Initiative may help India's efforts to amend Mauritius tax treaty; BEPS project will be taken up by G20 finance ministers this week in Peru
India's efforts to amend its tax treaty with Mauriti us received a huge boost with a grouping of 34 key world econo mies announcing a new world standard aimed at preventing abuse of double taxation avoid ance agreements.
The Organisation for Economic Co-operation and Development (OECD) on Monday unveiled the final plan for “a comprehensive coherent and coordinated“ re form of the international tax rules, called the Base Erosion and Profit Shifting, or BEPS, project which will be taken up by G20 fi nance ministers this week in Li ma, Peru. “All the countries must incorporate anti-abuse provi sions in their treaties...,“ said Pas cal Saint-Amans, director of the OECD's Centre for Tax Policy and Administration, who led the BEPS project.
To prevent treaty shopping and countering 'letter-box' compa nies, OECD has suggested a 3 pronged approach by introducing anti-abuse provisions in tax treaties such as the limitation of benefit clause and a more general antiabuse rule based on the “principal purposes of transactions“. Limitation of benefit clause is usually incorporated in treaties to ensure that only genuine investors avail benefits of a tax pact and include conditions such as a minimum level of investment, listing on the local stock exchange, ceiling on turnover and minimum expenditure, local residents on company board, and number of board meetings for carrying out operations in one of the contracting states.
India's tax treaty with Singapore has such a clause. New Delhi has been attempting to incorporate a similar rule in its treaty with Mauritius, which offers exemption from capital gains tax to investors from the island country .
The OECD will in 2016 come out with a multilateral convention aimed at preventing treaty abuse.India will have the option to be come a signatory and if Mauritius also signs it then the provisions will overtake the bilateral or renegotiate the bilateral treaty on the basis of the convention.
“The BEPS recommendation on need for Limitation of Benefit (LOB) clause to prevent treaty shopping clearly demonstrates that if India implements the recommendation and Mauritius signs it, the treaty benefit subject to wordings of the LOB clause, shall in future be limited only if adequate substance as per the LOB is there in Mauritius entity ,“ said Rahul Garg, leader direct tax at PwC India.
Sudhir Kapadia, national tax leader at EY, said the OECD initiative “will push forward the need for various jurisdictions to strengthen their `tax residency' requirements to make them amenable to application of BEPS principles by larger economies like India“. Multinational corporations are known to employ a wide range of aggressive tax planning techniques covering multiple jurisdictions that result in little or no tax liability and these techniques are referred to as BEPS. Indian tax authorities had received wide criticism for attempting to counter these practices in the country .
But, the OECD package will change the landscape of global tax policy .
“This will ensure that taxes that were due will be paid... All the countries have agreed that they need to protect their tax base and have agreed to these measures...This has to happen in a coordinated manner... This is a new political signal,“ said Saint-Amans in a webcast from Paris.
Revenue losses from BEPS are conservatively estimated at $100240 billion annually , or anywhere from 4%-10% of global corporate income tax (CIT) revenues. Given developing countries' greater reliance on CIT revenues as a per centage of tax revenue, the impact of BEPS on these countries is particularly significant.
“Compliance burden on multinational companies is going to increase along with an expectation and demand that they pay their fair share of taxes in each country they do business in,“ said Neeru Ahuja, partner at Deloitte Haskins & Sells LLP.
Garg said most BEPS recommendations favour developing country economies such as India, but corporates would need to ma ture to align to likely changes in tax regime as a result.
“Particular attention would be required to deal with mandatory reporting requirements, avoidance of permanent establishment due to split contracts, certain financing instruments, and treaty shopping like arrangements,“ Garg said.
The Economic Times, New Delhi, 6th Oct. 2015
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