beps multilateral instrument (mli), india’s...
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BEPS Multilateral Instrument (MLI), India’s Corresponding Positions,
Implementation (GAAR)
Dr. Parthasarathi Shome Chairman
International Tax Research and Analysis Foundation (ITRAF)
www.itraf.org
Visiting Fellow, London School of Economics
Faculty of Law, 2017-18
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Recent Developments in Indian Tax Laws, Policy and Practices
Introduction
• TheOECDtabledtheReport–AddressingBaseErosionandProfitShiftingtotheG20in2013
à Following this, theOECD andG20 countries adopted a 15 point ActionPlantoaddressBEPS
• FinalActionreportswereissuedinlate2015.• TheBEPSpackagewasdesignedtobeimplementedthrough:
à Changesindomesticlawà Modificationoftreatyprovisions
• Tohelpwiththe implementationoftheBEPSActions,Action15envisagedtheformulationofaMLI(alsocalledtheConvention)àTheMLIcontainsArticles.TheseareprovisionspertainingtocorrespondingsubjectsofotherBEPSActions
• Accordingly,welookatsomeoftheActionsandthecorrespondingMLIArticles
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Recent Developments in Indian Tax Laws, Policy and Practices
Introduction (contd.)
TheOECDMultilateralInstrument(MLI)wassignedbysome70countrieson7June2017 and incorporates treaty measures in relation to several BEPS related areasincluding:
à HybridMismatch(Action2) àTreatyAbuse(Action6)
à PermanentEstablishment(Action7) àDisputeResolution(Action14)
PartiestotheMLIarealsorequiredtosubmitanMLIPositiondocumentcontaining:
à CoveredTaxAgreements(CTAs)–TaxtreatiescoveredbytheMLI
à Listofreservationsandnotificationsmadebytheparty
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Recent Developments in Indian Tax Laws, Policy and Practices
Action 2 Hybrid Mismatch Arrangements
à HybridMismatchArrangementsexploitdifferencesinthetaxtreatyofanentityorinstrumentunderthelawsoftwoormoretaxjurisdictionstoachievedoublenon-taxation,includinglongtermdeferral(Action2,2015FinalReport)
à Action 2 aims to ensure that hybrid instruments and entities, as well as dualresidententities,arenotusedtoobtainthebenefitsofatreaty
à Thus Action 2 calls for the development of “model treaty provisions andrecommendationsregardingthedesignofdomesticrulestoneutralisetheeffectsofhybridinstrumentsandentities”
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Recent Developments in Indian Tax Laws, Policy and Practices
Action 2 Hybrid Mismatch Arrangements (contd.)
MLIPartIIArticle3TransparentEntitiesà Income derived from an entity or arrangement that is treated as fiscally
transparentbyeitherjurisdictionwhichisapartytotheCTA,shallbeconsideredincomeofaresidentofapartytotheCTA,butonlytotheextentthatthatpartytreatssuchincomeastheincomeofaresident.
à AtaxexemptionordeductionprovisionofaCTA,totheincomeofaresidentofone jurisdiction, shall not apply solely because the income is also designated‘income’derivedbyaresidentofotherjurisdictionswhicharepartytotheCTA.
IndianPositionàIndiahasreservedtherightstoArticle3initsentirety
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Recent Developments in Indian Tax Laws, Policy and Practices
MLIPartIIArticle4DualResidentEntitiesà IfbyvirtueoftheprovisionsofaCTA,aperson(notanindividual)isdeemedto
be a resident ofmore thanone jurisdiction, then theparties to theCTAmustdetermine through mutual agreement which one jurisdiction the person is aresident,forthepurposesoftheCTA.
à The decision must be made giving regard to the entity’s place of effectivemanagement, the place where the entity is incorporated or otherwiseconstitutedandanyotherrelevantfactors
à Intheabsenceofsuchagreement,suchpersonshallnotbeentitledtoanyreliefor exemption from tax provided by the CTA except to the extent and in suchmannerasmaybeagreedupon
Action 2 Hybrid Mismatch Arrangements (contd.)
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Recent Developments in Indian Tax Laws, Policy and Practices
MLIPartIIArticle4(contd.)
IndianPosition
à As per Article 4(4) India has listed CTAs containing provisions not subject toreservationsunderArticle4
à IfalljurisdictionstoaparticularCTAhavealsolistedthesameprovisionthenthesaidprovisionwillbereplacedbytheprovisionofArticle4(1)
à In all other cases the provision of Article 4(1) shall ‘supersede’ the provisionslistedbyIndia,totheextentthattheCTAprovisionisincompatiblewithArticle4(1)
Action 2 Hybrid Mismatch Arrangements (contd.)
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Recent Developments in Indian Tax Laws, Policy and Practices
MLIPartIIArticle5ApplicationofMethodsforEliminationofDoubleTaxationà OptionA:TaxexemptionprovisionsofaCTAexemptingtaxonanincomeofa
residentinonejurisdiction,toeliminatedoubletaxation,shallnotapplyiftheotherjurisdictionhasalsoappliedthesameexemptionprovisiononthesameincome.
à OptionB:TaxexemptionprovisionsofaCTAexemptingtaxonanincomeofaresidentinonejurisdiction,toeliminatedoubletaxationbecausetheincomeistreatedasadividendinthatjurisdiction,shallnotapplyifthatsameincomegivesrisetoadeductionintheincomeofaresidentoftheotherjurisdiction.
à OptionC:Whenaresidentofonejurisdictionderivesincomeorownscapitalwhichmaybetaxedintheotherjurisdiction,thefirstjurisdictionwillallowataxdeductionontheincomeequaltotheincometaxpaidbytheresidentorataxdeductiononthecapitalequaltothecapitalgainstaxpaidbytheresident,inthesecondjurisdiction.
IndianPositionàIndiahasreservedtherightstoArticle5initsentirety
Action 2 Hybrid Mismatch Arrangements (contd.)
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Recent Developments in Indian Tax Laws, Policy and Practices
Action 6 Treaty Abuse
à Action 6 identifies Treaty Abuse as an important source of BEPS concerns. It is not surprising that it is a minimum standard reflected as mandatory provisions in MLI Articles 6 and 7
à Action 6 recognizes two instances of Treaty Abuse:
1. Cases where a person tries to circumvent limitations provided by the treaty itself (eg. treaty shopping)
2. Cases where a person tries to circumvent the provisions of domestic law using treaty benefits
à Action 6 admits that the first set of cases could not be addressed by specific anti-avoidance rules and required a general anti-avoidance rule in treaties. This is found in the Principal Purpose Test (PPT) and SLOB options in the MLI
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Recent Developments in Indian Tax Laws, Policy and Practices
Action 6 Treaty Abuse (contd.)
MLIPartIIIArticle6PurposeofaCoveredTaxAgreement(CTA)à ThefollowingpreambulartextshallbeaddedtoaCTA(Article6(1)):“Intending to eliminate double taxationwith respect to the taxes covered by thisagreement without creating opportunities for non-taxation or reduced taxationthroughtaxevasionoravoidance(includingthroughtreaty-shoppingarrangementsaimed at obtaining reliefs provided in this agreement for the indirect benefit ofresidentsofthirdjurisdictions)”à This text shall be included in place of or in the absence of any preambular
languageinaCTAreferringtoanintenttoeliminatedoubletaxationà Asitisaminimumstandardtheonlyreservationallowedisiftherealreadyexists
preambularlanguagedescribingtheintenttoeliminatedoubletaxationwithoutcreatingtheopportunityfortaxevasionoravoidance
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Recent Developments in Indian Tax Laws, Policy and Practices
MLIPartIIIArticle6(contd.)à The Article also provides the option of an additional preambular text (Article
6(3)):“Desiring to further develop their economic relationship and to enhance their co-operationintaxmatters,”à ThistextisoptionalandisonlyapplicableifallpartiestoaCTAchosetoapplyitIndianPositionà TheIndianpositiondocumentissilentonArticle6à As a minimum standard the provision in Article 6(1) (mandatory inclusion of
preambulartext)canthereforebetakenasautomaticallyapplicable
Action 6 Treaty Abuse (contd.)
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Recent Developments in Indian Tax Laws, Policy and Practices
MLIPartIIIArticle7PreventionofTreatyAbuseWhilepertaining toaminimumstandard,Article7provides3options to fulfil themandatoryobligationofAction6:Option1PrinciplePurposeTest(PPT):à AbenefitundertheCTAwillnotbegrantedif it isreasonabletoconcludethat
obtainingthatbenefitwasoneoftheprincipalpurposesofanyarrangementortransactionthatresulteddirectlyorindirectlyinthatbenefit
à The benefit may yet be granted if, on the request of the person and afterrelevant factsandcircumstancesare taken intoconsideration, it isdeterminedthat the benefit would have been granted in the absence of the transactionunderscrutiny
Action 6 Treaty Abuse (contd.)
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Recent Developments in Indian Tax Laws, Policy and Practices
MLIPartIIIArticle7(contd.)Option2SimplifiedLimitationonBenefitclause(SLOB)(supplementedbythePPT):à CTAbenefitswillbelimitedtoonlyCTAprovisionswhichprovidethefollowing:
à If a person is the resident ofmore than one party, then the provisiondetermineswhichparty thepersonwillbeconsidereda residentof, forthepurposesoftheprovision
à If initial adjustmentsaremadebyotherparties toanenterpriseofoneparty,tothetaxamountonassociatedenterprises,andtheCTAprovidesforcorrespondingadjustments
à Residents are allowed to request tax authorities of a party to a CTA toconsidertaxcasesnotinaccordancewiththeCTA
à Unless the resident is designated to be a qualified person as determined byArticle7(9)
Action 6 Treaty Abuse (contd.)
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Recent Developments in Indian Tax Laws, Policy and Practices
MLIPartIIIArticle7(contd.)Option2SimplifiedLimitationonBenefitclause(SLOB)(contd.)Benefitswillalsobeentitled:à Whenaresidentwithan‘activeconductofbusiness’inonejurisdictiontoaCTA,
derivesan income in theother jurisdictionwhich is incidental to thatbusiness(regardlessofwhethertheresidentisaqualifiedperson)(Article7(10))
à When an unqualified resident owns at least 75 per cent of the beneficialinterestsoftheresident,onatleasthalfofthedaysofanytwelve-monthperiod(includingthetimewhenthebenefitwouldotherwisebeaccorded)(Article11)
à At the discretion of a tax authority, for a resident not entitled to the abovebenefits, ifsuchresidentcandemonstratethatitsprinciplepurposewasnottoattainsuchbenefitfromtheCTA
Action 6 Treaty Abuse (contd.)
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Recent Developments in Indian Tax Laws, Policy and Practices
MLIPartIIIArticle7(contd.)Option3DetailedLOBclauseà TheMLI does not include a detailed LOB provision. This is because aDetailed
LOBrequiressubstantialbilateralcustomisation,whichwouldbechallenging inthecontextofamultilateralinstrument.(ExplanatoryStatementtotheMLI)
à OnlypartieswishingtoadoptadetailedLOBprovisionarepermittedtoreserveArticle7 in its entirety.Adetailed LOBmustbe combinedwitheither rules toaddressconduitfinancingstructuresoraprincipalpurposetest(Article7(15)(a))
Action 6 Treaty Abuse (contd.)
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Recent Developments in Indian Tax Laws, Policy and Practices
MLIPartIIIArticle7(contd.)IndianPositionà IndiahasoptedforthePPTprovisionfor36CTAsandtheSLOBprovisionfor9of
itsCTAs.à While thePPT is automatically applicable as aminimum standard, the SLOB is
onlyapplicableifallpartiestoaCTAoptforthesameà India has also introduced a general anti-avoidance rule (GAAR) in its domestic
law(discussedlater)
Action 6 Treaty Abuse (contd.)
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Recent Developments in Indian Tax Laws, Policy and Practices
Action 7 Permanent Establishment Status
MLI Part IV Article 12 Artificial Avoidance of Permanent Establishment StatusthroughCommissionnaireArrangementsandSimilarStrategies
à Action7lookstoaddresstheartificialavoidanceofpermanentestablishmentstatusthroughcommissionnairearrangements
à Action7definescommissionnairearrangementsas“anarrangementthroughwhichaperson sells products in a given State in its own name but on behalf of a foreignenterprise that is the owner of these products. Through such an arrangement, aforeignenterprise isable tosell itsproducts inaStatewithouthavingapermanentestablishmenttowhichsuchsalesmaybeattributedfortaxpurposes”
à Thusthepersonconcludingthesaledoesnotgettaxedontheprofitsasitdoesnotown the products, but only on the remuneration that it receives for its services,usuallyintheformofacommission.
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Recent Developments in Indian Tax Laws, Policy and Practices
MLIPartIVArticle12(contd.)
Incontinuation,
à AnenterprisewillbedeemedtohaveapermanentestablishmentinajurisdictionofaCTAifanypersononbehalfoftheenterprisehabituallyconcludescontracts:
à Inthenameoftheenterprise;or
à For the transfer of ownership or the right to use property owned by thatenterprise;or
à Fortheprovisionofservicesbythatenterpriseà Unlesstheseactivitiesaredeemednottoconstituteapermanentestablishment
bytheCTA
Action 7 Permanent Establishment Status (contd.)
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Recent Developments in Indian Tax Laws, Policy and Practices
MLIPartIVArticle12(contd.)
à The conditions of establishing permanent establishment in the previous slideshall not apply if the person acting on behalf of an enterprise does so as anindependentagentandintheordinarycourseofthatbusiness
à Theaboveexclusiondoesnotapply if suchapersonactsexclusivelyoralmostexclusivelyonbehalfofoneormoreenterprisestowhichitiscloselyrelated
IndianPosition
àIndiahasprovidedalistofprovisionscontainedinCTAsdescribingtheconditionforestablishingpermanentestablishment.Article12provisionswillapplyinplaceoftheselistedprovisions.
Action 7 Permanent Establishment Status (contd.)
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Recent Developments in Indian Tax Laws, Policy and Practices
MLI Part IV Article 13 Artificial Avoidance of Permanent Establishment StatusthroughtheSpecificActivityExemptions
Article13provides2optionsortheoptionnottochooseeither.
OptionA
à Notwithstanding CTA provisions defining permanent establishment, under theMLI,thetermpermanentestablishmentshallnotinclude
a)theactivitiesdeemednottoconstituteapermanentestablishmentundertheCTA
à whether or not, under the CTA, that exception from permanentestablishmentstatusiscontingentontheactivitybeingofapreparatoryorauxiliarycharacter,
à ifsuchactivityisindeedofapreparatoryorauxiliarycharacter
Action 7 Permanent Establishment Status (contd.)
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Recent Developments in Indian Tax Laws, Policy and Practices
MLIPartIVArticle13(contd.)
OptionA(contd.)
b) the maintenance of a fixed place of business solely for the purpose ofcarryingon,fortheenterprise,anyactivitynotdescribedina.
àifsuchactivityisofapreparatoryorauxiliarycharacter
c) themaintenanceof a fixedplaceofbusiness solely for any combinationofactivitiesmentionedina)andb)
à iftheoverallactivityofthefixedplaceofbusiness,isofapreparatoryorauxiliarycharacter
Action 7 Permanent Establishment Status (contd.)
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Recent Developments in Indian Tax Laws, Policy and Practices
MLIPartIVArticle13(contd.)
OptionB
à Notwithstanding CTA provisions definingpermanent establishment, under theMLI,thetermpermanentestablishmentshallnotinclude
a) the activities deemed not to constitute a permanent establishment under theCTA
à whether or not, under the CTA, that exception from permanentestablishmentstatusiscontingentontheactivitybeingofapreparatoryorauxiliarycharacter,
à except to the extent that the relevant provision of the CTA providesexplicitly that a specific activity shall be deemed not to constitute apermanentestablishmentprovided that theactivity isof apreparatoryorauxiliarycharacter;
Action 7 Permanent Establishment Status (contd.)
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Recent Developments in Indian Tax Laws, Policy and Practices
MLIPartIVArticle13(contd.)
OptionB(contd.)
b. the maintenance of a fixed place of business solely for the purpose ofcarryingon, for theenterprise, any activitynotdescribed in a), provided thatthisactivityisofapreparatoryorauxiliarycharacter;
c. themaintenanceof a fixedplaceof business solely for any combinationofactivitiesmentionedina)andb),providedthattheoverallactivityofthefixedplaceofbusinessresultingfromthiscombinationisofapreparatoryorauxiliarycharacter.
Action 7 Permanent Establishment Status (contd.)
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Recent Developments in Indian Tax Laws, Policy and Practices
MLIPartIVArticle13(contd.)
IndianPosition
à IndiahasselectedOptionAtoapplytoitsCTAs
à India has provided a list of CTAs containing similar provisions with thecorrespondingArticleandparagraphnumber
à OptionAwillonlyapplytoCTAslistedbyIndiaiftheotherpartiestotheCTAalsochoosethesameoption.
Action 7 Permanent Establishment Status (contd.)
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Recent Developments in Indian Tax Laws, Policy and Practices
IndianDomesticLegislationregardingPlaceofEffectiveManagement(PoEM)
à FinanceAct2015definedPoEMtobe:
“aplacewherekeymanagementandcommercialdecisions thatarenecessary fortheconductofthebusinessofanentityasawhole,areinsubstancemade.”
à In 2017 the CBDT issued guiding principles to determine the PoEM for anenterprise
Action 7 Permanent Establishment Status (contd.)
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Recent Developments in Indian Tax Laws, Policy and Practices
Action 14 Dispute Resolution
à Action 14 recognizes that countering BEPS must be complemented with actions that ensure certainty and predictability for business
à Action 14 identifies mutual agreement procedure (MAP) as an essential complement to BEPS and therefore a minimum standard
à The minimum standard also includes easy access to procedures for the taxpayer, and timely resolution. These standards are evident in Article 16 of the MLI
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Recent Developments in Indian Tax Laws, Policy and Practices
Action 14 Dispute Resolution (contd.)
MLIPartVArticle16MutualAgreementProcedure(MAP)à A person agrieved by the taxation in any of the parties to a CTA due to the
provisions of the CTAmay approach the competent authority in either of thejurisdictions even if a remedy is available through the domestic law of thejurisdictionwherethepersonwasagrieved.Partiesmustpresentthecasewithinthreeyearsoftheobjectionbeingraisedbytheperson.
à If such objection appears justified and the jurisdiction is unable to reach asatisfactorysolution, thecompetentauthoritiesof theparties to theCTAmustaim through mutual agreement to resolve the case with a view to avoidingtaxation not in accordance with the CTA. Agreements reached will beimplementednotwithstandinganytimelimitindomesticlaw.
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Recent Developments in Indian Tax Laws, Policy and Practices
MLIPartVArticle16(contd.)à Parties to a CTAmust endeavour to resolve dificulties and doubts in the CTA
throughmutual agreement. Theymayalso consult fordouble taxationoutsidethepurviewoftheCTA
à Article16pertainstoaminimumstandard.Hencepartiesareallowedtomakevarious reservations to this Article only according to the directions providedwithintheArticle.
Action 14 Dispute Resolution (contd.)
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Recent Developments in Indian Tax Laws, Policy and Practices
Action 14 Dispute Resolution: Indian position
MLIPartVArticle16(contd.)IndianPositionà India has reserved the right to the first part of the first provision, thereby
disallowingagrievedpersonstoapproachthecompetentauthorityofanypartytotheCTA(asperArticle16(5)(a)).
à India reserves this provision on the basis (as permitted by the MLI) that itintends to meet the minimum standard by allowing the resident of thejurisdiction, agrieved by a provision of the CTA, to approach the competentauthorityofthatparticularjurisdiction(insteadofeitherjurisdiction).
à In the case of provisions based on nationality, residents will be allowed toapproach the competent authority of the jurisdiction where the nationalbelongs.
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Recent Developments in Indian Tax Laws, Policy and Practices
Action 14 Dispute Resolution: Indian position (contd.)
à India has listed CTAs containing provisions similar to the second sentence ofArticle16(1)withatimeframeoflessthan3years(casestobepresentedwithin3years)
à India has listed CTAs containing provisions similar to the second sentence ofArticle16(1)withatimeframeofatleast3years(casestobepresentedwithin3years)
à India has listed CTAs not containing provisions similar to the first sentence ofArticle16(2)(casestobesolvedbymutualagreementbetweenparties)
à IndiahaslistedCTAsnotcontainingprovisionssimilartothesecondsentenceofArticle 16(2) (mutual agreement to be implementednotwithstanding any timelimitindomesticlaw)
à India has listed CTAs not containing provisions similar to the first sentence ofArticle16(3) (resolving issuesof interpretationorapplicationofCTAprovisionsthroughmutualagreement)
à IndiahaslistedCTAsnotcontainingprovisionssimilartothesecondsentenceofArticle16(3)(consultationregardingcasesnotprovidedforbytheCTA)
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Recent Developments in Indian Tax Laws, Policy and Practices
Indian Domestic Legislation on Treaty Abuse
GeneralAnti-AvoidanceRule(GAAR)à IndiaappliedGAARfrom1April2017à TheGAARcomplementstheprovisionscombattingtreatyabuseintheMLIà Anti avoidance rules allow authorities to analyse agreements and transactions
thanwaspreviouslypermittedà GAAR and similar provisions are formulated to impact companies which lack
substance
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Recent Developments in Indian Tax Laws, Policy and Practices
Indian Domestic Legislation on Treaty Abuse
GeneralAnti-AvoidanceRule(GAAR)(contd.)à AccordingtotheIndianGAAR:
à An arrangement may be declared an impermissible avoidancearrangement
à Suchanarrangementshallbepresumed(unlessproventothecontrary)tohavebeenenteredintoforthemainpurposeofobtainingataxbenefit
à Consequencesof such an arrangementwould include thedenial of anytreatybenefit
à ThemainpurposetestissimilartothePPTmandatedbyAction6
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Recent Developments in Indian Tax Laws, Policy and Practices
Indian Domestic Legislation on Treaty Abuse (contd.)
GeneralAnti-AvoidanceRule(GAAR)(contd.)à Animpermissibleavoidanceagreementisdefinedtobeanarrangement:
à Themainpurposeofwhichistoobtainataxbenefità Which creates rights or obligations not ordinarily creates between
personsdealingatarm’slengthà WhichresultsinthemisuseorabuseoftheprocisionsoftheIncomeTax
Actà Whichlackscommercialsubstanceinwholeorinpartà Is enetered into or carried out bymeans or in amanner not ordinarily
employedforbonafidepurpose
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Recent Developments in Indian Tax Laws, Policy and Practices
Indian Domestic Legislation on Treaty Abuse (contd.)
ComparisonofShomeCommitteeReportandtheIndianGAARDefinitionofImpermissibleAvoidanceArrangementsProvisionofDraftGAAR:“Animpermissibleavoidancearrangementmeansanarrangement,themainpurposeoroneofthemainpurposesofwhichistoobtainataxbenefit[…]”ShomePanelrecommendation:TheCommitteerecommendsthattheActmaybeamendedtoprovidethatonlyarrangementswhichhavethemainpurpose(andnotoneofthemainpurposes)ofobtainingtaxbenefitshouldbecoveredunderGAAR.à ThefinalGAARprovisionimplementedtheaboverecommendation:““Animpermissibleavoidancearrangementmeansanarrangement,themainpurposeofwhichistoobtainataxbenefit[…]”
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Recent Developments in Indian Tax Laws, Policy and Practices
Indian Domestic Legislation on Treaty Abuse (contd.)
ComparisonofShomeCommitteeReportandtheIndianGAAR(contd.)ConsequenceofImpermissibleAvoidanceArrangementsProvisionofDraftGAAR:“anarrangementshallbepresumedtohavebeenenteredinto,orcarriedout,forthemainpurposeofobtainingataxbenefit,ifthemainpurposeofastepin,orapartof,thearrangementistoobtainataxbenefit,notwithstandingthefactthatthemainpurposeofthewholearrangementisnottoobtainataxbenefit.”(ShomePanelReport)ShomePanelrecommendation:“Whereonlyapartofthearrangementisimpermissible,thetaxconsequencesofan“impermissibleavoidancearrangement”willbelimitedtothatportionofthearrangement.”
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Recent Developments in Indian Tax Laws, Policy and Practices
Indian Domestic Legislation on Treaty Abuse (contd.)
ComparisonofShomeCommitteeReportandtheIndianGAAR(contd.)ConsequenceofImpermissibleAvoidanceArrangementsFinalGAARProvision:“98(1)Ifanarrangementisdeclaredtobeanimpermissibleavoidancearrangement,then,theconsequences,inrelationtotax,ofthearrangement,includingdenialoftaxbenefitorabenefitunderataxtreaty,shallbedetermined,[…]bywayof[…]:(a)disregarding,combiningorrecharacterisinganystepin,orapartorwholeof,theimpermissibleavoidancearrangement[…]”
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Recent Developments in Indian Tax Laws, Policy and Practices
Indian Domestic Legislation on Treaty Abuse (contd.)
ComparisonofShomeCommitteeReportandtheIndianGAAR(contd.)OnusoftheRevenue ProvisionsofdraftGAAR:“97(4)Thefollowingshallnotbetakenintoaccountwhiledeterminingwhetheranarrangementlackscommercialsubstanceornot,namely:—(i)theperiodortimeforwhichthearrangement(includingoperationstherein)exists;(ii)thefactofpaymentoftaxes,directlyorindirectly,underthearrangement;(iii)thefactthatanexitroute(includingtransferofanyactivityorbusinessoroperations)isprovidedbythearrangement.”ObservationofShomePanel:DraftprovisionswereindirectconflictofSupremeCourt:“Revenue/Courtsshouldkeepinmindthefollowingfactors:theconceptofparticipationininvestment,thedurationoftimeduringwhichtheHoldingStructureexists;theperiodofbusinessoperationsinIndia;thegenerationoftaxablerevenuesinIndia;thetimingoftheexit;thecontinuityofbusinessonsuchexit.Inshort,theonuswillbeontheRevenuetoidentifytheschemeanditsdominantpurpose.”
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Recent Developments in Indian Tax Laws, Policy and Practices
Indian Domestic Legislation on Treaty Abuse (contd.)
ComparisonofShomeCommitteeReportandtheIndianGAAR(contd.)OnusoftheRevenue(contd.) RecommendationoftheShomePanel:“(i)theperiodoftimeforwhichthearrangement(includingtheoperationstherein)exists;(ii)thefactofpaymentoftaxes,directlyorindirectly,underthearrangement;(iii)thefactthatanexitroute(includingtransferofanyactivityorbusinessoroperations)isprovidedbythearrangement.”arerelevantbutmaynotbesufficientandthesefactorswillbetakenintofullaccountinformingaholisticassessmenttodeterminewhetheranarrangementlackscommercialsubstance.WhentheAssessingOfficerinformstheassesseeinhisinitialintimationinvokingGAAR,heshouldincludehowtheabovefactors(i)to(iii)havebeenconsideredandwhytheyfailtoconvincetheAssessingOfficerthatGAARshouldnotbeappliedintheparticularcase.”
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Recent Developments in Indian Tax Laws, Policy and Practices
Indian Domestic Legislation on Treaty Abuse (contd.)
ComparisonofShomeCommitteeReportandtheIndianGAAR(contd.)OnusoftheRevenue(contd.)àFinalGAARprovisionwassimilartotheShomePanelrecommendation“97(4)Fortheremovalofdoubts,itisherebyclarifiedthatthefollowingmayberelevantbutshallnotbesufficientfordeterminingwhetheranarrangementlackscommercialsubstanceornot,namely:—(i)theperiodortimeforwhichthearrangement(includingoperationstherein)exists;(ii)thefactofpaymentoftaxes,directlyorindirectly,underthearrangement;(iii)thefactthatanexitroute(includingtransferofanyactivityorbusinessoroperations)isprovidedbythearrangement.”
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Recent Developments in Indian Tax Laws, Policy and Practices
International Treaty modification on Treaty Abuse
à GAARlikerulesinprevalenttreaties(eg.IndianDTAAswithUK,Norway,Poland,UAE)
à Double Taxation Avoidance Agreements modified to include LOB clause (e.g.
IndianDTAAswithMauritius,Cyprus,Singapore)à DTAA clause allowing domestic GAAR to override DTAA provisions (e.g Indian
DTAAswithLuxembourg, Malaysiaetc.)
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Thank you
International Tax Research and Analysis Foundation (ITRAF)
www.itraf.org