Delhi ITAT clarifies that BEPS is a tax policy consideration; law to be interpreted as it exists in the statute

 

This Tax Alert summarizes a recent decision of the Delhi Income Tax AppellateTribunal (ITAT) in the case of Baker Hughes Singapore Pte. Ltd. on the issue of whether the benefit of presumptive basis of taxation under the Indian Tax laws (ITL) as is applicable to income earned by a non-resident (NR). Although on merits, the ITAT allowed the benefit of presumptive taxation, one of the issues discussed was whether the benefit can be denied on the ground that it leads to Base Erosion and Profit Shifting (BEPS) in India. The ITAT held that BEPS is a matter of tax policy consideration, not relevant for the process of judicial decision making. It was held that law has to be interpreted as it exists in the statute and not as how it ought to have been, based on different ideologies. Thus a benefit cannot be denied where the law otherwise provides for such benefit.

 

The concept of BEPS refers to tax strategies targeted at shifting profits to locations where there is little or no real activity but where taxes are low resulting in little or no overall corporate tax being paid. The BEPS Project aims at better aligning rights to tax with real economic activity. As part of this Project, OECD has formulated 15 action points to address various aspects of BEPS concerns. Presently the discussion drafts and reports issued by the OECD on the various action points are in the form of recommendations.

 

Though the BEPS Project has not reached the implementation stage, it has influenced tax policy changes in various countries and has been influencing landscape of tax provisions. An accelerated applicability of BEPS by the Tax Authority also creates uncertainty and greater risk and for the taxpayers.

 

In this context, the Delhi ITAT ruling is a welcome decision that reiterates that BEPS considerations are relevant for making appropriate changes in the legislation. However, unless such change is implemented by way of legislative action (i.e. amendment to the ITL or a new enactment), it continues to remain a policy consideration which cannot be enforced as law.