An article by IMF economists Jannick Damgaard, Thomas Elkjaer, and Niels Johannesen, claims that “A stunning $12 trillion—almost 40% of all foreign direct investment positions globally—is completely artificial,” and that “in India and China, 50% to 90% of outward FDI “goes through a foreign entity with no economic substance.”
India and China have signed an amended Double Taxation Avoidance Agreement (DTAA) plugging loopholes in the existing treaty that provided windows to people to skip paying taxes in their respective countries on the income from businesses while not having to pay tax in the country they operated their businesses from.
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“The Protocol incorporates changes required to implement treaty-related minimum standards under the action reports of Base Erosion & Profit Shifting (BEPS) project, in which India had participated on an equal footing. Besides minimum standards, the Protocol brings in changes as per BEPS Action reports as agreed upon by the two sides,” the Indian Finance Ministry said in a statement.
BEPS refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations.
In 2016, India signed a multilateral convention to implement measures to prevent shifting of profits by companies to low-tax nations as a way to avoid paying taxes.
“Under the inclusive framework, over 100 countries and jurisdictions are collaborating to implement the BEPS measures and tackle BEPS,” Organization for Economic Cooperation and Development (OECD) website reads.
The convention implements two minimum standards related to the prevention of treaty abuse and dispute resolution through mutual agreement procedures.
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A recent report published by research firm KPMG claimed that Chinese companies invested nearly $2 billion in Indian start-ups in 2017 alone that were predominantly focused on e-commerce, followed by transportation and fintech (financial technology), with a majority of the biggest deals in the late-stage e-commerce sector. Some of the major investors in the Indian start-up ecosystem include Alibaba, Ctrip, and Tencent.