Global tax- avoidance rules may over ride Indian treaties

There is a possibility that the General Anti-Avoidance Rules (GAAR,ontaxes)and the tax treaties signed by the government with those of Mauritius,Singapore and Cyprus,and even othernations suchasNetherlands,couldbeovertakenbyanotherevent.

These could,say experts ,be partially or fully over ridden by the Multilateral Instrument (MLI) to implement tax treaty related measures for preventing Base Erosion and Profit Sharing (BEPS).

BEPS is a tax avoidance strategy used by multinational companies— profits are shifted from jurisdictions that have high taxes to those with low or no taxes.The Organisation for Economic Cooperation and Development (OECD)grouping of countries had developed the MLI to tackle such issues.A little over 100 countries had adopted the MLI by November 2016.It will be signedby themthisJuneandislikelytobe implementedbyIndiainApril2018 or2019.

The MLI and related BEPS measures will be implemented through amendments in the IncomeTax(I-T) Act.“MLI islikely to override the relevant parts of existing bilateral treaties,”observed are cent note by global consultancy PwC.

Aftertherecentamendingbythe governmentofitstaxtreatieswith Mauritius,CyprusandSingapore,itis believed some foreign portfolio investorsmightshifttoEuropean jurisdictionssuchasSpain,France orNetherlands,toavoidpayingtax oncapitalgains.However,thepossibilitythatMLImightoverridetreaties witheventhesecountriescouldpreventthis.Inexistingregulations,in thecaseofataxtreaty,theI-TActshall applytotheextentthatitismorebeneficialtothetaxpayer.However,notin thecaseofGAARprovisions,which willapplyevenwherethetaxtreatyis morebeneficialtothepayer.

IntroductionofMLIcouldmean anotherpossibility.“Ifthetaxtreaty (afterMLI)itselfismorestringent, willtheGAARprovisionsstillapply? Thereislackofclarityonthis.It appearsthatinaconflictbetween theI-TActandtheMLI,thelatter shouldordinarilyprevail.However, incaseswhereGAARprovisions apply,anattemptshouldbemade forharmoniousreadingofGAAR provisionsandMLI,”saidSuresh Swamy,partner,financialservices, PwCIndia.TheMLIhasa‘principal purposetest’.Wherein,taxtreaty benefitsmaybedeniedifoneofthe principalpurposesofanarrangementoratransactionwasto,directlyorindirectly,obtaintaxbenefit. “Thistestappearstobewiderthan theexistingGAARprovisionsin Indiantaxlaw,”saysSwamy.

Further,MLIswillcontainlimitation-on-benefitsclauses,.Theseare Specific Anti Avoidance Rules (SAAR),aimedatcertainarrangementsoftaxavoidance.Thiscould createanothergreyarea.“Treatybenefitswillberestrictedinaccordance withtheseclauses.GAARprovisions, though,maystillbeapplicableand invokedbythetaxauthoritiesand overridetheseSAARprovisions. However,thisisanuntestedpropositionandcouldleadtosomelitigation,” said Punit Shah, partner, DhruvaAdvisors.

MLIprovidesparticipatingcountriesandjurisdictionstheoptionto specifyatthetimeofratificationthe provisionstheywouldoptinandout of.TheIndiangovernmentrecently issuedastatementindicatingtheir approachtowardsBEPSandthepositionslikelytobetaken,depending onthecontentsoftheMLI.Forthis purpose,acommitteehasbeenconstitutedtoexaminealltheaction plansoftheBEPSregimeandrecommendations,saidsources.
Business Standard New Delhi,19th January 2017