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[TD="width: 589"]Maulik Madhu, The Business Line
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[TD="width: 589"]All of us like to look for ways to bring down our taxes. But we’re not the only ones to do so. Companies across the world employ complex strategies to dodge the taxman. And they do this by engaging in what is called Base Erosion and Profit Shifting (BEPS).Last week, the OECD presented a BEPS Plan to the G-20 countries to help them curb such tax-avoiding tactics. These recommendations will be considered for adoption by member countries.What is it?BEPS refers to the erosion of a country’s tax base because of the shifting of profits by multinational companies to other regimes with low or zero tax rates. So, even though a company may do the bulk of its business in a high-tax country such as the US, it camouflages its profits as emanating from some low- or no-tax country, in order to bring down its tax liability. It transfers the profits through sophisticated tax planning strategies to a ‘letter-box company’ (with just a mailing address and no real business activity) set up in low tax regimes such as Luxembourg, Cayman Islands, Macao or Monaco for this purpose. As a result, the country which is the actual centre of economic activity is wrongfully deprived of tax revenues.So how do companies shift profits? Here’s one illustration.
Take a US-based tech company that despite carrying out all product development and making the most of its sales in the US, pays hardly any tax in the country. How does it achieve that? The company transfers the intellectual property rights that it holds over its products to its letter-box subsidiary.It then pays royalty to the subsidiary at an arbitrarily high rate to bump up its expenses and reduce its profits in the US, thereby shrinking its tax outgo. At the same time, the subsidiary escapes taxation on income (royalty) earned by it as it is based out of a tax haven.But do note, though unfair, BEPS is not illegal. When companies engage in BEPS, they legally avoid taxes simply by taking advantage of the exemptions in a country’s tax regulations. What also works in their favour are the wide variations in tax regimes across countries, leaving ample scope for arbitraging taxes.
Why is it important?
With governments deprived of tax revenues, BEPS has attracted the ire of tax authorities and taxpayers the world over. BEPS is estimated to cause an annual revenue loss of $100-240 billion, which amounts to 4-10 per cent of global corporate income tax revenues.This is turn means a higher burden on other taxpayers and less funds in the government coffers for funding welfare and essential infrastructure.BEPS is also discriminatory. Tax savings from BEPS give multinational companies an edge over domestic companies, who may lack the wherewithal to employ such strategies.
Why should I care?
BEPS is just not fair. When honest taxpayers pay up their share of taxes, why must multinational companies raking in billions of dollars in revenues get to avoid doing so? The less such companies chip in, the more the state exchequer has to extract from us.But, your perspective could change if you happen to be a shareholder of one of these tax-savvy companies. Tax savings for these companies could then translate into higher returns for you.The bottomlineTax slabs are designed so that the wealthy pay more tax. But it turns out that deep pockets are a help in tax evasion too.[/TD]
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[TD="width: 589"]Maulik Madhu, The Business Line
Published on October 13, 2015
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[TD="width: 589"]All of us like to look for ways to bring down our taxes. But we’re not the only ones to do so. Companies across the world employ complex strategies to dodge the taxman. And they do this by engaging in what is called Base Erosion and Profit Shifting (BEPS).Last week, the OECD presented a BEPS Plan to the G-20 countries to help them curb such tax-avoiding tactics. These recommendations will be considered for adoption by member countries.What is it?BEPS refers to the erosion of a country’s tax base because of the shifting of profits by multinational companies to other regimes with low or zero tax rates. So, even though a company may do the bulk of its business in a high-tax country such as the US, it camouflages its profits as emanating from some low- or no-tax country, in order to bring down its tax liability. It transfers the profits through sophisticated tax planning strategies to a ‘letter-box company’ (with just a mailing address and no real business activity) set up in low tax regimes such as Luxembourg, Cayman Islands, Macao or Monaco for this purpose. As a result, the country which is the actual centre of economic activity is wrongfully deprived of tax revenues.So how do companies shift profits? Here’s one illustration.
Take a US-based tech company that despite carrying out all product development and making the most of its sales in the US, pays hardly any tax in the country. How does it achieve that? The company transfers the intellectual property rights that it holds over its products to its letter-box subsidiary.It then pays royalty to the subsidiary at an arbitrarily high rate to bump up its expenses and reduce its profits in the US, thereby shrinking its tax outgo. At the same time, the subsidiary escapes taxation on income (royalty) earned by it as it is based out of a tax haven.But do note, though unfair, BEPS is not illegal. When companies engage in BEPS, they legally avoid taxes simply by taking advantage of the exemptions in a country’s tax regulations. What also works in their favour are the wide variations in tax regimes across countries, leaving ample scope for arbitraging taxes.
Why is it important?
With governments deprived of tax revenues, BEPS has attracted the ire of tax authorities and taxpayers the world over. BEPS is estimated to cause an annual revenue loss of $100-240 billion, which amounts to 4-10 per cent of global corporate income tax revenues.This is turn means a higher burden on other taxpayers and less funds in the government coffers for funding welfare and essential infrastructure.BEPS is also discriminatory. Tax savings from BEPS give multinational companies an edge over domestic companies, who may lack the wherewithal to employ such strategies.
Why should I care?
BEPS is just not fair. When honest taxpayers pay up their share of taxes, why must multinational companies raking in billions of dollars in revenues get to avoid doing so? The less such companies chip in, the more the state exchequer has to extract from us.But, your perspective could change if you happen to be a shareholder of one of these tax-savvy companies. Tax savings for these companies could then translate into higher returns for you.The bottomlineTax slabs are designed so that the wealthy pay more tax. But it turns out that deep pockets are a help in tax evasion too.[/TD]
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