Fundamentals of BEPS: formula sheet

Key formulas

Meaning of BEPS

BEPS = Base erosion (shrinking taxable base) + Profit shifting (moving profits to low-tax places without matching activity)

Use this one-line definition at the start of any theory answer.

Three guiding themes

Coherence + Substance + Transparency (plus certainty and dispute resolution)

Coherence of domestic rules, alignment of taxation with substance and value creation, and transparency.

15 Action Plans (grouped)

1 Digital economy | 2 Hybrid mismatches | 3 CFC rules | 4 Interest deductions | 5 Harmful tax practices | 6 Treaty abuse | 7 PE status | 8-10 Transfer pricing outcomes and value creation | 11 Measuring BEPS | 12 Mandatory disclosure | 13 Transfer pricing documentation and CbCR | 14 Dispute resolution | 15 Multilateral instrument

Learn the numbers with their themes. Actions 8 to 10 cover intangibles, risks and capital, and other high-risk transactions.

Minimum standards

Actions 5, 6, 13 and 14

These are the four minimum standards that participating countries in the Inclusive Framework committed to implement.

Meaning of BEPS

BEPS = tax planning that exploits gaps and mismatches between tax systems to shift profits or erode the tax base

Start your answer with this line. The OECD/G20 project has 15 Actions.

Action 1 core problem

Digital presence in market country ≠ physical PE, so market country may have no taxing right under old PE rules

State this gap before listing options.

Action 1 options discussed

Significant economic presence (new nexus) | Withholding tax on digital transactions | Equalisation levy

The 2015 report discussed these options. It did not make them a minimum standard.

Hybrid mismatch outcomes

D/NI = deduction in one country, no inclusion in the other | DD = deduction in both countries

Also learn indirect D/NI, where a mismatch is imported through a chain of payments.

Action 2 linking rule

Primary rule: payer country denies deduction | Defensive rule: receiver country includes the income

The defensive rule applies only when the primary rule is not applied by the other country. Learn the order.

Fixed ratio rule (Action 4)

Allowed net interest deduction = Fixed % × tax-EBITDA

Recommended percentage lies in a corridor of 10% to 30%. Net interest means interest expense minus interest income.

Tax-EBITDA

Tax-EBITDA = Taxable income + Net interest expense + Depreciation and amortisation (all as per tax rules)

Computed from tax figures, not accounting profit. Exempt income is excluded.

Group ratio rule (Action 4)

Group ratio = Group net third-party interest expense ÷ Group EBITDA

Optional addition to the fixed ratio. An entity may deduct net interest up to its EBITDA × group ratio, where permitted.

Nexus approach (Action 5)

Qualifying income = Overall income from IP × [(Qualifying expenditure + Uplift) ÷ Overall expenditure]; Uplift = lower of (30% × Qualifying expenditure) and (Acquisition cost + Related-party outsourcing)

Qualifying expenditure is R&D incurred by the taxpayer itself, including outsourcing to unrelated parties. Related-party outsourcing and acquisition costs are excluded from it, but they are in overall expenditure and can support the uplift. The fraction cannot exceed 100%.

CFC building blocks (Action 3)

Definition of CFC; exemptions and thresholds; definition of CFC income; computation rules; attribution rules; prevention or elimination of double taxation

Six recommendations. Write all six in theory answers.

Action 5 core tests

Substantial activity requirement + Transparency framework (spontaneous exchange of rulings)

Action 5 is a minimum standard under peer review.

Action 6 minimum standard

Treaty preamble statement + (PPT alone, or PPT + simplified or detailed LOB, or detailed LOB + conduit rule)

The three approaches are alternatives. Every country must at least meet the minimum standard.

Principal purpose test

Benefit denied if: obtaining the benefit was one of the principal purposes of the arrangement AND granting it is not in line with the treaty's object and purpose

Objective and fact based: it asks what is reasonable to conclude on all facts and circumstances. It need not be the sole or main purpose. The benefit is not denied only if the taxpayer establishes that granting it accords with the treaty's object and purpose.

Limitation on benefits

Benefit granted only if the resident is a 'qualified person' (listed, ownership/base erosion test, active business, etc.)

Objective and entity based. It is rule-driven, unlike the PPT.

Agency PE (Action 7)

Person acting on behalf of an enterprise habitually concludes contracts, or habitually plays the principal role leading to contracts concluded without material modification, and those contracts are (a) in the name of the enterprise, or (b) for transfer of ownership of, or grant of the right to use, property owned by the enterprise or which it has the right to use, or (c) for provision of services by the enterprise = PE

Covers commissionaire arrangements. An independent agent acting in the ordinary course of its business is excluded. The exclusion does not apply to a person acting exclusively or almost exclusively for one or more closely related enterprises.

Specific activity exemptions

Storage, display, delivery, purchasing, collecting information: exempt only if preparatory or auxiliary

Anti-fragmentation applies where related entities carry on complementary functions forming one cohesive business.

Value creation principle (Actions 8-10)

Return follows function, asset and risk performed and controlled, not legal title or contract

For intangibles, DEMPE functions drive the return. For risk, control plus financial capacity drive allocation.

Action 11

Measure and monitor BEPS

Focus on data and economic analysis. It does not create a reporting form.

Action 12

Mandatory disclosure = early reporting of aggressive tax arrangements

Modular design: countries decide what is reportable and who reports.

Action 13 three tiers

Master file + Local file + CbC report

Master file: group-wide overview. Local file: entity-level transactions. CbC report: jurisdiction-wise financial and activity data.

CbC report data per jurisdiction

Revenue (related and unrelated), profit before tax, tax paid, tax accrued, stated capital, accumulated earnings, employees, tangible assets

Also lists each constituent entity and its main business activities.

OECD CbC revenue threshold

Consolidated group revenue ≥ EUR 750 million

This is the OECD benchmark for groups required to file. For India, use the threshold in the Rules given in your study material.

Action 14 MAP timeline

Target average to close MAP cases: 24 months

A minimum standard, reviewed through peer review.

When the MLI modifies a treaty

Treaty is modified = Both parties are MLI signatories + both have listed the treaty as a CTA + the provision is not excluded by a permitted reservation of either side

If the first two conditions fail, the original treaty text continues. Reservations are allowed only where the MLI permits them, and minimum-standard provisions cannot simply be opted out of.

Compatibility of choices

Optional provisions: apply only where the MLI's compatibility rule for that article is met. Minimum-standard provisions (preamble, PPT/LOB, MAP): apply to every CTA, even where the parties' chosen methods differ

The compatibility rule varies by article. Check the exact outcome for each article. Do not assume the stricter or softer view applies automatically.

Minimum standards

Minimum standards = (1) Prevention of treaty abuse, including the preamble statement on no double non-taxation and the PPT/LOB options + (2) Improved dispute resolution (MAP)

Countries must meet both. The treaty abuse standard can be met by the PPT alone, by the PPT plus a Limitation on Benefits rule, or by a detailed LOB rule supplemented by a mechanism to deal with conduit arrangements. The MAP standard is met through the MLI's MAP article or an equivalent treaty provision, and compliance is reviewed through peer review.

Principal Purpose Test (PPT)

Treaty benefit denied if it is reasonable to conclude that obtaining the benefit was one of the principal purposes of the arrangement, unless granting it accords with the object and purpose of the treaty

The test is objective. It does not need proof that the benefit was the only purpose.

BEPS action to Indian measure

Action 15 → MLI; Action 13 → Master File, CbCR and local file; Action 4 → interest limitation; Action 1 → equalisation levy (introduced by India, now withdrawn); Action 6 → PPT through the MLI

Use this as a map to link the global action with the Indian response. India introduced an equalisation levy following Action 1. The 6% levy on online advertising was abolished from 1 April 2025 and the 2% levy on e-commerce supply was withdrawn from 1 August 2024, so do not present it as a current measure. India's interest limitation rule applies only to specified interest paid to non-resident associated enterprises, so check its scope in your ICAI material. GAAR is a separate domestic rule that predates BEPS and complements treaty anti-abuse measures.

Quick revision

• BEPS = Base Erosion and Profit Shifting: using gaps and mismatches in tax rules to shift profits to low-tax places.
• The OECD/G20 BEPS Project produced 15 Action Plans.
• Action 1 deals with tax challenges of the digital economy.
• Action 2 neutralises hybrid mismatch arrangements.
• Action 3 strengthens Controlled Foreign Company rules.
• Action 4 limits base erosion through interest deductions and other financial payments.
• Action 5 counters harmful tax practices, with focus on transparency and substance.
• Action 6 prevents treaty abuse and Action 7 prevents artificial avoidance of PE status.
• Actions 8 to 10 align transfer pricing outcomes with value creation.
• Action 11 measures BEPS, Action 12 is mandatory disclosure, Action 13 is transfer pricing documentation with CbCR.
• Action 14 improves dispute resolution and Action 15 is the Multilateral Instrument.
• The four minimum standards are Actions 5, 6, 13 and 14.

Common mistakes

• Calling BEPS tax evasion Fix: BEPS exploits gaps within the law and is avoidance, often aggressive. Evasion is illegal concealment.
• Saying BEPS is a binding treaty or law Fix: The OECD/G20 outputs are recommendations, standards and tools. Countries implement them through domestic law and treaties, and the multilateral instrument modifies treaties.
• Writing that Action 1 gave a binding new tax on digital companies. Fix: Say Action 1 discussed options and left countries to choose domestic measures. Treat Pillars One and Two as later developments.
• Treating all digital companies as a separate category. Fix: Write that the report found the digital economy cannot be ring-fenced because the whole economy is digitalising.
• Calling all three actions minimum standards. Fix: Remember that among these three, only Action 5 is a minimum standard. Action 3 is a set of recommendations (best practices), and Action 4 is a best practice (common approach). Neither is a minimum standard.
• Applying the Action 4 percentage to gross interest or to accounting profit. Fix: Use tax-EBITDA and net interest expense, meaning interest expense less interest income.
• Saying the PPT applies only when tax avoidance is the sole purpose. Fix: Write that it is enough if obtaining the benefit was one of the principal purposes. Then add the object and purpose escape.
• Treating LOB and PPT as the same test. Fix: Say LOB is objective and entity based, and PPT is a fact based, transaction based test using a 'reasonable to conclude' standard. State that the minimum standard allows PPT alone or with LOB.
• Saying the CbC report proves transfer pricing adjustments are justified. Fix: State that CbC data is a high-level risk assessment tool. Adjustments need a proper transfer pricing analysis.
• Mixing up master file and local file contents. Fix: Master file is the group view. Local file is the entity view with related-party transaction detail.

Exam tips

• Start every theory answer with the meaning of BEPS and then structure the rest as causes, response, objectives and actions.
• Learn the 15 actions by theme and number. Marks are often given for correct name and number.
• In case scenarios, name the structure first and then map it to the relevant action.
• Keep the minimum standards (5, 6, 13, 14) ready, because they are frequently asked.
• Do not quote figures on revenue loss unless the question gives them.
• Begin every answer with the one-line meaning of BEPS and the Action number. This earns marks quickly.
• For case questions, draw a two-country sketch in your rough work and write each country's treatment before concluding.
• Do not describe Pillar One or Pillar Two as part of Action 1. Mention them only as later developments.