New rules take effect from April 1 ;tax treaties won’t be overridden
The finance ministry sent positive signals to foreign portfolio investors(FPIs)on Friday by clarifying that the general anti avoidance rules(GAAR,on taxes) will not over ride tax treaties with suitable limitation of benefit (LoB)clauses,but which had certain grey areas toi nterpret.
Experts said it would have been better if these clarifications could have come earlier,as it takes time to windup some commercial arrangements.However, this is still better than the rules on place of effective management,which have been enforced from the current financial year. The GAAR takes effect from April 1,when the next year begins.
Investments made through compulsory convertible instruments,among others,would not draw GAAR,if made prior to April 1.Some other safe guards have also been put to avoid arbitrariness.
“...if a case of avoidance is sufficiently addressed by LoB provisions in the tax treaty,there shall not be an occasion to invoke GAAR,”the Central Board of Direct Taxes (CBDT) clarified.
This means,GAAR will not override the recently revised double taxation avoidance agreements with Mauritius and Singapore,as both the treaties have LoB clauses ,explained Amit Maheshwari of AshokMaheswaryandAssociates. However, GAAR could override the revised pacts with Cyprus and Netherlands,asthesedon’thaveLoB clauses,hesaid.
TheLoBclauseswithMauritiusand Singaporeare,however,foravailingof benefitsoveratransitionperiodoftwo years. Maheshwari said after the transitionperiod,capitalgainstaxwould anywaybeimposedonthoserouting their investments from these two countries,andthereislittlefearofGAAR overriding these. And, the CBDT clarificationscategoricallysayifthe jurisdictionofanFPIisfinalisedonthe basisofnon-taxcommercialconsiderations,andthemainpurposeofthe arrangementisnottoobtainataxbenefit,GAARwillnotapply.And,that GAARwillnotinterplaywiththeright ofataxpayertoselectorchoosethe methodofimplementingatransaction.
“Itisaverypositivedevelopmentfor markets,asitputsanendtoambiguityon thetaxationfrontforforeigninstitutionalinvestors.Italsoaddresseslotof concerns of the foreign investors, includingthatofretrospectivetaxation. AfterGAAR,wearelikelytoseeanuptick inforeigninflowsintothecountry,”said Deven Choksey, managing director, KRChokseyShares&Securities.
Rajesh Gandhi of consultancy Deloitte said the clarifications had partially fulfilled a long-standing demand,thoughthebenefithadgot dilutedtoalargeextentbecausetheLoB clauseintheSingaporeandMauritius treatieswererelevantonlyforavailing the50percenttaxratefortwoyears.
“In the present form,the guidelines leave some room forinter pretation and dispute.To provide certainty to foreign investors,it would be better to clarify that if the conditions specified under LoB clause are met,GAAR would not apply,” said Vikas Vasal of Grant Thornton.
Also,theCBDTclarificationshave saidtheadoptionofanti-abuserulesin taxtreatiesmightnotbesufficientto addressalltaxavoidancestrategiesand thesearerequiredtobetackledthrough domesticanti-avoidancerules.
This means some of the treaties could be overridden by GAAR.
Abhishek Goenka of consultants PwC said as the clarifications cannot envisage all possible scenarios, it does leave room for subjectivity and one could still need to pass the GAAR test even where the arrangement is cleared under LoB provisions. “This creates an unduly onerous obligation on investors,” he felt.
On this point, the guidelines are subjective and could be more directional, said Girish Vanvari, national head of tax, KPMG. “This is an important area, which needs more attention,” he said.
A committee headed by Parthasarathi Shome had earlier recommended that where aspecific anti-avoidance rule is applicable on a particular aspect or element, GAAR not be invoked on that.
“Similarly, where antiavoidance rules are provided in a tax treaty in the form of an LoB clause, the GAAR provisions shall not apply overriding the treaty. If there is evidence of violations of antiavoidance provisions in the treaty, the treaty should be revisited but GAAR should not override the treaty,” the committee had recommended.
CBDT said grandfathering (the term for an old rule continuing to apply for some existing situations, while the new rule would apply to all future cases), in line with income tax rules, would be available for compulsorily convertible instruments, bonus issuances or splits, and consolidation of holdings in respect of investments made prior to April 1 in the hands of the same investor.
And, that if at the time of sanctioning an arrangement acourt has explicitly and adequately considered the tax implications, GAAR will not apply.
“It has also been clarified that GAAR will not apply if an arrangement is held as permissible by the Authority for Advance Rulings,” the Board said.
A proposal to apply GAAR will be vetted first by a principal commissioner of income tax (PCIT) or commissioner of income tax (CIT). And, at the second stage, by an approval panel headed by a judge of a high court.
“The stakeholders have been assured that adequate procedural safeguards are in place to ensure GAAR is invoked in a uniform, fair and rational manner,” CBDT said.
If an arrangement has been held to be permissible in one year by PCIT and CIT or the approval panel, and the facts and circumstances remain the same, GAAR will not be invoked for that arrangement in a subsequent year.
“The CBDT has taken adequate steps to ensure GAAR is invoked in deserving cases. The proposal to declare an arrangement as impermissible will undergo a two-stage vetting process. This will ensure proper evaluation of cases and target only genuine tax avoidance arrangements,” said Partho Dasgupta, partner-direct tax, BDO India.
Business Standard New Delhi,28th January 2017
The finance ministry sent positive signals to foreign portfolio investors(FPIs)on Friday by clarifying that the general anti avoidance rules(GAAR,on taxes) will not over ride tax treaties with suitable limitation of benefit (LoB)clauses,but which had certain grey areas toi nterpret.
Experts said it would have been better if these clarifications could have come earlier,as it takes time to windup some commercial arrangements.However, this is still better than the rules on place of effective management,which have been enforced from the current financial year. The GAAR takes effect from April 1,when the next year begins.
Investments made through compulsory convertible instruments,among others,would not draw GAAR,if made prior to April 1.Some other safe guards have also been put to avoid arbitrariness.
“...if a case of avoidance is sufficiently addressed by LoB provisions in the tax treaty,there shall not be an occasion to invoke GAAR,”the Central Board of Direct Taxes (CBDT) clarified.
This means,GAAR will not override the recently revised double taxation avoidance agreements with Mauritius and Singapore,as both the treaties have LoB clauses ,explained Amit Maheshwari of AshokMaheswaryandAssociates. However, GAAR could override the revised pacts with Cyprus and Netherlands,asthesedon’thaveLoB clauses,hesaid.
TheLoBclauseswithMauritiusand Singaporeare,however,foravailingof benefitsoveratransitionperiodoftwo years. Maheshwari said after the transitionperiod,capitalgainstaxwould anywaybeimposedonthoserouting their investments from these two countries,andthereislittlefearofGAAR overriding these. And, the CBDT clarificationscategoricallysayifthe jurisdictionofanFPIisfinalisedonthe basisofnon-taxcommercialconsiderations,andthemainpurposeofthe arrangementisnottoobtainataxbenefit,GAARwillnotapply.And,that GAARwillnotinterplaywiththeright ofataxpayertoselectorchoosethe methodofimplementingatransaction.
“Itisaverypositivedevelopmentfor markets,asitputsanendtoambiguityon thetaxationfrontforforeigninstitutionalinvestors.Italsoaddresseslotof concerns of the foreign investors, includingthatofretrospectivetaxation. AfterGAAR,wearelikelytoseeanuptick inforeigninflowsintothecountry,”said Deven Choksey, managing director, KRChokseyShares&Securities.
Rajesh Gandhi of consultancy Deloitte said the clarifications had partially fulfilled a long-standing demand,thoughthebenefithadgot dilutedtoalargeextentbecausetheLoB clauseintheSingaporeandMauritius treatieswererelevantonlyforavailing the50percenttaxratefortwoyears.
“In the present form,the guidelines leave some room forinter pretation and dispute.To provide certainty to foreign investors,it would be better to clarify that if the conditions specified under LoB clause are met,GAAR would not apply,” said Vikas Vasal of Grant Thornton.
Also,theCBDTclarificationshave saidtheadoptionofanti-abuserulesin taxtreatiesmightnotbesufficientto addressalltaxavoidancestrategiesand thesearerequiredtobetackledthrough domesticanti-avoidancerules.
This means some of the treaties could be overridden by GAAR.
Abhishek Goenka of consultants PwC said as the clarifications cannot envisage all possible scenarios, it does leave room for subjectivity and one could still need to pass the GAAR test even where the arrangement is cleared under LoB provisions. “This creates an unduly onerous obligation on investors,” he felt.
On this point, the guidelines are subjective and could be more directional, said Girish Vanvari, national head of tax, KPMG. “This is an important area, which needs more attention,” he said.
A committee headed by Parthasarathi Shome had earlier recommended that where aspecific anti-avoidance rule is applicable on a particular aspect or element, GAAR not be invoked on that.
“Similarly, where antiavoidance rules are provided in a tax treaty in the form of an LoB clause, the GAAR provisions shall not apply overriding the treaty. If there is evidence of violations of antiavoidance provisions in the treaty, the treaty should be revisited but GAAR should not override the treaty,” the committee had recommended.
CBDT said grandfathering (the term for an old rule continuing to apply for some existing situations, while the new rule would apply to all future cases), in line with income tax rules, would be available for compulsorily convertible instruments, bonus issuances or splits, and consolidation of holdings in respect of investments made prior to April 1 in the hands of the same investor.
And, that if at the time of sanctioning an arrangement acourt has explicitly and adequately considered the tax implications, GAAR will not apply.
“It has also been clarified that GAAR will not apply if an arrangement is held as permissible by the Authority for Advance Rulings,” the Board said.
A proposal to apply GAAR will be vetted first by a principal commissioner of income tax (PCIT) or commissioner of income tax (CIT). And, at the second stage, by an approval panel headed by a judge of a high court.
“The stakeholders have been assured that adequate procedural safeguards are in place to ensure GAAR is invoked in a uniform, fair and rational manner,” CBDT said.
If an arrangement has been held to be permissible in one year by PCIT and CIT or the approval panel, and the facts and circumstances remain the same, GAAR will not be invoked for that arrangement in a subsequent year.
“The CBDT has taken adequate steps to ensure GAAR is invoked in deserving cases. The proposal to declare an arrangement as impermissible will undergo a two-stage vetting process. This will ensure proper evaluation of cases and target only genuine tax avoidance arrangements,” said Partho Dasgupta, partner-direct tax, BDO India.
Business Standard New Delhi,28th January 2017
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