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Created on Wednesday, 18 December 2013 19:31
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Published on 18 December 2013
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INDIA would have to subject itself to an acid test on countering Base erosion and profit shifting (BEPS) over the next two years after having committed to an action plan on this count as a G20 country. It is easy to sign a declaration at an international event. It is, however, difficult for India to unwind tax incentives without risking reduction in inflow of fresh foreign investments and flight of existing portfolio investments. This explains why India has been making half-hearted efforts since 1995 to convince Mauritius to amend the bilateral Double Taxation Avoidance Convention (DTAC).
No w that Organization for Economic Cooperation and Development (OECD) and G20 are spearheading the time-bound BEPS project, India would find it hard to drag its feet over amending the 'treaty shopping' loopholes in different bilateral Double Taxation Avoidance agreements (DTAA). According to OECD Secretary-General's recent Report to the G20 Leaders Summit, governments lose substantial corporate tax revenue because of international tax planning designed to shift profits in ways that erode the taxable base of developed and developing countries to locations where they are subject to a more favourable tax treatment. This type of tax planning can often lead to double non-taxation, i.e., situations where income is not taxed anywhere: not in the taxpayer' country of residence nor in the source country. It says that the consequences of the BEPS currently achieved by some multinationals range from unintended competitive advantages for multinational enterprises over smaller or domestic companies to distortion of investment decisions and loss of substantial corporate tax revenue for governments. More fundamentally, the perceived unfairness resulting from BEPS jeopardizes citizens' trust in the integrity of the tax system as a whole, thereby undermining voluntary tax compliance. With this background, India would have to now show the diplomatic acumen to pro Mauritius, Cyprus and Singapore to amend the respective DTAA to stop double non taxation, aggressive tax structuring, profit shifting, money laundering, etc. These three countries are favourite destinations for both inbound investment by foreign companies and outbound investments by Indian companies including public enterprises and subsidiaries of multinationals. These countries apart, India should ideally review all bilateral and multilateral DTAAs, Comprehensive Economic Cooperation Agreements (CEPAs) and Bilateral Investment Promotion and Protection agreements (BIPPA) following its commitment to act on BEPS as a G20 country. This commitment flows from the Saint Petersburg G20 Leaders Declaration' issued on 5th September at the two-day G20 Leaders Summit. As put by the Declaration, "In a context of severe fiscal consolidation and social hardship, in many countries ensuring that all taxpayers pay their fair share of taxes is more than ever a priority. Tax avoidance, harmful practices and aggressive tax planning have to be tackled. The growth of the digital economy also poses challenges for international taxation. We fully endorse the ambitious and comprehensive Action Plan - originated in the OECD - aimed at addressing base erosion and profit shifting with mechanism to enrich the Plan as appropriate. It continues: "We welcome the establishment of the G20/OECD BEPS project and we encourage all interested countries to participate. Profits should be taxed where economic activities deriving the profits are performed and where value is created. In order to minimize BEPS, we call on member countries to examine how our own domestic laws contribute to BEPS and to ensure that international and our own tax rules do not allow ornc ourage multinational enterprises to reduce overall taxes paid by artificially shifting
profits to low-tax jurisdictions."
The 'Tax Annex to the Saint Petersburg G20 Leaders Declaration' issued on 5th September
contains four-point action plan that G20 countries would follow in a time-bound manner.
The first three initiatives to be taken are: 1) Changes to international tax rules must be
designed to address the gaps between different countries' tax systems, while still respecting the sovereignty of each country to design its own rules; 2) the existing international tax rules on tax treaties, permanent establishment, and transfer pricing will be examined to ensure that profits are taxed where economic activities occur and value is created and 3) More transparency will be established, including through a common template for companies to report to tax administrations on their worldwide allocation of profits and tax.
The 4 th action point says, "All the actions are expected to be delivered in the coming
18 to 24 months. To ensure that the recommendations may be implemented quickly,
the OECD will be developing a multilateral instrument for interested countries to
amend their existing network of bilateral treaties."
India spun a complex web of bilateral and regional agreements over the years.
As noted by 'OECD Investment Policy Review: India 2009', India's approach appears to be
evolving beyond the model BIPA. It started with India-Singapore CECA in 2005. It combines
preferential trade agreement, an investment agreement and a tax treaty in one package for
the first time in the history of India's bilateral pacts. It later signed CCEAs with Japan, South
Korea and Malaysia. India is negotiating CECAs with a few more countries such as Australia.
BEPS project should thus provide clarity on the merits of keeping bilateral agreements domain specific as compared to CECA.
India's challenges on BEPS front can be appreciated by focusing on India-Mauritius DTAC.
Both the countries have been playing ping-pong with the Convention as is evident from
Indian Finance Minister's reply to a question raised in upper house of Parliament on 27 th
August 2013.
As put by the Reply, "India had proposed amendments to the DTAC including Capital Gains
and Limitation of Benefits (LOB) for prevention of treaty abuse. Government of Mauritius did
not accept these proposals. A Joint Working Group (JWG) comprising members from the
Government of India and the Government of Mauritius was constituted in 2006 to inter-alia,
put in place adequate safeguards to prevent misuse of the India-Mauritius DTAC. However,
the issues remained unresolved."
The reply continues: "In 2011, Government of India again sent a detailed proposal for
amendments of various articles of DTAC including Capital Gains and LOB. In response to this,
Government of Mauritius sent their proposal in 2012 which did not satisfactorily address the
concerns of Government of India. Thereafter, in April 2013, Government of Mauritius sent
another proposal on LOB Article to Government of India. Government of India has examined
the Mauritius proposal and has sent detailed comments in May 2013. Response of
Government of Mauritius is awaited."
It is here pertinent to bring in the stance of the India's Parliamentary Standing Committee
(PSC) on Finance on this issue.
It last year stated: "The big corporates and MNCs are using tax avoidance treaties like
India's DTAA with Mauritius to indulge in 'treaty shopping'. It is noteworthy that over 40% of
FDI inflows into India are routed through Mauritius, which only points towards tax avoidance
and not - bona fide transactions. All the scams in the recent period, from the 2G scam, IPL
scam, Jagan Reddy scam in AP etc., have a Mauritius connection. This is leading to huge
revenue losses."
In its report proposing certain changes in the contents of the Direct Tax Code submitted to
Parliament in March 2012, PSC recommended that the tax authorities must be empowered to apply Anti Avoidance Rules (GAAR) provisions of the proposed DTC law and the onus of
proving that a company is not avoiding taxes should lie on the companies.
The Government stance on this anti-BEPS recommendation would be known only when it
releases the text of the revised DTC bill after its approval by the Indian Cabinet.
India's laxity in amending DTAC is deplorable as Mauritius has been misused by several Indian companies for undertaking dubious transactions as brought about in the report of Joint Parliamentary Committee (JPC) on Stock Market Scam in 2002-03.
One such case has still not been investigated fully by India's Directorate of Enforcement under the Foreign Exchange Management Act (FEMA). The latest update on this case relating to a company named Padmini Technologies Limited as disclosed to Parliament in August 2013 is: "This case is presently under investigation by the Directorate under FEMA relating to acquisition / disposal of the shares of this company by certain Mauritius based OCBs. Necessary information / details have been sought from RBI (Reserve Bank of India) which are still awaited. Also, the investigations are held up as this company is no longer operating from its earlier known addresses, and efforts are afoot to locate their present whereabouts."
Against this back, it would be interesting to know what ratings OECD's Global Forum on
Transparency and Exchange of Information for Tax Purposes would give to India and Mauritius in November 2013.
Both the countries figure in the list of 50 jurisdictions for which the ratings are to be
announced. As put by OECD Secretary General's report to G20 leaders, "Ultimately the real test of whether the Global Forum has achieved its goal is whether it has improved transparency and made exchange of information more effective in practice. A key output of the reviews of practice is the assignment of a rating both for a jurisdiction's compliance with each element of the Global Forum's Terms of Reference as well as an overall rating. The issuance of an overall rating will best achieve both the recognition of progress by jurisdictions toward a level playing field and the identification of jurisdictions that are not in step with theinternational consensus."
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