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CA Final · Direct Tax Laws & International Taxation · Fundamentals of BEPS

Under the nexus approach of BEPS Action 5 for preferential intellectual property regimes, a company incurred the following expenditure on developing a patent: Rs 60 crore of own and unrelated-party R&D (qualifying expenditure), and Rs 40 crore paid to related parties for outsourced R&D. There was no acquisition cost. The uplift is the lower of 30% of qualifying expenditure and the sum of related-party outsourcing and acquisition costs. The patent generates overall income of Rs 50 crore. How much income can benefit from the preferential regime?

Rs 39 crore of income qualifies. The uplift is Rs 18 crore, being 30% of Rs 60 crore qualifying expenditure, which is lower than the related-party spend. The nexus ratio is 78 out of 100 overall expenditure, and 78% of Rs 50 crore income is Rs 39 crore.

  1. ARs 30 crore
  2. BRs 39 croreCorrect
  3. CRs 45 crore
  4. DRs 50 crore

Explanation

Uplift = lower of 30% x 60 = 18 and 40, so 18. Nexus ratio = (qualifying expenditure 60 + uplift 18) / overall expenditure 100 = 78%. Qualifying income = 78% x Rs 50 crore = Rs 39 crore. Rs 30 crore ignores the uplift (60%). Rs 45 crore wrongly takes the uplift as 30% of overall expenditure. Rs 50 crore treats all expenditure as qualifying.

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