BEPS and GAAR: A Practical Primer

What BEPS addresses

Base Erosion and Profit Shifting refers to international tax planning strategies that exploit gaps between different countries' tax rules to artificially shift profits to low or no-tax jurisdictions, away from where the real economic activity actually happens. The global BEPS initiative introduced coordinated measures — many of which India has adopted — to counter this.

What GAAR does domestically

India's General Anti-Avoidance Rules give tax authorities the power to disregard an arrangement, or recharacterise it, if its main purpose is to obtain a tax benefit and it lacks genuine commercial substance — essentially, a backstop against structures designed primarily for tax avoidance rather than genuine business reasons.

What this means for a business with cross-border structures

• Intercompany arrangements need genuine commercial rationale, not just tax efficiency, to withstand scrutiny
• Substance matters — where key decisions are actually made, where employees with real authority are located, and where genuine business risk is borne all factor into whether a structure holds up
• Documentation of the commercial reasons behind a structure — not just its tax outcome — is important to maintain contemporaneously

What tends to attract scrutiny

• Structures where the tax benefit is disproportionate to any discernible commercial purpose
• Entities with minimal genuine substance (no real staff, decision-making, or operations) holding significant assets or income
• Round-trip or circular arrangements that don't reflect genuine independent business activity

A practical takeaway

Any cross-border structure should be able to answer a straightforward question convincingly: what is the genuine commercial reason for this structure, independent of the tax outcome? If that answer isn't clear and well-documented, the structure carries real risk under both BEPS-aligned rules and GAAR.

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