INDIA PLUGS TAX TREATY GAPS BY JOINING GLOBAL ANTI-ABUSE INITIATIVE

07.06.2017:  By signing a multilateral treaty in Paris, India has, in one sweep, sought to make its double tax avoidance agreements (DTAAs) with 93 nations, including the ones with countries like Cyprus, Mauritius and Singapore, foolproof in terms of preventing aggressive tax avoidance by multinational corporations (MNCs).

The multilateral instrument signed at a meeting of the Organisation of Economic Cooperation and Development (OECD) seeks to prevent the corporate practice of making profits artificially disappear from the market where economic activity takes place in jurisdictions with low or no tax.

The treaty will come into force early 2018, according to an OECD statement issued in Paris. A finance ministry statement issued  said the deal signed by finance minister Arun Jaitley reaffirmed New Delhi’s commitment to cooperate in global efforts to tackle aggressive tax planning. Sixty seven other nations signed the deal on Wednesday and many others have expressed their intention to sign.

This deal will result in automatic modification of about 1,100 tax treaties worldwide. Preventing the generation and laundering of unaccounted wealth has been a priority for the National Democratic Alliance (NDA) administration.

India’s DTAAs with countries like Cyprus, Mauritius and Singapore, originally meant to prevent double taxation of the same income in two countries, are long known to be exploited by some investors for non-taxation of the same income in neither of the countries. India eventually amended the treaties with these nations to install safeguards to prevent “double non-taxation”.

The treaty with Singapore was amended with effect from February 2017 and the one with Mauritius was amended with effect from July 2016. The treaty with Cyprus was modified with effect from December 2016.

While these amendments address some of the gaps, the multilateral instrument is more comprehensive and covers issues such as characterization of financial instruments that are treated differently in different nations and definition of the taxable presence of an MNC in a country, referred to as “permanent establishment”.

India, however, did not accept a provision for binding arbitration in tax disputes, which has been accepted by 25 nations. New Delhi is of the view that taxation is a sovereign right of the government not subject to international arbitration.

OECD stated “conservatively” that the magnitude of tax base erosion for nations from the artificial shifting of profits by businesses to low tax jurisdictions is of the order of $100-240 billion a year, or the equivalent of 4-10% of global corporate income tax revenues.

“The signing of this multilateral convention marks a turning point in tax treaty history,” an OECD statement said, quoting OECD secretary-general Angel Gurría.

India has been closely involved in preparing the multilateral treaty text and has already adopted some of the action plans under the Base Erosion and Profit Shifting (BEPS) project, including provisions for taxation of the digital economy and country-by-country reporting (CBCR) of transactions by MNCs.

The CBCR framework enables national tax authorities to determine whether the taxable income reported by a unit of an MNC in a particular country actually corresponds to the economic activity and value creation in that market.