Multinational groups entering India today operate inside a tax framework rebuilt over the last decade:
OECD/G20’s Base Erosion and Profit Shifting (BEPS) initiative.
BEPS was born from a simple observation —
Multinational Group can structure cross border transaction in a way that the taxable profit is separated from the jurisdiction where the underlying economic activity took place and the value is created.
BEPS measures seek to align taxation with economic substance and value creation.
Understanding BEPS at the outset is a pre-condition to structuring an Indian entity.
What Is BEPS, and Why Should You Care?
BEPS refers to tax planning strategies that exploit gaps and mismatches between different countries’ tax rules to artificially shift profits to low- or no-tax locations, where there is little or no real economic activity. The response, coordinated by the OECD and G20, unfolded in two stages:
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BEPS 1.0 —A 15-point Action Plan, launched in 2013, with final consensus reports on all 15 Actions released on 5 October 2015 and endorsed by G20 Leaders shortly after.
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BEPS 2.0 —The “Two-Pillar Solution”, agreed in 2021, extending the project to the tax challenges of a digitalised, highly mobile global economy.
In the current global business scenario BEPS puts impetus on:
- How the transfer pricing is scrutinized
- Whether the treaty benefits be granted or denied
- How much substance a holding or IP structure needs to survive
- What will be the groups minimum effective tax, wherever in the world it operates
BEPS 1.0 — The 15 Action Points
The 15 Actions are best understood as addressing four connected problems:
- Coherence (Actions 2–4),
- Substance (Actions 5–10),
- Transparency (Actions 11–14),
- Implementation (Action 15).
Coherence: closing the gaps between tax systems
Action 1 — Tax Challenges of the Digital Economy
Digitalisation does not create a wholly separate BEPS problem; it intensifies the existing ones.
A business can now generate substantial revenue from a country’s market without any physical presence there.
A company selling advertising or digital products needs no office, warehouse or staff on the ground — a digital footprint is enough.
Action 2 — Neutralise Hybrid Mismatch Arrangements
The same item of income can be characterised differently under different countries’ domestic tax laws, and a group can exploit the mismatch — for instance, by using a hybrid entity that is treated as tax-transparent in one jurisdiction and non-tax-transparent (opaque) in the other, so that the income effectively falls outside both tax nets, or a deduction is claimed in one country without a corresponding inclusion in the other.
Action 2 recommends domestic and treaty rules that neutralise this effect rather than eliminate the underlying mismatch.
Action 3 — Strengthen CFC Rules
Controlled Foreign Company (CFC) rules allow a parent’s home jurisdiction to tax certain passive income earned by a subsidiary in a low-tax jurisdiction, rather than allowing that income to sit untaxed offshore indefinitely.
Action 3 sets out the building blocks for effective CFC regimes, so that profit cannot simply be parked in a low-tax subsidiary while the parent company enjoys the benefit.
Action 4 — Limit Base Erosion via Interest Deductions
Interest is treated very differently across jurisdictions — deductible in some, restricted in others, untaxed on receipt in a few. This asymmetry lets a group shift debt (and the associated interest deductions) to wherever they are most valuable, independent of where the borrowed funds are actually used.
Action 4 recommends capping net interest deductions by reference to a fixed ratio or to the group’s actual worldwide interest expense, so the deduction tracks real economic activity rather than tax efficiency alone.
Substance: aligning tax outcomes with real economic activity
Action 5 — Counter Harmful Tax Practices
Preferential regimes — patent boxes, tax holidays, advance rulings — are only acceptable under BEPS if they require substantial activity in the jurisdiction granting the benefit.
Regimes designed purely to lure foreign companies with a favourable rate, with no requirement for real activity, fall foul of Action 5.
For intellectual property regimes specifically, the Nexus Approach requires that the tax benefit an entity claims correlate with the R&D expenditure it actually incurred — a company cannot buy IP, move it to a low-tax box, and claim the preferential rate on income the box did nothing to create.
Action 6 — Prevent Treaty Abuse
A tax treaty exists to prevent double taxation — not to manufacture double non-taxation through treaty shopping.
Action 6 introduces two principal safeguards:
- the Limitation of Benefits (LOB) rule, a mechanical test of who may claim treaty benefits,
- the Principal Purpose Test (PPT), a broader anti-abuse rule denying benefits where obtaining them was one of the principal purposes of the arrangement.
Action 7 — Prevent Artificial Avoidance of Permanent Establishment (PE) Status
A Permanent Establishment is, in essence, a fixed place of business in another country that generally triggers a tax liability there.
This action point tightens the definitions that groups had used to keep substantial local activity just short of PE status — commissionaire arrangements and artificially fragmented activities among them — and, correspondingly, tightens the rules on profit attribution, i.e., how much profit is taxable in the PE’s jurisdiction versus the rest of the group.
On the flip side this creates additional compliance and administrative cost for the Multi-National Companies working in various jurisdictions.
Actions 8–10 — Aligning Transfer Pricing Outcomes with Value Creation
Actions 8, 9 and 10 form the backbone of modern transfer pricing practice, built around three themes:
- Intangibles (Action 8) — a broad, clear definition of what counts as an intangible; profit allocated in line with actual usage and contribution to value creation, not mere legal ownership; specific rules for hard-to-value intangibles; and guidance on cost contribution arrangements.
- Risk and Capital (Action 9) — preventing risk from being contractually allocated to an entity that has no real capacity to control or bear it, and preventing capital from being pumped into a low-function entity purely to justify a disproportionate return.
- Other High-Risk Transactions (Action 10) — closer scrutiny of management fees, head-office expense recharges, and other categories that are easy vehicles for shifting profit without a matching shift in activity.
The common thread across all three: operating profit must track real economic activity — the people, functions, and decisions that actually create value — not just where contracts happen to sit.
Transparency: giving tax administrations the information they need
Action 11 — Measuring and Monitoring BEPS
BEPS is estimated to cost governments significant Corporate Income Tax (CIT) revenue every year.
Action 11 built the tools and indicators tax administrations use to measure the scale of the problem and to track whether the other 14 Actions are actually working.
Action 12 — Mandatory Disclosure of Aggressive Tax Planning
Recommends that countries introduce mandatory disclosure rules requiring taxpayers to report aggressive or abusive tax planning arrangements to the tax authority up front, rather than letting them surface only on audit.
Action 13 — Re-examine Transfer Pricing Documentation
This Action introduces a coordinated, three-tiered approach alongside the documentation requirements prescribed under domestic law, to give tax administrations a genuine picture of where an MNE group’s income, activity and tax actually sit:
- Master File — a group-wide overview of the MNE’s global business, its intangibles, and its financing arrangements.
- Local File — entity-specific detail on material related-party transactions in that jurisdiction.
- Country-by-Country Report (CbCR) — a minimum standard requiring large groups to report revenue, profit, tax paid, employees and assets, broken down by country.
Action 14 — Make Dispute Resolution More Effective
When two jurisdictions both seek to tax the same transaction or activity, the taxpayer is left to resolve a dispute it did not create.
Action 14 strengthens the Mutual Agreement Procedure (MAP) — the mechanism by which two tax authorities negotiate a resolution — and sets minimum standards aimed at removing the practical impediments.
Implementation: making it all binding
Action 15 — The Multilateral Instrument (MLI)
Retrofitting BEPS changes into the world’s roughly 3,000 bilateral double tax treaties, one renegotiation at a time was never realistic.
Action 15 solved this with the Multilateral Instrument (MLI): a single convention that modifies a signatory’s covered bilateral treaties simultaneously, without a treaty-by-treaty renegotiation.
The MLI text was agreed in November 2016, opened for signature on 7 June 2017, and entered into force internationally on 1 July 2018. It principally carries the treaty-related Actions into effect:
- Action 2 — Hybrid mismatch arrangements
- Action 6 — Treaty abuse (LOB / PPT)
- Action 7 — Artificial avoidance of PE status
- Action 14 — Improving dispute resolution
Each signatory retains flexibility over which of its treaties it lists as “covered” and which optional provisions it adopts, subject to a set of agreed minimum standards.
BEPS 2.0 — The Two-Pillar Solution
BEPS 1.0 tightened the existing rules;
BEPS 2.0 rewrites part of the underlying architecture for a digital, highly mobile global economy.
It rests on two pillars.
Pillar One — Reallocating Taxing Rights
Pillar One proposes to reallocate a portion of the taxing rights over the largest and most profitable multinational groups to the jurisdictions where their customers and users are located — even where the group has no physical presence there at all.
Pillar One is intended to apply to multinational enterprises with global revenue over €20 billion and a pre-tax profit margin above 10%.
It is aimed squarely at the situation Action 1 first identified: significant market-jurisdiction revenue with no corresponding taxing right.
Pillar Two — The Global Minimum Tax
Pillar Two introduces a 15% global minimum effective tax rate for multinational groups with consolidated group revenue above €750 million.
If a group’s effective tax rate in any jurisdiction falls below 15%, a top-up tax brings it up to the minimum — regardless of whether that low rate came from a headline rate, an incentive, or a preferential regime.
In substance, Pillar Two is the direct answer to the practice BEPS 1.0 could only partially reach: a group planning its worldwide structure so meticulously that, taken as a whole, it pays materially less tax than its actual worldwide economic activity would suggest.
The compliance architecture behind Pillar Two
- GIR (GloBE Information Return) — the standardised return through which an MNE group reports its Pillar Two computations.
- CbCR (Country-by-Country Reporting) — the same Action 13 mechanism, now also feeding Pillar Two’s safe-harbour calculations.
- QDMTT (Qualified Domestic Minimum Top-up Tax) — a domestic top-up tax that lets a jurisdiction collect the top-up itself, rather than ceding that right to the parent’s home jurisdiction under the Income Inclusion Rule (IIR).
Together, these three form the Corporate Compliance Action Plan an in-scope MNE group now has to build around Pillar Two — group-wide effective tax rate modelling, jurisdiction-by-jurisdiction data collection, and a genuine assessment of exposure before, not after, the return falls due.
Where Does India Stand?
For a foreign investor, the general BEPS framework matters less than how India has actually implemented it.
- MLI: India signed the MLI on 7 June 2017, deposited its instrument of ratification on 25 June 2019, and the MLI entered into force for India on 1 October 2019. However, its application to a particular treaty and provision depends on matching treaty notifications, reservations and the effective-date rules applicable to the two jurisdictions.
- Not every Indian treaty is affected: As of the date of publication the India–USA treaty is untouched because the United States never signed the MLI, and the India–Mauritius treaty is currently outside its scope because Mauritius has not listed it as a covered agreement.
- Pillar Two: as of 2026, India has not yet enacted a domestic QDMTT, though it continues to participate actively in the OECD Inclusive Framework and has signalled its intent to align with the global framework.
- In practice, this matters less than it might for other jurisdictions, because India’s headline corporate tax rates — 25.17% under Section 115BAA — already sit above the 15% Pillar Two floor.
- Although India’s headline corporate tax rates generally exceed 15%, this does not by itself eliminate Pillar Two exposure.
- The GloBE effective tax rate is calculated under a separate framework and may differ from the domestic headline rate because of incentives, timing differences, covered-tax adjustments and other GloBE rules.
- Transfer pricing and documentation: India’s transfer pricing regime already reflects Actions 8–10 and 13 — Master File and CbCR obligations apply to Indian constituent entities of large MNE groups, and Indian transfer pricing audits increasingly test substance and value creation directly, not just contractual allocation.
Practical Takeaways Before You Structure an India Entry
- Substance now matters more than form. Whatever entry vehicle is chosen, the entity needs real people, real decision-making, and real functions in India to support the profit it is expected to earn here.
- Treaty planning has to be tested against the PPT and LOB, not just the treaty’s face wording — a structure whose principal purpose looks like treaty shopping will not survive scrutiny.
- Transfer pricing documentation is not a compliance afterthought. Master File, Local File and CbCR obligations should be built into the structuring exercise from day one, not reverse-engineered after the fact.
- Groups above the €750 million threshold need Pillar Two modelling before entry, not after — India’s above-15% headline rate offers some comfort, but incentive-heavy structures deserve a specific effective-tax-rate check.
- BEPS is not a one-time compliance event. It is an evolving framework — Pillar Two administrative guidance, India’s own QDMTT decision, and further MLI matching are all still moving — and a structure built to survive today’s rules should be reviewed periodically.
Planning to enter or operate in India without a local entity? Talk to our advisory team before commencing activities in India.
For an initial discussion, write to us at rajnish@sgaindia.co.in.
About the Author
CA Rajnish Shukla is the Founder Partner of M/s Shukla Gupta & Arora – Chartered Accountants, with over two decades of experience in taxation, regulatory compliance and business advisory. He advises foreign-owned and internationally operating businesses on India market entry, entity structuring, taxation, FEMA, transfer pricing and ongoing compliance.