India has one of the lowest administrative costs of collecting taxes in the world, being merely 0.57% of the total tax collected. Just as one would give credit to corporate India for effectively cutting down their costs, the Government of India should be credited for achieving this feat.
Keeping in mind the Government of India’s objective to efficiently manage its administrative costs, one may question introduction of the provisions of General Anti-Avoidance Rules (GAAR). GAAR as they stand in their current form, leave a lot of uncertainty and doubt on their practical application due to their very wide import. Such discretion will lead to a substantial increase in administrative cost of the Government, in addition to affecting the ease of doing business in India. The Government of India has thus justifiably deferred GAAR.
However, this is not to say that the concerns of the administration to prevent fiscal evasion are misplaced. The overwhelming support for the Base Erosion and Profit Shifting (BEPS) project of the Organization of Economic Cooperation and Development (OECD) and the speed at which it has progressed is testament to the importance that globally governments are attaching to countering tax practices inspired by BEPS activities.
If we look at the two concepts together, namely the BEPS project and GAAR, their ultimate motive is the same. However, the actions set out under the BEPS project are specific and detailed, whereas the GAAR is all-encompassing, anti-avoidance provision.
When looked at from an Indian context, it is crucial that implementation of anti-avoidance measures is with clarity. A common concern voiced about GAAR provisions, as they stand currently, is that they are too “vague”. In this respect, it will seem appropriate to introduce specific, suitable recommendations of the BEPS project, which are based on an expansive study of international legislations and practices, into our domestic tax laws.
To some extent, the Government has also endorsed this position by articulating in the memorandum to the Union Budget 2015–16, that it will be proper to implement the GAAR provisions as part of a comprehensive regime to deal with BEPS and aggressive tax avoidance, and has deferred the implementation until April 2017. This, indeed, is a welcome step, not because of the deferral of GAAR, but for the stated intent that tax avoidance will be checked as part of a comprehensive regime.
Such a regime should strive to balance the following three aspects:
- Introducing provisions that target specific avoidance strategies, while being clear about permissibility and consequences;
- Having reporting requirements through which sufficient information can be gathered for the purpose of assessments/audits;
- Wording as well as implementation of law at the ground level should not result in unnecessary over-regulation.
In this regard, the US tax book may be referred to see the extent and form in which regulations have been introduced to tackle aggressive tax planning strategies, from Controlled Foreign Corporation (CFC) provisions for taxing overseas passive income to anti-conduit regulations in relation to financing arrangements.
Illustratively, the following aspects from the OECD BEPS Action Plans may have relevance in the Indian context:
Specific provisions regarding taxation in the digital economy: This has been a special focus of the BEPS project and the final deliverable for this action has also been released. India could do with clarity on treatment of virtual presence. India has expressed disagreement with OECD’s view on many aspects of e-commerce transactions. A fine balance has to be struck on various aspects, i.e., the need to plug revenue, ease of administration/audit and the risk of unwarranted double taxation. The view it takes on the matter should also find favor in its tax treaties.
CFC regulations: The BEPS deliverable on strengthening CFC regulations is yet to be released. Furthermore, India currently does not have any CFC rules in the domestic law. They were contemplated in the Direct Taxes Code, 2013, which has now lapsed. However, outbound investments are only going to see an upward swing in the future, which would necessitate regulations to tax CFCs lacking substance, which are set up in low-tax jurisdictions. That being said, the measures should be holistic, providing for simpler internal reorganizations within a group as well as being clear on the aspect of underlying foreign tax credit.
Country by country reporting (CBCR): In the push for transparency, the CBCR concept is one that is crucial. Under CBCR, multi-national groups are expected to provide organizational and financial information, which discloses revenues, taxes paid, asset base etc., on a country-by-country basis, so that transfer pricing assessments can be more meaningful and the tax authorities can have a view of worldwide operations in order to check tax avoidance strategies. If these reporting requirements are formalized in law, it would have the potential to bring increased transparency and reduce transfer pricing disputes. Countries such as the US and Australia intend to implement this measure from 2016.
Once the BEPS project is completed, a wealth of recommendations to address tax challenges will be available. It is of paramount importance that the Government and the business community engage in a constructive dialog to walk through the pitfalls/ challenges for implementing any recommendations. It will go a long way in achieving the governments’ avowed objective of bringing in clarity and certainty in a collaborative manner.