multinationals that can shift their profits across borders to reduce or avoid tax. Fair
competition is marred by the distortions induced by BEPS.

As BEPS strategies take advantage of mismatch in the tax rules of various countries, it may be
difficult for any single country to act alone. While formulating their domestic tax laws, countries may
not take into consideration the effect of other countries’ tax laws. This may cause gaps where
corporate income escapes taxation.

In the domestic context, coherence is achieved through principle of matching – payment is

deductible only if receipt has been taxed. However, there is no similar principle at the international
level, which leaves scope for arbitrage by taxpayers. A substantial part of the effort in the area of
international taxation has focused on avoidance of double taxation. BEPS relates primarily to
instances which lead to double non taxation. Hence, to address the BEPS issue, The Organisation for
Economic Cooperation and Development (OECD) has set out 15 action plans to be implemented
through multilateral instruments and bilateral treaty provisions.