BASE Erosion and Profit Shifting (BEPS) project is facing massive erosion threat on multiple fronts. The four main risks to the Project are: 1) absence of inclusivity; 2) complex challenges in plugging revenue leakages under existing tax treaties; 3) avoidance and evasion in booming digital economy due to problems in engineering customized taxation and 4) Divisive impact of different model tax conventions. All of them are supposed to achieve BEPS objectives.

Take first the inclusivity. Only 15 countries have so far ratified Multilateral Convention to Implement Tax Treaty Related Measures to prevent BEPS / Multilateral Instruments (MLI). As many as 76 countries/jurisdictions had signed or formally expressed their intention to sign on 7th June 2017.

So far only 84 out of over 202 tax jurisdiction have joined BEPS Convention. The United States & Brazil continue to shun MLI. The 84 signatories cover over 1,400 bilateral tax treaties, which is 41.17% of total 3400 treaties signed by all tax jurisdictions.

The bilateral treaties specified in ratification instruments would be subjected to match-making, fast-track amendments through MLI toolkit. All 1400 treaties would actually come under MLI cover only when 69 out of 84 signatories submit their ratification/approval to Organisation for Economic Co-operation and Development (OECD).

This may take years as certain countries would have to take approval from their respective Parliament. Each signatory submits its instrument of ratification with many reservations about different articles of 49-page MLIs convention.

Reservations from all signatories can be perceived as thousands of pinpricks in BEPS umbrella. The word 'Reservation' appears 105 times in the text of the Convention.

According to OECD, "where a substantive provision of the multilateral agreement does not reflect a minimum standard, a Party is generally given the flexibility to opt out of the provision entirely or, in some cases, partly. Where a Party uses a reservation to opt out of a provision, that provision will not apply between the reserving Party and all other Parties to the Covered Tax Agreements under the Multilateral Instrument".

This brings us to the second issue of complex challenges in aligning bilateral tax treaties with BEPS provisions. If one country includes a bilateral treaty in its submission to OECD depositary, the same might be excluded by the other party to the treaty in its submission.

This means status quo for country that saw BEPS as an opportunity to amend a bilateral treaty that encourages double non-taxation, tax avoidance, treaty shopping and what have you.

This challenge is best illustrated by India-Mauritius Double Taxation Avoidance Convention / agreement (DTAC/DTAA).

India has included this in its MLI position relating to existing bilateral agreements. Mauritius has, on the other, excluded it from its MLI position. Both are likely reiterate this situation in their respective ratification instruments as has been done by 15 ratifying countries so far.

If one puts the two countries' submissions to interactive MLI matching database tool, one gets this message: "This agreement would not be a 'covered tax agreement' because Mauritius has not included it in its notification".

A covered tax agreement is an agreement for avoidance of double taxation that is in force between parties to the MLI and for which both parties have made a notification that they wish to modify the agreement using the MLI.

Amendment of bilateral treaties is thus not going to be a cake-walk. Amendments would dodge thousands of treaties especially due to many tax jurisdictions not coming on BEPS bus. An unofficial estimate puts the total number of bilateral treaties amongst all tax jurisdictions at 3400.

BEPS project would thus fail to curb big-ticket revenue losses to one party or the other as the second party would resist amendment or drag its feet as long as possible.

It is apt to quote the World Bank's Director (Governance Global Practice) James Brumby. In an article penned in November 2016, Mr. Brumby notes: "Tax treaties are like a bathtub; a single leaky one is a drain on a country's revenues".

Notwithstanding such reality, OECD has presented an optimistic perspective.

An OECD legal note thus describes MLI convention means "one negotiation, one signature and one ratification".

The Note says: "The MLI is a multilateral treaty which will be applied alongside existing bilateral tax treaties modifying their application. In this way, bilateral treaties can be modified in a synchronized and consistent way in order to swiftly implement the tax treaty-related BEPS measures".

Consider now digital economy and its taxation. OECD has been grappling with unfolding challenges of defining and taxing digital economy.

The enormity of the challenges can be gauged from five-year timeframe set by OECD to fully grasp the issues and facilitate a broad consensus on taxation. Its 2015 BEPS Action 1 Report, 'Addressing the Tax Challenges of the Digital Economy', thus fixed 2020 as timeline for submission of a final report on Tax Challenges Arising from Digitalisation.

OECD presented an interim report on the subject presented during March 2018 & would issue an update in 2019. The key issue here is whether OECD would succeed in creating a consensus on taxation that prevents BEPS in digital domain. Lack of consensus is a strong possibility. It would therefore deepen global divide over BEPS implementation in most fertile arena of new revenue generation.

The Interim Report noted the different views among countries on whether and to what extent digitalisation should result in changes to the international tax rules.

It has not made any interim recommendations as there is no consensus among the countries on the merits of, or need for, interim measures.

According to Interim Report, "Overall, there is support for undertaking a coherent and concurrent review of two key aspects of the existing tax framework, nexus and profit allocation rules that would consider the impacts of digitalization".

All complicated issues such as tax jurisdiction, value creation, profit allocation under different digital business models would have to be sorted out. Meanwhile, emerging digital technologies are spawning more difficulties.

European Commission's Staff Working Document released during March 2018 has aptly summed the challenges. It says: "The digitalisation of the global economy is happening fast and corporate taxation rules are outdated. Today's rules have been built on the principle that profits should be taxed where the value is created. However, they were largely conceived in the early 20th century".

Moreover, digital technology is adding to the taxation challenges and opportunities. To quote an OECD's note submitted to Asia-Pacific Economic Cooperation (APEC) in July 2018, "Technology is providing other challenges and opportunities for tax administrations, such as crypto-currency and block-chain Technology".

APEC report on 'Structural Reform and Digital Infrastructure' released last month observed, "The rise of a digital economy can mean the decline of traditional sectors and the tax base. Tax reforms are inevitable, and it is important they should not become forms of competition in themselves".

Competition in unveiling interim digital taxation is picking up. Certain jurisdictions have already unveiled or contemplating new taxes. While doing so, the jurisdictions have kept in view taxation options explored earlier by OECD's Task Force on Digital Economy.

These options are: 1) a new nexus rule in the form of a "significant economic presence" test; 2) a withholding tax which could be applied to certain types of digital transactions; and 3) an equalisation levy, intended to address a disparity in tax treatment between foreign and domestic businesses where the foreign business had a sufficient economic presence in the jurisdiction.

India, for instance, amended its Income Tax Act in February 2018, to tap new nexus rule in form of significant economic presence of non-resident business entity. This amendment will take effect from 1st April, 2019.

According to Indian Government, for a long time, nexus based on physical presence was used as a proxy to regular economic allegiance of a non-resident.

However, with the advancement in digital technology over the last few decades, new business models operating remotely through digital medium have emerged. Under these new business models, the non-resident enterprises interact with customers in another country without having any physical presence in that country resulting in avoidance of taxation in the source country.

India contends the existing nexus rule based on physical presence therefore do not hold good anymore for taxation of business profits in source country. It adds: "As a result, the rights of the source country to tax business profits that are derived from its economy is unfairly and unreasonably eroded".

The Government hopes the amendment will enable India to negotiate for inclusion of the new nexus rule in the form of 'significant economic presence' in DTAAs.

In 2016, India introduced Equalisation Levy (EL) as a separate tax on online advertising services provided by non-resident entities.

Similarly, Italy's Levy on Digital Transactions is set be become effective from 1 st January 2019.

Australia introduced legislation to extend the GST to offshore accommodation booking services in Parliament during September 2018.

According to Australian Treasury's Discussion Paper on 'The digital economy and Australia's corporate tax system' released last month, the country is going beyond BEPS project.

European Union (EU) is another case in point. On 21 st March 2018, European Commission unveiled two taxation proposals to "ensure that digital business activities are taxed in a fair and growth-friendly way in the EU".

The proposals are: 1) levy of digital service tax (DST) on certain revenue from digital services and 2) changes in corporate tax rules to ensure that profits are taxed where businesses interact substantially with users via digital platforms. The proposals might be abandoned in the wake of Opposition from the United States & fear of American retaliation among some EU member countries.

Last month, US Senate Committee Chairman & a Member wrote a joint letter to President, European Commission and President, European Council, pointed out that DST would lead to double taxation of multinational companies (MNCs).

Through interim digital taxation initiatives, "the EU would be erecting another deeply concerning barrier to transatlantic trade," the letter dated 18th October 2018 contends. It advises EU to work for consensus within OECD on digital taxation models.

The talk of consensus brings us to the lack of consensus among countries to have a single model tax convention (MTCs). At present, there are three, prominent MTCs: 1) OECD Model Tax Convention 2017, 2) United Nations Model Double Taxation Convention between Developed and Developing Countries 2017 (UNMDTC) and 3) U.S. Model Income Tax Convention 2016. All of them are updated to reflect issues addressed by BEPS project.

OECD MTC is designed to promote the interest of developed countries. Notwithstanding this, the United States, as capital exporter and the world's largest economy with its own economic interests, has always maintained its own model convention. UNMDTC, as the name indicates, is drafted to protect interest of development countries, which are net capital importers.

According to PWC's Tax Policy Bulletin August 2018, "none of the three models are law, but provide benchmarks and guidance for countries seeking to reach particular types of agreement bilaterally"

These are different from MLI, which has legislative effect by overlaying provisions on top of existing bilateral or multilateral agreements.

The Bulletin notes: "However, domestic courts will often look to these models and related commentary when trying to determine the meaning of a treaty provision (even in the case of US treaties, using the OECD Model as a secondary source having considered firstly the US model)".

According to Doron Narotzki, an acedmic from Ohio-based Akron University, The OECD Model acts under the general assumption that there is a rough parity of trade and capital flows between countries, and gives relief for double taxation by reducing the tax in the source country where the income was produced.

In an exhaustive paper published last year in Akron Law Review, Mr. Narotzki writes the U.N. Model takes into account special circumstances of developing countries and promotes tax sparing. It leaves reductions of withholding rates to bilateral negotiations, which usually leads to higher withholding rates.

As for the US model, he says although it is largely consistent with the OECD Model, there were some issues upon which the U.S. Model could not compromise. These issues are The "Saving Clause," where the United States reserves the right to tax U.S. citizens as if the tax treaty does not exist; consistent refusal to allow effective management to dominate the corporate residence rules and refusal to include "Tax Sparing" in its tax treaties.

According to UNMDTC, The UN Model generally favours retention of greater taxation rights of the host country of investment (source country) as compared to those of the 'residence country' of the investor.

UNMDTC reflects a compromise between the source principle (SP) and the residence principle, although it gives more weight to the SP than does the OECD Model.

Comparing OECD & UN models, PWC's Tax Policy Bulletin says: "some bilateral treaties have followed more closely one Model or the other." It notes that departures from either Model have also occurred as a result of negotiations between the two parties.

It adds: "The 2017 updates to these treaties will provide vital guidance as fresh wording finds its way into newly signed treaties. They may also help to provide assistance with the modifications made to the effect of existing treaties by the multilateral instrument (MLI) where it applies to a Covered Tax Agreement between two territories".

Put simply, different countries are joining MLI with their respective legacy model baggage. They would thus refer to relevant, updated Model to which their economic interests are aligned. The resulting reservations and negotiations thus create potential opportunities for tax planning and arbitrage for global investors.

Why not junk all MTCs & BEPS project and opt for one, simple pact on taxation rates on all types of money flows across the world? Different tax rates should be specified for foreign direct investment, portfolio investment, dividend repatriation, royalty payment, capital appreciation at time of disinvestment, immigrant remittances. The rates should be applied uniformly by all countries both at entry and exit of money.

Excluding education and hospital fee flows, all inflow and outflow of money should be taxed as tax deduction at source (TDS). Foreign Direct Investment (FDI), for instance, could be levied 5% tax each by capital exporting and capital import country. Similarly, dividend accruing from FDI could be taxed 10% each by both the countries.

If a rational convention on moderate, double taxation on all capital flows could be worked out, then non double taxation, tax avoidance and evasion would become very difficult. The differences between tax rates should be minimal to avoid risk of tax arbitrage.

A spin-off benefit of double taxation would be a moderation in speculative money flows. Moreover, the playing field for capital investment would become less uneven. If double-taxed capital flows are backed by free flow of work permit-managed labour across the world, the economic growth would get rebooted.

All said and done, the world needs out-of-the-box solutions to ensure that direct taxation does not become a major stumbling block in inclusive growth of all nations. Let BEPS be eroded by a new, stable tax regime that evens out all advantages & disadvantages to different countries over the long term.