Base Erosion and Profit Shifting (BEPS).

• Overview:
• BEPS refers to tax planning strategies employed by multinational corporations (MNCs) to exploit gaps in the tax rules of certain countries. The primary goal is to artificially shift profits to jurisdictions with low or no taxes, despite having little or no actual economic activity in those locations.
• Two Types of BEPS:
  1. Shifting Base to Tax Havens:
     • Prominent global companies, such as Apple, Facebook, Amazon, Nike, and Uber, engage in BEPS by registering in tax havens with favorable tax rates. This involves moving profits to jurisdictions like Mauritius or Ireland, eroding the tax base in countries where actual economic activities occur.
     • Loss of tax revenue for governments: Governments of countries where these companies operate lose substantial tax revenue due to profit shifting.
  2. Shell Companies and Money Laundering:
     • BEPS also occurs through the use of shell companies, which lack genuine business activities and exist only on paper. These entities may be utilized to show fictitious profits and losses, facilitating the laundering of illegal funds into seemingly legitimate channels.
     • Legal and illegal investments: Shell companies may involve both legal and illegal funds, serving as conduits for investment and money laundering.
• Impact on Voluntary Compliance:
  • BEPS activities by multinational corporations can create a moral hazard, weakening voluntary tax compliance by all taxpayers. Legal tax avoidance by large corporations may influence individual taxpayers' perceptions and compliance behavior.
• International Efforts to Address BEPS:
  • The Organization for Economic Co-operation and Development (OECD) has established an inclusive framework to address BEPS. Numerous countries, including India, actively participate in this framework to develop strategies and standards for preventing tax avoidance practices.
• Foreign Account Tax Compliance Act (FATCA):
  • The United States enacted FATCA in 2010, requiring foreign financial institutions (FFIs) to identify and report assets and identities of U.S. customers. FATCA aims to enhance tax transparency and combat tax evasion globally.
• G20 Initiatives:
  • The Group of Twenty (G20) has discussed and formulated strategies for common fiscal laws and practices. The G20 platform provides a forum for addressing global tax challenges and fostering cooperation among member countries.
• India's Efforts Against BEPS:
  • India has experienced BEPS challenges, particularly related to the misuse of double taxation avoidance agreements (DTAA) and transfer pricing issues. The country has modified its DTAA with Mauritius to counter BEPS and has undertaken various measures to strengthen its tax framework.

BEPS remains a complex global issue, requiring ongoing international collaboration to develop effective countermeasures and ensure fair and transparent taxation practices.