BEPS (Base Erosion and Profit Shifting)

By Manu Rao | Updated March 2026

What Is BEPS?

Base Erosion and Profit Shifting (BEPS) refers to tax avoidance strategies used by multinational enterprises (MNEs) to exploit differences between the tax rules of different countries, shifting profits from higher-tax jurisdictions (where the actual economic activity occurs) to lower-tax or no-tax jurisdictions (where there is little or no real activity). The result: reduced tax revenue for the countries where the value is actually created.

The OECD, at the request of the G20, launched the BEPS Project in 2013 and delivered 15 Action Plans in 2015. These action plans provide governments with domestic and international tools to address BEPS — from new treaty provisions and transfer pricing rules to mandatory disclosure regimes and multilateral instruments.

India has been one of the most active participants in the BEPS project, both as a member of the OECD's Inclusive Framework (which now includes over 140 countries) and as a country that has aggressively implemented BEPS recommendations into domestic law. For foreign investors in India, BEPS is not an abstract OECD concept — it directly shapes the tax rules you will face.

The 15 BEPS Action Plans

BEPS Pillar One and Pillar Two

Beyond the original 15 actions, the OECD's BEPS Inclusive Framework has been working on two additional "pillars" since 2019:

Pillar One — Profit Reallocation

Pillar One reallocates taxing rights to market jurisdictions (where customers are) rather than jurisdictions of residence or production. It primarily targets large MNEs with global revenue exceeding EUR 20 billion and profitability above 10%. Under Pillar One's "Amount A," a portion of residual profits (above a 10% return on revenue) would be allocated to market countries based on revenue sourced from each country.

For India, Pillar One means it would gain taxing rights over a share of profits from large digital and consumer-facing companies that earn revenue from Indian customers but may not have a taxable presence here. India agreed to withdraw its Equalization Levy (2% on e-commerce) as part of the Pillar One negotiations, but implementation has been delayed as the multilateral convention is still being finalized as of early 2026.

Pillar Two — Global Minimum Tax

Pillar Two introduces a global minimum effective tax rate of 15% for MNEs with consolidated revenue exceeding EUR 750 million. If an MNE's effective tax rate in any country falls below 15%, the home country (or other jurisdictions in the chain) can apply a "top-up tax" to bring the rate up to 15%.

Pillar Two has three components:

• Income Inclusion Rule (IIR) — The parent company's country applies a top-up tax if a subsidiary's effective rate is below 15%
• Undertaxed Profits Rule (UTPR) — A backstop where other jurisdictions deny deductions or require equivalent adjustments if the parent country does not apply the IIR
• Qualified Domestic Minimum Top-up Tax (QDMTT) — A country can itself apply the top-up tax domestically, ensuring it collects the revenue rather than letting the parent country do so under IIR

India has signaled its intention to implement Pillar Two, particularly the QDMTT, which would allow India to collect the top-up tax on undertaxed profits of Indian subsidiaries rather than ceding that revenue to the parent company's jurisdiction. As of March 2026, India has not yet enacted Pillar Two legislation, but draft rules are expected.

How BEPS Affects Foreign Investors in India

Transfer Pricing — DEMPE Analysis

BEPS Actions 8-10 require that transfer pricing outcomes align with value creation. The DEMPE framework asks: who Develops, Enhances, Maintains, Protects, and Exploits the intangible? If an Indian subsidiary performs significant R&D but a low-tax group entity owns the IP, India's transfer pricing authorities will argue that the Indian subsidiary should be compensated for its DEMPE functions — potentially increasing taxable income in India.

For foreign investors with Indian subsidiaries performing R&D, contract manufacturing, or shared services, the DEMPE analysis is now a standard part of every transfer pricing audit.

Country-by-Country Reporting (CbCR)

BEPS Action 13 requires MNE groups with consolidated revenue exceeding INR 5,500 crores (approximately EUR 750 million) to file a CbCR showing revenue, profit, tax paid, employees, and tangible assets for each country of operation. In India, the CbCR is filed through:

• Form 3CEAC — Intimation by the Indian entity of whether it is the parent or the constituent entity
• Form 3CEAD — The actual CbCR (if the Indian entity is the parent or the reporting entity)
• Form 3CEAE — Filed by the Indian constituent entity if the parent is in a country that does not have an exchange agreement with India

The Indian tax authorities use CbCR data to identify risk areas for transfer pricing scrutiny. If the CbCR shows that an Indian subsidiary with 500 employees and INR 200 crores in revenue reports only INR 5 crores in profit while a group entity in a zero-tax jurisdiction with 2 employees reports INR 100 crores, expect a detailed transfer pricing audit.

Thin Capitalization (Section 94B)

Inspired by BEPS Action 4, India introduced Section 94B in 2017, limiting interest deductions on borrowings from associated enterprises. For an Indian company with significant inter-company debt from its foreign parent, interest deductions are capped at:

• 30% of EBITDA, or
• The actual interest paid/payable

whichever is lower. Excess interest can be carried forward for up to 8 assessment years. This rule applies when interest paid to associated enterprises exceeds INR 1 crore in a year.

The Multilateral Instrument (MLI)

India signed the MLI in 2017 (ratified in 2019), modifying over 90 of its bilateral DTAAs. The key changes for foreign investors:

• Principal Purpose Test (PPT) — Added to all MLI-covered treaties, denying benefits if a principal purpose of an arrangement is to obtain the benefit
• Narrower PE exemptions — Activities previously considered "preparatory or auxiliary" (like maintaining a warehouse or collecting information) may now trigger a PE
• Transparent entities — Clarified treatment of income through partnerships and other transparent entities

Permanent Establishment — Broader Scope

BEPS Action 7 broadened the PE definition to prevent artificial avoidance. India has been a strong advocate and has adopted broader PE definitions through the MLI. Key changes:

• Commissionaire arrangements (where a local agent habitually concludes contracts on behalf of a foreign enterprise) can now create a PE, even without formal authority to bind the foreign enterprise
• Splitting activities among group entities to claim the "preparatory or auxiliary" exemption is addressed — if the activities are complementary and form a cohesive business operation, the exemption does not apply

India's Implementation Track Record

India has been one of the most aggressive implementers of BEPS recommendations. Key domestic measures include:

• GAAR (effective April 1, 2017) — aligns with BEPS Action 6
• Section 94B thin capitalization (effective April 1, 2017) — aligns with BEPS Action 4
• Equalization Levy (2016 for digital advertising, 2020 for e-commerce, partially withdrawn 2024) — aligns with BEPS Action 1
• Secondary adjustment provisions (Section 92CE) — aligns with BEPS Actions 8-10
• CbCR requirements (Rules 10DA/10DB) — aligns with BEPS Action 13
• MLI ratification (2019) — aligns with BEPS Action 15
• Significant Economic Presence (Section 9(1)(i), Explanation 2A) — broadened PE definition for digital businesses, aligning with BEPS Action 7

Common Mistakes

• Treating BEPS as an OECD-only concern. India has implemented BEPS recommendations into domestic law. GAAR, thin capitalization, CbCR, and the MLI are all enforceable Indian law — not aspirational guidelines. Foreign investors who ignore BEPS because they are "only OECD recommendations" are caught off guard during tax assessments.
• Not filing CbCR when required. The filing threshold (INR 5,500 crores consolidated group revenue) applies to the global MNE group, not the Indian entity alone. A small Indian subsidiary of a large global group must still comply with CbCR filing obligations in India.
• Ignoring DEMPE analysis in transfer pricing. Pre-BEPS transfer pricing focused primarily on comparable benchmarking. Post-BEPS, the Indian TPO asks detailed questions about who performs DEMPE functions. Companies that cannot demonstrate alignment between profits and DEMPE functions face adjustments.
• Overleveraging the Indian subsidiary. Foreign parents that heavily debt-fund the Indian subsidiary to extract interest deductions hit the 30% EBITDA cap under Section 94B. The denied interest is not a deduction — it increases taxable income in India.
• Assuming old treaty provisions still apply. The MLI has modified many of India's DTAAs. Investors relying on pre-MLI treaty text (e.g., older PE exemptions or absence of PPT) may find that the treaty has been updated through the MLI without any bilateral renegotiation.

Practical Example

CloudTech Inc., a US SaaS company with global revenue of USD 2 billion, sets up CloudTech India Pvt Ltd in Bangalore with 200 engineers who develop and maintain the core product. CloudTech India is compensated on a cost-plus-15% basis.

BEPS issues identified during an Indian tax audit:

• DEMPE analysis (Actions 8-10): The Indian TPO notes that 200 engineers in India perform significant development, enhancement, and maintenance of the software platform (which generates USD 2 billion in global revenue). Yet the Indian entity earns only a cost-plus-15% markup, while the US parent (which owns the IP) books the majority of profits. The TPO argues India's compensation should reflect its DEMPE contribution — potentially increasing the Indian entity's profit to a much higher margin.
• CbCR (Action 13): CloudTech Inc.'s CbCR shows India has 200 employees and USD 50 million in revenue (cost-plus arrangement), while the US has 100 employees and USD 1.8 billion in revenue. The disparity between employees in India and revenue allocated to India raises flags.
• Thin capitalization (Action 4): CloudTech India has a USD 20 million inter-company loan from the US parent at 8% interest. Interest payments of USD 1.6 million are deductible — but only up to 30% of EBITDA. If EBITDA is USD 4 million, the deduction cap is USD 1.2 million. The remaining USD 400,000 is disallowed.
• PE risk (Action 7): CloudTech India's engineers interact with global customers, conduct product demos, and occasionally negotiate contracts. The Indian tax authorities examine whether these activities create a PE for CloudTech Inc. in India beyond the subsidiary.

The result: a multi-crore transfer pricing adjustment, a thin capitalization disallowance, and a potential PE dispute — all rooted in BEPS-aligned Indian tax rules.

Key Takeaways

• BEPS is a 15-action OECD/G20 initiative that India has aggressively implemented into domestic law
• India has enacted GAAR, thin capitalization (Section 94B), CbCR, Equalization Levy, and ratified the MLI
• Pillar Two (15% global minimum tax) is on the horizon — India is expected to implement QDMTT
• Transfer pricing now requires DEMPE analysis — profits must align with value creation functions in India
• CbCR filing is required for Indian subsidiaries of MNE groups with INR 5,500 crore+ global revenue
• The MLI has modified 90+ Indian DTAAs — adding PPT and narrowing PE exemptions
• Section 94B caps interest deductions on associated enterprise debt at 30% of EBITDA
• India uses CbCR data to target transfer pricing audits — misalignment between employees and profits is a red flag

Need to ensure your India structure is BEPS-compliant? Beacon Filing coordinates transfer pricing documentation, CbCR filing, and BEPS risk assessment for foreign-owned Indian companies.