International Taxation Conference – 2013
INTERNATIONAL TAX AND TREATY CONFLICTS "PLENARY SESSION"
December 5, 2013
Session Chairman – Sohrab Dastur, Senior Advocate, India
Speakers:
Special Address - Mr. Porus Kaka, President, International Fiscal Association
"Klaus Vogel" Speaker – Michael Lang, Head of Institute for Austrian and International Tax Law,
WU, Vienna: International Tax and Treaty Conflicts – An Overview
Stef van Weeghel, Partner, PricewaterhouseCoopers and Professor of International Tax Law,
University of Amsterdam, The Netherlands: Allocation of Taxing Rights under Model Tax Treaties
Arvid Skaar, Partner, Wiersholm, Norway: Permanent Establishment Article under OECD and UN
Models
Liselott Kana, Head of International Revenue Administration, Chile: Taxation of Services: OECD vs.
UN Model of the session:
Summary
The 19th FIT conference started with a special address by IFA President, Porus Kaka, who
dwelt on the challenges posed by the onset of BEPS. He termed OECD’s BEPS plan as a
‘bullet train’ where the tracks are still being laid and likened the ambitious BEPS timeline as
‘Mission to Mars’. Mr. Kaka told the audience that they were 9 months away from action
(BEPS) that would revolutionize the tax world and that there would be no places to hide and
run. He added that while there is public expectation of ‘moral’ tax payment, it would,
however, be balanced by the need for investment.
Mr. Kaka lauded the efforts of Indian
Government over the last year,
especially withdrawal of certain
circulars by CBDT and the
introduction of Safe Harbour rules.
He advised tax professionals that
they must not condone illegal tax
planning, and gave an example of
illegal bank accounts. Mr. Kaka
praised Indian Revenue officials for
their ‘competence’ but cautioned that
Revenue should not take over the
role of judges. He alluded to the fact
that India has become the factory of
the world for tax decisions, but in the
breath added that the judgments delivered by Courts and Tribunals must be valued by both,
the taxpayer and Revenue.
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Prof. Michael Lang opened the topic of Treaty Conflicts pointing out that the tax treaties
are applied and interpreted by national tax authorities and national courts. He stated that
absence of world tax court and lack of uniformity in interpretation and application leads to
treaty conflicts. He also discussed various solutions for addressing treaty conflicts such as
mutual agreement procedures (MAP), arbitration, (non-binding) opinion of independent
experts and international court.
He pointed out that OECD Commentary has been changed several times and that the 2014
version of the Commentary is awaited. He opined that
the Court would be very cautious or reluctant to rely on
later version of the Commentary, which has been
released after negotiation/signing of the treaty. He
observed that OECD Commentary should state a
rationale as to why a particular interpretation is
preferred over the one already existing.
Mr Lang also referred to Article 3(2) which states that
in cases of terms which are not defined in the treaty,
the domestic law meaning can be resorted only if the
context permits. In this context, Mr Dastur referred to the interpretation of phrase ‘may be
taxed’ and CBDT Notification issued u/s 90(3) which had clarified, with retrospective effect,
that use of this phrase indicates that the relevant income, though taxable in source country,
must also be included in Indian income (being country of Residence). Mr. Dastur pointed out
that ‘may be taxed’ is a phrase and not a term and therefore the provisions of Sec. 90(3)
could not be resorted to. Further, he also pointed out that the notification is contrary to SC
ruling in Azadi Bachao Andolan, which is law of the land.
Prof. Stef van Weeghel compared the provisions of OECD Model Tax Convention and UN
Model Tax Convention (MTC) to analyze allocation of taxing rights under the Model Tax
Treaties. He noted that UN model allocates more taxing rights to source state as compared
to residence state. He discussed the comparative provisions of both MTC such as Article 5
(with respect to service PE, agency PE, insurance PE), Article 7 (with regards to force of
attraction), Article 12(wider definition of royalty), Article 13 (capital gains in respect of
companies/firms which consists principally of immovable property), etc.
Referring to Article 7, he pointed out that UN MTC seeks to tax the profit attributable to sales
in the source state of goods/services which are of same or similar to kind as well as in the
source state of other business activities of same or similar kind. He stated that OECD
historically gets nervous about force of attraction rule. He also discussed differences as
deductibility of interest/royalty paid to head office or other offices. In this context, Mr Dastur
referred to an ITAT ruling where deduction of interest paid to foreign branch/HO relying on
treaty provision, was discussed. However, same was held as not taxable in India relying on
provisions of Income-tax Act. He pointed out that this situation has resulted into double tax
advantage.
Mr. Arvid Skaar compared provisions of OECD and UN Model Tax Convention vis-a-vis
Article 5 – Permanent Establishment. He stated that existence of fixed place of business is
an important condition for constitution of PE under Article 5(1) of both the conventions. He
also pointed out that in one of the recent Spanish rulings, website has been held as a PE
where a website was operated only for Spain and computer hosting the website was outside
Spain. He expressed his disagreement with that ruling relying on OECD principles.
Referring to Service PE clause in UN MTC, he stated that service PE is constituted when
enterprise furnishes services through employee or other personnel for a period of 183 days
or more in a 12 months period commencing or ending in the relevant fiscal year. He pointed
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out that the term ‘other personnel’ is not provided in the commentary. He also discussed 2
scenarios as to whether they would result into constitution of PE under OECD and UN MTC
viz. Toll manufacturing and commissionaire arrangement in given state of facts. In this
respect, Mr Dastur pointed out that Australian Tax Board has held that PE would not be
constituted in case of contract manufacturing, while the Spanish Court has held otherwise.
Therefore, he commented that the issue is very much alive.
Ms Liselott Kana discussed the issues related to taxation of services under UN and OECD
MTC. She discussed 3 main approaches of taxation of services viz. (i) No special rules –
Article 7 to apply (OECD approach), (ii) Additional time threshold and application of Article 7
and Article 14 (UN approach) and (iii) withholding taxes on service income under Article 12
or under a separate article. She also discussed the work of the UN Committee of Experts on
International co-operation with respect to taxation of services. She also discussed the
changes with respect to Article 14 of UN model on taxation of independent personnel
services. She stated that UN Sub-committee had been mandated to address the issue of
taxation of services in general at broad level basis and is also mandated for wordings and
options for Article on taxation of fees for technical services.
While replying to a question, Mr Skaar stated that since different countries had varying
interests, it is good to have more than one model tax convention. In concluding remarks, Mr
Roy Rohatgi stated that both, rules as well as interpretation of rules, contribute to treaty
conflicts. Considering the different interest of different countries, it is natural to have multiple
options in the form of more than one model tax convention to address them.
INTERNATIONAL TAX AND TREATY CONFLICTS
Session Chairman – Ketan Dalal, Joint Head of Tax, PricewaterhouseCoopers, India
Speakers:
Peter H. Blessing, Partner, KPMG LLP, United States: Double Non-Taxation-ACritical Analysis
Patricia Brown, Director, University of Miami School of Law, United States: Use and Abuse of Tax
Treaties
Ashish Kumar, Director (TPL), Government of India:Conflicts under Article 13 of the Model Tax
Treaty
Marcus Desax, Partner, Walder Wyss, Switzerland: Beneficial Ownership under Tax Treaties- Current
Developments
Marc Hein, Chairman, Financial Services Commission, Mauritius: Recent Fiscal Regulatroy
Development
Summary of the session:
Mr. Ketan Dalal, Chairman of the session, in his opening remarks, stated that India is
largely a source rule taxation country. This model could give rise to cases of double nontaxation, some intended, some unintended. He mentioned that the Mauritius route is a
classic case of intended double non-taxation. He also mentioned that there is a very thin line
of difference between treaty use and abuse. He mentioned that so far India has had judicial
GAAR, which would very soon be legislated w.e.f April 1, 2015. Indian GAAR proposes
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treaty override to check
abuse situations. He also
mentioned that the
concept of beneficial
ownership is also linked to
and relevant to GAAR.
Mr. Peter H. Blessing,
(Partner, KPMG LLP, US)
spoke on the concept of
double non-taxation. He
also felt that that not all
doubly non-taxed income
is “unintended” or
inappropriate. He
mentioned that Mauritius is an example of intended double non-taxation. According to him,
intentional tax arbitrage is at the other end of the spectrum and various other forms of double
non-taxation lie in between.
He opined that the receipt of any form of tax relief by the Source country is conducive for
double non-taxation. While economists prefer residence based taxation to avoid the source
argument, it has the drawback of mobility of residence and capital. He discussed that double
non-taxation is also being criticized on the grounds of being unfair given that companies do
not pay their fair share of taxes and that it ends up giving a foreign company a higher edge
over domestic companies.
Talking of whether GAAR could be a solution in combating double non-taxation, he
mentioned that GAAR suffers from both over-inclusiveness and under-inclusiveness, but
avoids the “one size fits all” approach. He also mentioned that combating the issue
unilaterally has conflicted considerations of revenue and economic growth. Recently, France
and Australia have legislated laws to directly target double non-taxation. He summed it up by
mentioning that the issue is a very complex one and requires a lot more thought before
action is taken.
Ms. Patricia Brown (Director, University of Miami School of Law, US) spoke on the “Use
and Abuse of International Tax Treaties”. She mentioned that the goal of the treaties is to
promote international trade and commerce and allocating tax revenues therefrom between
various countries. She stated that the use of a tax treaty qualifies or becomes an abuse
when taxpayers get a benefit which is inconsistent with the intention of the treaty.
She discussed various forms of treaty abuse such as treaty shopping, conduit transactions,
arbitrage transaction, over-leverage/ base erosion and profit shifting, and methods used to
combat each of them. She mentioned that the threshold of what is treaty abuse is getting
lower and lower with passage of time. In her opinion, GAAR is likely to work better than
economic substance rule in case of conduit transactions.
She also discussed the steps taken by US to combat “Inversions” i.e. situations where
parent company of a group changes its tax residence to a new jurisdiction, or a new parent
company located outside original jurisdiction becomes the parent.
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She mentioned that Governments need to check what types of treaty abuses are of concern
to them and use types of anti-abuse rules to combat such cases. The anti-abuse rules
should be selected based on what would work best with their existing legal and tax system.
The UK practitioners preferred the “major purpose rule”, as opposed to the subjective
economic substance rule preferred by the US. Concluding that a single rule cannot work for
all countries, she mentioned that it would be interesting to see how OECD addresses the
issue in the BEPS report.
Mr. Ashish Kumar (Director (TPL), Government of India), spoke on the importance of
Article 13 of the tax treaties which taxes Capital Gains. He mentioned that the issue has
gained greater relevance today in light of certain amendments to the definition of “transfer”
under the Indian domestic law.
Analysing the Article under the UN and OECD models, he mentioned that a direct transfer of
immovable property by a foreign tax resident is taxable in India. However, an issue arises
when such transfer is indirect i.e. through shares in the company holding the immovable
property.
Speaking in this context, he mentioned that unlike for other articles, UN Model on Capital
gains is more residence oriented whereas OECD model is more source oriented. He also
mentioned that unlike the OECD Model, UN Model provides for an exception for land used in
business unless it is in the business of managing land.
Dealing with the issues faced while taxing capital gains under this Article, he mentioned that
in absence of the definition of the term “alienation” under the treaty, there is a conflict on
whether definitions under domestic law would apply. Furthermore, another issue is whether
the static definition (ie definition as exising at the time of entering into the treaty) or the
dynamic definition (ie amended meaning as at the time of applying the treaty) should apply.
In his view, the dynamic definition of the term needs to be applied vis-à-vis the static
definition.
He mentioned that the Andhra Pradesh HC in the case of Sanofi Pasteur Holding SA [TS-57HC-2013(AP)] has adopted a static approach by holding that Sale of shares of ShanH was
not transfer of Indian entity's (Shantha Biotechnics Ltd - SBL) shares or underlying assets,
since ShanH served a legitimate commercial purpose i.e. FDI by way of participation in SBL.
However, Madras HC in Verizon Communications Singapore Pte. Ltd. [TS-577-HC2013(MAD)], has adopted a dynamic approach in the context of meaning of the term ‘royalty’
under the India-Singapore Treaty.
Mr. Marc Hein, spoke on Mauritius, as a mature International Financial Centre (‘IFC’). He
contended that Mauritius has walked an extra mile in terms of the substance requirement.
He then spoke about various changes that Mauritius has brought in its legal framework with
regards to substance and economic nexus.
He negated the general attitude that companies just come to Mauritius because of tax
benefits. He highlighted various other benefits for choosing Mauritius as an IFC like solid
regulatory framework, good corporate governance, business friendly environment etc.
Speaking about recent report of OECD on Mauritius, he mentioned that Mauritius voluntarily
underwent both Phase 1 and 2 reviews by OECD, which has rated it as a ‘Largely
Compliant’ jurisdiction that has substantially implemented tax standards.
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He informed that the India-Mauritius ‘Joint Working Group’ met last week and is working on
the LOB clause, round tripping, substance requirement and improper use of treaty. He did
admit that the Indian GAAR legislation was a concern, especially the uncertainty over the
way it would be implemented. Finally, he commented that Mauritius shares a very special
relationship with India, and he looked at the India – Mauritius DTAA as a ‘Win- Win’ one.
Mr. Marcus Desax, explained the recent developments in the term ‘Beneficial ownership’
under tax treaties. He highlighted the proposed changes to Articles 10 to 12 of OECD Model
Tax Convention. He further discussed recent judgements in Canada, Denmark and
Switzerland on ‘beneficial ownership’.
Panel Discussion I – Some selected examples of Tax and Treaty Conflicts: Should
Treaty Shopping be permitted? How relevant should domestic law be for Treaty
interpretation?
5 December 2013
A panel discussion led and chaired by Jairaj Purandare, Chairman, JMP Advisors, India (former
Senior Partner, PwC, India).
Panelists: Michael Lang, Austria; Pous Kaka, India; Pramod Kumar, India; Arvid Skaar, Norway;
Rajesh Ramloll, Mauritius; Patricia Brown, U.S.A.; Marc Hein, Mauritius.
Summary of the session
The panellists expressed diverse opinions on the contentious issues of ‘Treaty Shopping’
and ‘Double Non-taxation’. Prof. Michael Lang, opined that any attempt to completely
eliminate both ‘Double taxation’ and ‘Double Non-taxation’ will lead to an imperfect tax
system. The best way to avoid ‘Double taxation’ and ‘Double Non-taxation’ is by interpreting
treaties in their right context rather than using domestic law.
Senior judge of Indian Tax Tribunal, Mr. Pramod Kumar, categorised ‘Double Nontaxation’ into 3 compartments: first, where ‘Double Non-taxation’ is by purpose, i.e. the
country having the taxing
right doesn’t tax. He stated
that this situation ought not
to be too much of a
concern. He envisaged the
second scenario as one
where the transactions are
structured in a manner that
is not visualised by tax
treaty; in which case,
judges would have to look
into the scheme of the
treaties. Lastly, Mr. Kumar
referred to a situation,
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where one of the countries changes its domestic rules, after the treaty was first entered into.
To illustrate this point, he cited the example of Mauritius with which India entered into a tax
treaty in the mid 1980s, but the FDI and FII floodgates opened in the early 1990s when
Mauritius changed its domestic law and incorporated Mauritius Offshore Business
Corporations Act.
Mr. Porus Kaka, referring to the third scenario explained by Mr. Kumar, mentioned that in
such cases the other country ought to be put on notice and the treaty should be renegotiated. While admitting that ‘Double Non-taxation’ did concern him as a responsible
citizen, the same, however, had been consciously permitted by some treaties and therefore,
this situation has to be addressed by policy makers.
Mr. Mark Hein, had a different take on ‘Treaty Shopping’ and the India-Mauritius tax treaty.
He stated that Mauritius tax residents too, pay corporate tax in Mauritius and therefore it
should not be looked upon as a case of ‘Treaty Shopping’ or ‘Double Non-taxation’.
Ms. Patricia Brown strongly contended that ‘Treaty Shopping’ has been there for a long
time and merely establishing an entity in a third country is not an abuse of treaty, if there are
no anti-treaty shopping provisions.
Mr. Rajesh Ramloll, opined that domestic law must be used only as a last resort and one
must necessarily be guided by treaty in cases of ‘Double Non-taxation’. Mr. Porus Kaka
concurred with this view and citing the recent Indian Court decision, in the case of Sanofi,
stated that Article 3(2) must be use as a last resort. On this point, Mr. Pramod Kumar argued
that even if Article 3(2) were to be abolished altogether, there would be no material impact
on the outcome.
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International Taxation Conference – 2013
EMERGING INTERNATIONAL TAX TRENDS IN INDIA "PLENARY SESSION"
December 6, 2013
Session Chairman – Dinesh Kanabar, Deputy CEO and Chairman, Tax, KPMG, India
Speakers include:
Parthasarathi Shome, Minister of State: Finance and Advisor to Finance Minister, Govt. Of India:
Trends in Indian Tax Policy
Mohan Parasaran, Solicitor General, India: A Legal Perspective
Ajay Vohra, Senior Advocate, India: A Practitioner’s Perspective
Summary of the session
Session Chairman, Mr. Dinesh Kanabar kicked off the proceedings on Day 2, by talking in
brief about some of the emerging and contentious tax issues. He observed that while some
of the orders passed by the Revenue may be struck down by Courts, they may not sound as
preposterous as they used to a few years back. With regards to black-listing of Cyprus, Mr.
Kanabar wondered if the same was a warning to Mauritius and Singapore. On BEPS, he felt
that it would be interesting to see if India’s views gain importance.
Delivering the key note
address, Dr. Parthasarthi
Shome emphasized that
relatively negative effect of tax
avoidance is being felt across
the world and that tax
avoidance through artificial
structures erode revenue
collections and are, hence, not
economically desirable. He
alluded to the increased
perception that domestic and
international tax rules are
broken and those who pay
taxes are considered ‘naïve.’
Dr. Shome further stated that tax administration in developing countries is making
aggressive adjustment on MNC’s dodging taxes.
On BEPS, Dr. Shome mentioned that there was a consensus that base erosion and profit
shifting was occurring but cautioned that BRIC’s countries need to maintain a strict vigil so
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that they receive a fair share of taxes. On the hotly debated issue of intangibles (transfer
pricing), he admitted that it was difficult to find comparables and determine their value. As
regards marketing intangibles, he stated that assigning of value to activities carried out in
India was a challenge.
As regards the controversial topic of share valuation, Dr. Shome opined that capital financing
was an international transaction. He further added that if the share transaction between
associated enterprises was at less than market value, then in such cases the tax department
can determine the arm’s length price for such transactions. Dr. Shome framed the issue in
such cases in the following words: …”should the resultant benefit be taxed in the hands of
domestic companies or foreign companies as deemed income is an open question?” Further
he questioned that whether the difference should be taxed as capital gains. He also raised
an issue that whether such difference should be taxed in the year of subscription or
disposition of shares.
Mr. Mohan Parasaran (Solicitor General, India) was to speak on “A Legal Perspective on
the trends in Indian tax policy”. In his absence,
Mr Mukesh Butani read out the speech prepared
by him. Mr. Parasaran stated that the leading
disputes could be broadly classified into two
categories: cases arising out of innovations in
technology and cases arising out of innovations
in finance.
He mentioned such cases highlight the need to
focus on BEPS since they lead to a serious
erosion of tax base to the detriment of the
general public in these countries, despite tightly
drafted tax laws. He mentioned that the key focus
of BEPS is to prevent double non-taxation and
balancing avoidance of double taxation, so that
the cross border flow of investments and job
creation is not disturbed.
He said that clarificatory amendments with retrospective effect that seek to correct a wrong
judgment which have effect of defeating tax policy are sometimes absolutely necessary.
However, some parts of the retrospective amendments may have gone beyond the need to
clarify the Vodafone judgment. In his view, Parliament’s intention would have been restored,
with the necessary retrospective effect, if just the words “through” and “situate in” had been
clarified appropriately in Section 9 of the Income Tax Act.
Advocating in favour of the GAAR, he mentioned that despite amendments, new situations
may arise in the future that will result in such interpretational difficulties for the Revenue and
the Courts. Some taxpayers are innovative and creative, and often come up with ingenious
(and at times dubious) ways to “save” tax. It is undoubtedly necessary to have GAAR
provisions designed to equip the Revenue to be able to proactively deal with such situations
without necessarily having to await Parliamentary or judicial intervention in each and every
case. But, he acknowledged that to implement GAAR effectively, Revenue officials
would need extensive training in various areas such as international taxation, finance,
banking and corporate law.
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Mr. Ajay Vohra (Senior Advocate, India) spoke on ‘A Practitioner’s Perspective on the Tax
Policy Trends in India’.
He mentioned that it was a difficult topic to discuss since India’s tax policy is not in black and
white and there is a gap between policy and implementation. Since India is a net exporter of
services, its tax policy is inclined towards source based tax. India seems to be moving to an
era where more and more income is deemed to accrue or arise in India. Recent ruling in
Verizon case is the sole ruling which says that Treaty definition and IT Act definition are parimateria. Most rulings so far have said that unilateral change in IT Act does not impact treaty
definition.
He agreed with Dr. Shome’s comment that transfer pricing should not be used for revenue
generation as is being done currently such as tax on hypothetical income like corporate
guarantee. Speaking of DTC, he questioned the rationale behind completely rewriting the IT
Act, adding that it was only creating uncertainty and anxiety amongst stakeholders as
nobody is sure on when and how and whether it will be implemented. He, however,
disagreed with Dr. Shome’s suggestion of a 360 degree profiling of high tax payers/ HNIs
and felt that tax evasion needs to be tackled more at the ground level than at the HNI level.
Mr. Arvind Datar (Senior Advocate, India) spoke on ‘Emerging International Tax Trends in
India’. He remarked that one disturbing trend which originated in India and has international
ramifications was that of overturning rulings which were decided against the Revenue. This
disturbs the elementary principles of tax law. Basic principles of international tax support tax
on basis of residence or source. However, as a result of recent amendments to Indian tax
law, we were coming to a situation where if any payment emanates from India, it became
taxable in India. In his view, the amendments relating to taxation of capital gains qua a
direct/ indirect transfer, royalty taxation qua computer literature and satellite transmission
were against the fundamental and elementary knowledge of tax principles.
He stated that the amendment regarding explanation to Sections 9(1)(v), (vi) or (vii) – which
state that a non-resident need not have a residence, place of business or business
connection in India to be taxable or need not render services in India to be taxable, is
draconian.
In his concluding remarks, he mentioned that India’s federal structure of taxation, i.e.,
division of revenue between centre and State is the key reason for multiple layers and types
of taxes on the same commodity/ service – eg software, uplinking/ downlinking.
He discussed Article 245, clause 2 of the Indian Constitution which says no law made by
Parliament shall be deemed to be invalid only on the ground that it has application outside
the territory of India. However, tracing the history of the Constitution and the clause, he
mentioned that in today’s evolved scenario, we face the danger of levying extra territorial tax.
PANEL DISCUSSION - 2013 Global Impact of Indian Tax Trends
6 December 2013 - Discussion led by Dinesh Kanabar and chaired by Parthasarathi Shome
Panelists: Mohan Parasaran, Arvind Datar, Arvind Datar, Ajay Vohra, Mukesh Butani, all from
India.
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Summary of the session
The Panel discussed five burning tax issues covering – taxation on basis of payments from
India and issues arising therefrom, notification of Cyprus as a non-compliant country by
India, BEPS and India impact, India’s aggressive stand on taxing share premium and capital
inflows (eg Shell, Vodafone) and the long running controversy tax treaty with Mauritius.
The panel agreed that a very fine distinction was needed between extra-territorial
application/ legislation and extra-territorial operation of Indian tax laws. However, India does
not have a clear ruling on whether the Indian Parliament can legislate laws with extraterritorial operation. One school of thought exists that laws can have extra-territorial
application as long as they impact Indian nationals/ corporation and not non-residents.
Dr. Shome also stated that advancement in technology had to be matched with taxation eg
with existence of electronic devices and IT, presence was not required to conduct business.
One cannot emphasize need for physical presence for taxation. A middle path to identify the
source of income in the e-world needs to be worked out.
Mr. Mukesh Butani felt that
notifying Cyprus as a noncompliant jurisdiction is a very
bold step by the Indian
Government and reflects
India’s desire that all treaty
and non-treaty partners
comply with exchange of
information. Mr. Dinesh
Kanabar added that this could
possibly be used as a tool to
renegotiate tax treaties to
include the LoB and EoI
clauses. Dr. Shome
commented that notification
has been issued after due
steps in this regard have been taken and is not a sudden outburst. He believed that India
has been very pragmatic in its approach since it is open to take a relook at the situation if the
exchange from Cyprus improves.
Differing in his opinion, Mr Vohra was of the opinion that such step has put uncertainty in
minds of taxpayers until the issue is resolved between the two countries as the Cyprus treaty
has been around for some time and investment decisions have been made based on it.
Speaking of BEPS, Dr. Shome remarked that the world was moving towards source based
taxation and the risk was not because of source based taxation but because of
retrospectivity.
BEPS seemed to be mirage at the first instance to Mr. Mukesh Butani, which now is a reality
waiting to happen. He mentioned that BEPS is very clear about not tolerating double nontaxation, which also implies that it will not tolerate economic double taxation. Aggressive
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countries like India, Brazil and China which are leading to economic double taxation will
need to commit towards making BEPS workable.
Mr. Arvind Datar opined that the whole controversy of share premium and capital inflows
being taxable was a classic example of unnecessary litigation which should not have started
in the first place.
Speaking of the Mauritius controversy, Dr. Shome mentioned that the aim was certainly not
to keep anything uncertain. Since India has a long historical connection and investment
through Mauritius, the process is on to resolve the issue of BEPS in a rightful manner. He
believed that the position in the tax treaty should be followed but there is no reason why the
treaty could not be revisited. He also mentioned that there is no question of uncertainty since
Mauritius has time and again indicated its willingness to discuss the treaty.
INTERNATIONAL TAX STRUCTURING FOR INVESTING ABROAD Option A
6 December 2013
Session Chairman – Nishith Desai, Founder, Nishith Desai Associates, India
Speakers include:
Jeffrey Owens, Professor and Director of the Global Tax Policy Centre, WU, Austria (former Director,
OECD, Paris): Base Erosion and Profit Shifting (BEPS)- An International Tax Issue
Jon Bischel, Professor and Author on International Taxation, United States: Tax Conflicts for
Multinationals under BEPS
Summary of the session
Mr. Nishith Desai introduced the session “BEPS – striking the right balance”. According to
him, the first anomaly of the report was that “base” was not defined. Lot of double taxation
was caused due to conflicting source rules, extra territorial nexus and unilateral measures
overriding treaties. Prof. Dr. Jeffrey Owens spoke on BEPS - an overview.
He stated that the next Government of India will have to either move forward or backward on
tax reforms and cannot maintain status quo. According to him, they might have to move back
to the reforms put forth by Mr Singh. He remarked that it’s time for India to stop talking of its
economic potential and start realizing it. He mentioned that BEPS offers an India an
opportunity to puts its case on why a reform is needed, but it is a process which will need
compromise from both parties – OECD as well as India.
He stated that there is enormous amount of pressure to move forward on BEPS and the
various steps taken establish the effort being taken in this regard. He stated that BEPS is a
top-down project of OECD where top Government officials have identified it as a problem
and are trying to find solutions to it. Going forward is when the difficult phase of BEPS will
start ie getting the Governments to identify and agree what the issues are and agree on
steps to solve them
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Discussing the BEPS action plan in light of the three key themes of coherence, realignment
and transparency & predictability – he felt the 15 action points of the July 2013 BEPS report
are basically a part of one of these 3 themes.
According to him, BEPS has become an issue
due to three reasons - international tax rules
which aren’t working ideally, aggressive tax
planning by MNCs and aggressive tax by
Governments.
He mentioned that while dispute resolution in
the form of MAP is picking up, there are very
few non-OECD countries which have even
had a single MAP. He also discussed the
OECD’s proposal for global transfer pricing documentation.
He mentioned that there has been a huge change in the norms with which OECD sets
international rules. Earlier, rules were set at OECD and expected to be followed, but now
they try to get global consensus.
Mr. Jon Bischel spoke on tax conflicts for MNCs under BEPS.
He mentioned that tax treaties do not address the issue of “arm’s length price”. Sometimes,
even arm’s length pricing is not the ideal way to benchmark transactions since it does not
take into consideration the residual profits earned by MNCs. This is one of the reasons for
BEPS. He also mentioned that current available tax principles are not effectively able to
address BEPS.
He discussed a few scenarios which actually lead to profit shifting such as relocating
corporate headquarters, off-shore call centers, foreign subsidiaries in tax havens, etc. He
stated that, among others, redefining “source” would be a step towards preventing profit
shifting.
He stated that assuming BEPS is successful, a bit of revenue may be gained say 0.5% of
GDP, but huge economic development is at stake.
Panel Discussion: Base Erosion and Profit Shifting (BEPS) - An International Tax
Issue
6 December 2013
A panel discussion led by Bobby Parikh, India
Panelists: Jeffrey Owens, UK; Jon Bischel, USA; Vaughan Herberden, Mauritius; Stef van
Weeghel, Netherlands; Liselott Kana, Chile; Promila Bhardwaj, India
Summary of the Session
Former Director General of International Tax, Ms. Promila Bhardwaj, took the audience
through the reasons behind the BEPS initiative, the main one being the resource crunch
faced by both developed and developing countries in the wake of the 2008 global meltdown.
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Mr. Jeffrey Owens chipped in with a different perspective saying that large domestic
companies who don’t have tax planning opportunities like MNCs, want a level playing field.
He further added there is a good economic case why MNCs should comply with both the
letter and spirit of the law. Mr. Stef van Weeghel mentioned about the big activist role played
by NGOs and quipped that they are not going to stop beating up the drums. Mr. Jon Bischel
cautioned that one should be careful not to go to a system that is of the ‘least common
denominator.’ He also strongly defended the MNCs stating that they needed incentives as
investing abroad entailed taking risks for businesses.
Mr. Jon Bischel felt that the solution to BEPS problem for developing countries is different
from those for developed countries. Mr. Jeffrey Owens observed that one of the key issues
in BEPS is going to be the definition of ‘tax haven’ and that even some OECD countries
have ‘tax haven’ elements in them. Mr. Nishith Desai, strongly advocating for ‘one world one
tax system’ wondered how OECD could end base erosion without a global consensus on
what constitutes ‘base’. He also stated that the ‘name and shame’ game will prove to be
counterproductive. Ms. Promila Bharadwaj concluded by saying that this is the first time
everyone feels things cannot go on like they are now…She added that there are no easy
choices and things would not change overnight.
TAX AND TREATY CONFLICTS Option B
Panel Discussion I: Is it proper to bring about changes in the treaty, significantly or
incidentally, due to changes in domestic law?
December 6, 2013
A panel discussion led by Satya Poddar, India
Panelists: Pranav Sayta, India; Rama Sithanen, Mauritius; Carol Dunahoo, USA; Ashish Kumar,
India; Gurbachan Singh, Singapore; Pinakin Desai, India
Summary of the session
Ms. Carol Dunahoo, explained that in US, both the domestic laws and treaty provisions are
treated equally. In US, as regards applicability, the later of the two prevails. She emphasized
that treaties are negotiated to encourage investment. She stated that US would have very
few treaty override cases.
Mr. Gurbachan Singh, highlighted that various policies and treaties have been negotiated by
Singapore to achieve a larger objective of promoting national interest and attracting FDIs. He
further stated that Singapore authorities / policies are pro-business. Hence, it might be
considered a Tax Haven. Further, he commented that minimal efforts are taken by
Singapore authorities to collect taxes, because they believe that once the economy is
dynamic, taxes will flow naturally. He further went on highlighting that they would make
changes in domestic laws so that it does not conflict with the treaty provision.
Mr. Ashish Kumar, gave his view on ‘whether it can be said that GAAR overrides the treaty?’
He stated that though GAAR provisions require subsequent alignment in treaties, but GAAR
does not override the intended outcome of a treaty.
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Mr. Pinakin Desai, discussed various cases where changes in domestic policy have
impacted treaties. One of which was of course GAAR, which explicitly provides for relevant
changes in treaties. Another classic example he stated was of ‘Cyprus being notified as nonco-operative jurisdiction’. He stated that without a notification to this effect by Indian
Revenue authority, the LOB clause with Cyprus would not have been re-negotiated.
Mr. Pranav Sayta, explained that India is very clear in its legislation as it provides for
‘beneficial of the two provisions’ to prevail, unlike US where both are treated at par. He also
differentiated that in India, if domestic provision is
against a treaty, it will override the treaty
provision whereas in US, later of the two prevails.
Commenting on GAAR, he pointed out that it will
override treaty provisions. He, thus, posed a
larger question before the panel ‘Whether GAAR
overrides the promise of the Indian Revenue to
avail beneficial of the two provisions?’
Mr. Rama Sithanen, also expressed his views
that treaty provisions are meant to give stability
to investors. If domestic considerations are the basis for bringing changes in the treaties,
then it will not serve its purpose.
TAX AND TREATY CONFLICTS Option B
Panel Discussion II: What are the key attributes of enhanced relationship from perspective of
taxpayer & Revenue in developing countries? Would enhance relationship encourage
voluntary compliance by taxpayers? What steps should be taken to enhance relationship?
December 6, 2013
A panel discussion led by Ajay Vohra, India
Panelists: Shanker Iyer, Singapore; Bela Mao, India; Marc Levey, USA; Kamlesh Varshney, India;
Bijal Ajinkya, India; Ranjana Gupta, New Zealand
Summary of the session:
Mr. Marc Levey, opined that transparency with the Revenue team, will help developing
relationship between the two. Further, he stated that a jury lawyer / consultant is a
connecting thread between taxpayer and administrator. So he has to understand the
perspectives of both of them to help build an ‘enhanced relationship’.
Ms. Bela Mao, opined that enhanced relationship would encourage voluntary compliance by
taxpayers. Further, she opined that if taxpayers are honest, then the revenue authorities will
also look at situations pragmatically. She further stated that enhancing relation would have
the effect of reducing litigation to a certain extent.
Mr. Shanker Iyer, shared his Singapore experience with the Revenue authorities. He
described it as a very authoritarian regime in early days. Revenue authorities were neither
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approachable nor questionable earlier. But over a period of time, he noticed changes in their
attitude. He stated that Singapore revenue authorities are much friendlier and approachable
now.
Mr. Kamlesh Varshney, gave Revenue’s perspective on enhanced relationship. He
explained that it works both ways. We have to move forward to build trust & confidence. He
gave example of a UK company being boycotted by its customers on not paying taxes. He
emphasised for such change in culture of a developing country too. The attitude should be
“It’s an honour to pay taxes”. Further, he supported ‘Exchange of information’ which will help
enhanced relationship between countries.
Ms. Bijal Ajinkya, emphasised that co-operation by taxpayer is something that will enhance
relation. She added that the taxpayer should explain the business well to the tax authorities,
in light of various complexities in the structure. The revenue should also be able to discuss
the judicial approach with the taxpayer. We need then to come to common understanding
between the two. This will help building an enhanced relationship.
Mr. Ajay Vohra, supporting the arguments of the panellists, stated that the Revenue officers
in charge need to be educated.
TAX AND TREATY CONFLICTS Option B
Panel Discussion: Framework for new GST Tax in India – An update
December 6, 2013
A panel discussion led by Satya Poddar, India
Panelists: Prashant Despande, India; Sachin Menon, India; Rohan Shah, India
Summary of the session:
Mr. Satya Poddar, referred to GST, as a dual tax
system by Centre & State. He stated that consensus
among about 32 state Governments is a difficult
task. He further stated that in GST, tax is charged
on consumption against production. But States
which are collecting tax on manufacturing are not
clear on how their income will be collected once
GST is implemented.
Mr. Sachin Menon, remarked that while the GST
road is slowly progressing, it is not a standstill. He
stated that at every step it is faced with new challenges. He highlighted other reasons
attributable to the delay- such as lack of trust between Central & State Governments,
petroleum & alcohol put out of the ambit of GST, IGST model etc. Mr. Rohan Shah, also
discussed State perspective on degree of harmonisation.
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International Taxation Conference – 2013
Joint Panel Discussion II – Should International Taxation be based on “Morality” or
“Legality”?
7 December 2013
A panel discussion led and chaired by Mukesh Butani, Managing Partner, BMR Legal, India.
Panelists: Jeffrey Owens, UK; Michael Lang, Austria; Pramod Kumar, India; Arvind
Datar, India; Rajesh Ramloll, Mauritius; Akhilesh Ranjan, India.
Special Address: Justice S. H. Kapadia, Former Chief Justice of India
Summary of the session
Delivering his special address on “morality versus legality” debate, Justice Kapadia stated
that in the Indian context, the discernible principles of law should prevail and not morality in
general sense. He was speaking as a part of the panel discussion at Foundation for
International Tax (FIT)’s event on last Saturday in Mumbai. Former Chief Justice mentioned
that “morality is an approach, it cannot be converted into principles, otherwise you are
tracing a pattern in shifting sand”. He stated that Court’s over-arching principles comes in
only when legislation is poorly drafted.
He reiterated the point that under Indian laws, subjects are not taxable according to spirit of
the statute but only by its plain words. Justice Kapadia explained that morality and fairness is
goal and ‘methods by which one arrives at that goal may differ’. Therefore, legality becomes
relevant in such situations, stated Mr. Kapadia. He also stated that concept of morality would
different for Courts and for the Government.
Justice Kapadia stated that the strength of Indian judiciary
is case by case adjudication. He stated that Court should
resist across the broad principle and every principle
should be confined and understood in the facts of the
case. Commenting on tax planning and morality, Justice
Kapadia raised a question that “Is it a bad morality under
Indian conditions for anybody to arrange his affairs so as
to reduce the brunt of taxation to a minimum? If I have to
reduce my tax liability is it immoral?”. He further added
that “If it is immoral, then of course morality has to be the
benchmark. But if it is within the legal right under the tax
law or the law which make a provision for that, can you say that such an approach is
immoral or will you go and judge such an approach by the test of morality? My answer is we
have to go by pure legal principles as enshrined in the Act”.
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Referring to the McDowell ruling, Justice Kapadia quoted subsequent observations of
Justice Sabyasachi Mukharji where he stated that ““…but however in the Indian context the
question which may the ordinary taxpayer would ask is in a country of wasteful expenditure,
are we paying the tax as a price to buy civilization or are we facilitating the waste”. Referring
to the “social justice principles” under the Constitution, he added that “Our constitution uses
the word, equality of opportunity not equality per se”.
Referring to the drafting for tax laws, Justice Kapadia stated that concepts in law must
reduce discretion, not only for the Revenue Officers but also for the Courts. In the context of
GAAR, Justice Kapadia urged to the Government that the law should not be drafted only to
achieve revenue targets.
On the issue of retrospective law, Justice Kapadia stated that Parliament has plenary
powers. While testing retrospective law, he stated that the courts would see if the extent of
the change and its impact is confiscatory in nature and impacts principle of reasonableness.
Speaking on the panel on morality vs. legality under tax laws, Solicitor General Mohan
Parasaran told that the courts are not concerned
with morality while interpreting law, but the letter
of the law. Morality in law interpretation comes
into picture only when judges feel that there is an
ambiguity in law, stated Mr Parasaran. Observing
that the issue of morality vs. legality is of recent
origin, Mr. Parasaran expressed that it is
advancing due to aggressive electronic and print
media. Expressing concerns in Indian context, he
stated that this debate is “unguided”. He lucidly
stated that there are varying degrees of
approach based on judges’ perceptions while
interpreting law. He illustrated his stand with
examples of Azadi Bachao case, wherein the
courts showed greater latitude in interpreting law as against in McDowell’s case. Further, the
Vodafone judgment went ahead to reconcile both the cases. He concluded by saying that
though morality does not hold enough space in interpretation of tax laws, judges get swayed
by moral consideration due to the extreme conduct of taxpayers (where tax planning devices
are employed).
Concurring with Mr. Parasaran’s comments, Mr. Pramod Kumar, Member of Income Tax
Appellate Tribunal stated that Courts are not concerned about the morality, unless there is
an ambiguity involved. He stated that Judicial Officers are indifferent to the issue of morality,
unless such moral principles are implicit in the scheme of legal or contractual provisions
that they are required to deal with. Elaborating the rider on morality issues, Mr. Pramod
Kumar stated that doctrine of ‘substance over form’ is well established under the Indian
judicial system. He stated that the application of timing of this test and existence of
‘commercial reasons’ (which is not very easy in complex business situation) are some of the
relevant factors to be considered in this regard.
He stated that Judicial Parties are required to be ‘neutral’ not only with reference to the
parties before them, but also somewhat ‘competing’ set of values. The judges are required
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to implement will of the Legislature, but when moral values are not reflected in the law, it is
beyond their call of duty to fill in the vacuum, stated the ITAT Member. Mr. Pramod Kumar
stated that there is no consensus on the issue of morality and that it would increase
uncertainty for the business and could be detrimental. He stated that there are 4 different
approaches to this debate - tax mercenaries, policy makers, tax moralist and tax
academicians. He stated in the last few years Judges have followed approach of tax
academicians, who can understand inherent scheme of the law under first principles.
He stated that broader question to be asked is was it not unreasonable on part of the
corporations to use tax driven business structures which puts them at an unfair advantage
vis-à-vis other taxpayers and especially ordinary tax-paying public. He stated that judges
need to follow a surgical approach especially in complex business structures and stay away
from extreme stands.
Elaborating his thoughts on morality versus legality
debate, Jeffrey Owens stated that tax planning will
continue, but the question whether it is sustainable.
Tax according to him is not a morality issue, but a
business issue as it impacts the bottom-line. Owens
stated that soon the corporations will need to engage
“Tax Diplomats” as morality debate also has impact
on customers, vendors, employees. He felt the
corporations will need to change the approach
towards the tax function, where Tax Department is
seen as profit centre. He suggested use of Profit
After Tax (PAT) as a basis for CEO’s bonuses, as one
of the macro measures to be considered to address
tax planning issue.
Prof. Michael Lang stated that GAAR usually involves subjective elements and hence,
values of the individual judging it become relevant. With introduction of GAAR, he felt that
we forget to apply the sprit or objective behind introduction of the law.
Mr Akhilesh Ranjan, who is also the Competent Authority for India, sated that debate on
morality debate arise out of old concepts. He felt that the world is realising that current rules
do not work and GAAR is required in current scenario. He strongly stated that “exchange of
information” is the order of the day.
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Mr Rajesh Ramloll stated that retrospective change in law to nullify effect of a Court
judgment, under Mauritian law, is questionable. He stated that Mauritian GAAR has been
into force in 1974, but has been invoked only 4 times in last 40 years. He stated out of the 4
cases, Revenue has lost 2 cases, primarily due to the onus on Revenue.
Session: TAX AND TREAT CONFLICTS (Option A)
7 December 2013
Session Chairman – Pranav Satya, National Leader & Partner, Ernst & Young, India
Speakers include:
Rafic Barrage, Partner, Baker & McKenzie, United States: Taxation of Electronic Commerce-Issues
in Cloud Computing
PANEL DISCUSSION- International Tax Conflicts in Electronic Commerce : Should there
be different rules for e-commerce transactions against physical transactions? Or should we
modify the current rules? If yes, in what form?
A panel discussion led by Pranav Sayta.
Panelists: Rafic Barrage, USA; Rashmin Sanghvi, India; Shreya Rao, India; Rohinton Sidhwa,
India; Carol Tello, USA; Peter H. Blessing, USA
Summary of the session
Mr. Rafic Barrage, explained the concept of Cloud Computing. Few features of cloud
computing provided by him were resource pooling, rapid elasticity i.e. resources are applied
as per customer demand, no portion of software is generally downloaded at customer end
except for little scripting. He dealt with the discussion in 3 parts, i.e. firstly, on e-commerce
part with special focus on cloud computing; secondly, characterisation of income and; thirdly,
recent tax controversies. He also provided three business models of Cloud Computing, viz.
Infrastructure as service, Platform as service and Software as service.
He discussed the US Treas Rules 18 on characterisation of income. He explained that while
determining whether the income is royalty or business income, one has to bi-furcate income
in various components looking at the predominant purpose. He emphasized that determining
character of income is the key in e-commerce transactions. He ended his presentation by
discussing recent caselaws, dealing with the subject, of various courts in India and outside.
Panel Discussion:
Mr. Pranav Sayta, led the discussion and explained that there has been constant interplay
between digital world and physical world. He commented that e-commerce has completely
revolutionised the way businesses were carried on earlier. This has posed a challenge on
the current rules on residence, source and PE.
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Mr. Peter Blessing, also showed his concern over various issues posed by e-commerce like
collection of revenue, double non-taxation, person who shall be taxed in such transactions,
etc.
Ms. Shreya Rao, was of the opinion that though the PE concept is not redundant now, but it
has to be modified or redefined according to the need, to make it workable in the current
scenario of e-commerce. According to her, the current source rules are failing.
Mr. Rafic Barrage, however negated Shreya’s thoughts of modifying rules. He was of the
opinion that the current rules of PE are still workable in current environment, no fundamental
revisit is required.
Mr. Rashmin Sanghvi, opined that all the three concepts of source, residence & PE are
defective and needs to be improved in light of e-commerce. Further, he posed that just
because a customer is based in one country and no other operations are carried out there,
how much attribution can be made is also an issue. He pointed out the case of Google UK
which is forgoing tax by Google Ireland, where it has its Head office and no infrastructure is
available in any other countries. He remarked that now when there is avoidance of UK tax,
OECD has woken up and said all the three concepts are under a challenge.
Mr. Pranav Sayta, then commented that by large, there is consensus on residence concept,
but source concept is under a challenge. In brick & mortar world, source being place where
operations are carried out, it is not workable in current scenario where the traditional
production chain is missing. Further, he opined that gross basis taxation in such situation is
difficult when on overall basis business is making loss.
Mr. Rohinton Sidhwa, commented on the retrospective amendment in Sec 9(1) by virtue of
explanation whereby India has reserved its rights to tax services at source whether or not,
services are rendered in India or there is business connection in India. He further
commented that OECD does not tax services on source model, while UN model taxes some
services, but India taxes ‘all types of services’ on source model because otherwise the
service PE clause goes unprotected.
Mr. Rashmin Sanghvi, commenting on above explanation, stated that it only reserves right
to tax service & not goods. He opined that on grounds of equity, such explanation should be
applicable to goods also.
Ms. Carol Tello was of the view that residence concept & source are our traditional
concepts. She looks forward for a new system having connection with activity that is not
market based. Further, she was of the opinion that withholding tax is very difficult in such
situation. Further, she posed before the panel that is it really an income tax or should it be a
consumption tax?
Mr. Peter Blessing, opined that consumption tax i.e. GST is difficult as people & NGO’s will
oppose it.
Mr. Pranav Sayta concluded that withholdting tax looks difficult, even GST looks difficult.
‘What attribution to income generating country to be made without any other business
functions carried there’ is a question which goes unanswered? He commented that we all
are waiting for some change to happen.
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Session: TRANSFER PRICING DEVELOPMENTS (Option B)
7 December 2013
Session Chairman – Uday Ved, Senior Partner, KPMG, India
Co-ordinated and led by Caroline Silberztein, Baker & McKenzie, France
PANEL DISCUSSION- Interaction of Transfer Pricing and Base Erosion and Profit
Shifting: Is the Future still Arm's Length? How is the Changing Landscape affecting
OECD Transfer Pricing Guidelines?
Panelists: Akhilesh Ranjan, India; Michelle Levac, Canada; Marc Levey, USA; Peter Barnes,
USA; Vijay Iyer, India; Karishma Phatarphekar, India.
PANEL DISCUSSION - Transfer Pricing in Emerging Countries: What should Foreign
Investors know and do?
Panelists: Michelle Levac, Canada; Catherine Damelincourt, France; Monique van Herksen, The
Netherlands; Promila Bhardwaj*, India; T. P. Ostwal, India; Vinod Mangotra, India
Summary of the session
Mr Akhilesh Ranjan (Competent Authority India) reiterated
India’s stand against mandatory tax arbitration. He stated
that there is no uniformity across world on tax arbitration
and hence bilateral negotiations are more appropriate to
deal with such situations. He added that under Government
may soon provide clarity on the issue of Article 9(2) vis-àvis bilateral APAs. Responding to the question, he also
stated that ambiguity in use of the term “software code” in
the context of safe harbour rules, has been noted by the Government and it will soon issue a
suitable clarification in this regard.
Ms. Promila Bhardwaj explained the concept the location rent and location savings. He
stated in her analysis in 4 out of 5 US Court rulings, location savings were left with the lowcost manufacturer. In the context of Indian rulings on location savings, viz Li-Fung and GAP,
she stated that these judgments are not in conformity with India’s stand on UN Manual. On
this topic, Michelle Levac added that there is a need to revisit OECD’s guidance to ensure
that there is an appropriate balance.
Mr. T.P. Ostwal stated that India should consider its stand on inbound transfer pricing
adjustment vis-à-vis Indian multinationals as well. Mr. Vinod Mangotra strongly advocated
use of APAs for settling transfer pricing disputes in India for foreign investors investing in
India.
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Session: RECENT INTERNATIONAL TAX DEVELOPMENTS (Option A)
7 December 2013
Session Chairman – N. C. Hegde, Senior Partner, Deloitte, India
Speakers include:
Dan Berman, Partner, McGladrey LLP, United States: International Tax Developments in North
America
PANEL DISCUSSION- GROSS SOURCE WITHHOLDING v/s NET RESIDENCE CREDIT
A panel discussion led by Stef van Weeghel.
Panelists: James MacLachlan, UK; Sushil Lakhani, India; Marcus Desax, Switzerland; Dan
Berman, USA; N C Hegde, India; Shanker Iyer, Singapore.
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Summary of the session
Mr. Dan Berman, provided insight on US international tax developments, especially in North
America. He discussed the fiscal cliff i.e. US crisis in last year. The major reasons given by
him for such crisis were expiring Bush tax cuts and implementation of Obamacare taxes.
Further, he also provided deep insight into the FATCA provisions. He clarified that its an
additional tax and not a double tax. FATCA targets tax non-compliance by U.S. taxpayers
with foreign accounts.
Panel Discussion:
Mr. Stef van Weeghal, led the discussion and gave a background on Foreign Tax Credit
(FTC). He posed before the panelists that in a situation where withholding is generally on
gross basis, how to resolve double taxation issues?
Mr. Sushil Lakhani, spoke on peculiarity of Indian system of tax credit. He stated that there
are no formal rules for credit except provided in Article 23 or Sec. 91 of the Act. Generally,
only federal tax credit is allowed. Further, Supreme Court of India, on business income have
recognised that income subject to with-holding shall be on net basis. He further stated that
passive income are subject to withholding on gross basis as very minimal expenses are
associated with it. He further stated that Sec 199 provides for credit of taxes only in year in
which the income is taxed.
Mr. Dan Berman stated that US gives specified opportunities under public procedure to
demonstrate whether the payment subject to withholding tax should be on net basis. Further,
US generally does not tax foreigners capital gains. In general, foreign tax credit is limited to
resident. He further stated that credit allowed by treaty is subject to domestic law. He
commented that we often see timing mismatches because of change in tax year. Generally
India’s financial year ends in March and that in US ends in December. This is one of the
reason of mismatch. In US, he said that we have only one year of carry back available. He
added that in some cases change of tax year can be done but not in every case, the
Revenue will consider on case to case basis. Further, US is moving away from technical tax
payer rules and there are foreign tax credit splitter rules in US which are now followed.
Mr. Shankar Iyer, commented that a territorial tax system operates in Singapore. He further
stated that Foreign Tax Credit pooling system is in place where tax incurred outside
Singapore is put in a pool. Further, any unrealised credit cannot be moved further. He further
stated that because of low rates of taxes in Singapore, there is some limitation on credit
granted.
Mr. Marcus Desax gave insight on German rule on Foreign Tax credit. He says that there is
a mismatch in credit because of losses.
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Session: TRANSFER PRICING DEVELOPMENTS (Option B)
7 December 2013
Session Chairman – Shymal Mukherjee, Joint Head, PricewaterhouseCoopers, India
Speakers include:
Michelle Levac, Canada Revenue Authority & Chair of OECD Working Party 6: Transfer Pricing
Kamlesh Varshney, Commissioner of Income Tax (APA), India:
PANEL DISCUSSION- Future Business Models for Managing Global Companies: What
is the Global Overview of Transfer Pricing Disputes in Future? Would OECD and UN
Transfer Pricing Guidelines succeed in resolving them? How do the Indian and
Chinese Approaches differ from OECD Guidelines?
A panel discussion led by T.P. Ostwal.
Panelists: Akhilesh Ranjan, India; Michelle Levac, Canada; Peter Barnes, USA; Caroline
Silberztein, France; Jeffrey Owens, UK; G. C. Srivastava, India.
Summary of the session
Mr. Kamlesh Varshney stated that out of 11 other countries that have implemented ‘Safe
Harbour’, Indian safe harbour are more broad based manner. He stated that other countries
are providing for low-value-added intra-group services unlike India. On the issue of APA
filing deadline before the end of the financial year, Mr. Varshney stated that emerging
economies have appreciated this provision in Indian APA regime.
On OECD versus UN Transfer Pricing Guidelines debate, Mr. Akhilesh Ranjan stated that
there is no “in-principle” differences in UN and OECD, the difference is only on the approach.
Michelle Levac shared that during OECD’s interactions with business on digital commerce
taxability, they have received suggestions that we should not develop special PE definition.
Caroline Silberztein explaining the transfer pricing disputes in future, stated that intangibles
(IP) will remain a key area of debate. Definition, ownership, valuation etc are some of the
major issues in TP aspects of IP. Mr. G. C. Srivastava stated that he does not expect
reduction in Transfer pricing litigation in India. On the issue of location savings, Mr.
Srivastava stated that risk cannot be merely shifted on paper.
Akhilesh Ranjan stated that majority of pending MAP cases with India relate to IT/ITeS
sector. He stated that his team is in the process of developing model around comparable
companies and arrive it margins for the purpose of further discussions.
Session: Special Address by Revenue Secretary, Mr Sumeet Bose
7 December 2013
The Revenue Secretary Mr Sumeet Bose explained the federal structure and constitutional
set-up in India and its impact on taxes. He stated that India’s Tax-GDP ratio (including State
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taxes) is below peer nations. He said that “[This] is something which we have to carefully
consider as we move forward.”
The Revenue Secretary elaborated on improvements in State’s finances and that the States
are increasingly aware about tax reforms. Mr Bose stated that the fiscal deficit number on an
overall basis for States has come down below 2%. He also specifically mentioned greater
use of technology in State’s tax administration. This has lead to a situation where States as
well Center are well placed to ensure transition to GST, stated the Revenue Secretary.
On Transfer Pricing, Mr Bose stated that the major taxpayer concern is perhaps inconsistent
interpretation by tax administration in Transfer pricing audits. He stated that Government has
noted these concerns and has issued guidance wherever possible. Taxpayers have choice
to opt for regular tax audits, safe harbor, or APAs for Transfer Pricing disputes. He also
applauded Government’s change in
process of making laws/ rules. Inviting
stakeholder comments on new tax
developments, was most exciting part in
his tenure as Revenue Secretary, stated
Mr Bose. He added that Government is
contemplating creation of separate ‘DRP
charge’ instead of DITs, during carder
restructuring.
The Revenue Secretary also stated that
Government is not a compulsive litigator
and has already set monetary thresholds
for filing further appeals. He also stated that almost 30-35% of the cases referred to the
Board for filing SLP before Supreme Court, are actually rejected. Responding to a question
on revenue targets, Mr Sumit Bose stated that there is nothing wrong in setting collection
targets as Government has to collect taxes. But he added that there is no undue pressure
exercised on the officers for collections.
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Joint Final Session: RECENT INTERNATIONAL TAX DEVELOPMENTS IN INDIA
7 December 2013
Special Address: Mr.B. M. Singh, Chairman, Central Board of Direct Taxes, India
Panel Discussion – Recent Developments in Transfer Pricing in India
A panel discussion led by Vijay Iyer, Partner, Ernst & Young, India.
Panelists: Karishma Phatarphekar; G. C. Srivastava; Vinod Mangotra; Kamlesh Varshney;
Rajesh Simhan (all from India)
Panel Discussion – Recent International Tax Cases and other Developments in India
A panel discussion led by T.P. Ostwal.
Panelists: Punit Shah; Rohan Shah; N. C. Hegde; Bijal Ajinkya; Promila Bhardwaj* (all from
India)
Summary of the session
Mr. B. M. Singh, said that looking at the tax systems, taxman had always being one step
behind the assessee and tax consultant. He added that while taxman is wholly engrossed in
work before him of maximising revenue, he has to keep the macro need of Indian economy
in mind. The way taxman carries his work is viewed by foreigners as India. His objective has
to be to implement government policies and ensure transparent system.
He commented that the retro amendments are viewed as negatively by all. However, on the
positive side we have introduction of APA & safe harbour. It is said that we are BEPSing
now (it has become verb). Further, in terms of recent developments, he gave example of
TIN. He said TIN is a welcome step, in digital world, It leaves tax footprints, for AOs to follow
a trail. Further he added that to resolve foreignors issue we have AAR, DRP, MAP.
Panel Discussion on TP update in last 12 months:
Mr. Kamlesh Varshney, on APA, said that it’s a welcome step where both the parties are
engaged in negotiations. He added that if both are flexible & try understand each other’s
position, then such approach will resolve many cases.
Mr. Rajesh Simhan on ‘ Issue of shares’ commented that in Vodafone case Revenue was
one step ahead. He briefly discussed Bombay HC in Vodafone case. He posed before the
panel that does investment in share result in any income? And should TP be really applied?
Mr. Kamlesh Varshney gave APA approach to resolve ‘issue of shares’. He stated that
before issuing shares, if the assessee comes to us, we can work out price on which shares
can be issued. When taxpayer issues share at that price, the Revenue would have fairly
agreed to such valuation.
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Ms. Karishma Phatarphekar, speaking on Safe harbour rules, commented that one year
from its being in system has passed and nobody opted for it. She stated that larger risk is
that TPOs are moving to the definition by Safe harbour. Further, she stated that to do away
with documentation was intention of Safe Harbour, but it is still required to be maintained to
substantiate assessee’s position.
On this, Mr. Kamlesh Varshney said that we are not bound by the numbers which are
there in safe harbours. He further added that we look into the economic transactions.
Mr. Vijay Iyer, looking at one good part of Safe Harbour said that atleast safe harbour gives
a ceiling.
Mr. Vinod Mangotra discussed various recent cases. He discussed case of Delhi Special
Bench in case of LG Electronics [TS-11-ITAT-2013(DEL)-TP] on Advertising, Market and
Promotion where special bench had laid down 14 point criteria. He then discussed case of
Delhi ITAT in case of BMW India [TS-230-ITAT-2013(DEL)-TP], which contradicts the above
special bench decision on market intangibles.
Further, on BPO / KPO front, he discussed cases of Mumbai ITAT in Willis Proceessing
Services [TS-313-ITAT-2013(Mum)-TP] and Hyderabad ITAT in Capital IQ Information
Systems India Pvt. Ltd. [TS-720-ITAT-2012(HYD)-TP]. He also discussed cases of Mumbai
ITAT in Onward Technologies Ltd.[TS-94-ITAT-2013(Mum)-TP] and Ahemabad ITAT in
General Motors India Pvt. Ltd. [TS-215-ITAT-2013(Ahd)-TP] on foreign tested party. On
combined transaction approach, case of Bangalore ITAT in Toyota Kirloskar Motors Pvt.
Ltd.[TS-732-ITAT-2012(Bang)-TP] was discussed by him, which he believed to be very fact
specific.
Panel Discussion on recent international tax update
Mr. Rohan Shah, discussed Delhi HC in Infra soft [TS-592-HC-2013(DEL)] where income
from licensing of computer software, was held not taxable in India. The court held that there
was no transfer of copyright. The court held that the transaction involved transfer of
‘copyrighted article’ which does not give rise to royalty income. He added that while ruling in
favour of the assessee, the court have discussed various jurisprudence in this area. Further,
the comparison of DTAA and domestic law was also brought by the court.
Mr. N. C. Hegde, pointed out that Delhi HC did not bother to discuss retro amendment on
royalty, which if considered would be of great help to the assessees. He also touched upon
very briefly on Bombay HC in Vodafone case, as it was discussed at length in previous
sessions.
Mr. Hitesh Gajaria, discussed Madras HC in Verizon [TS-577-HC-2013(MAD)] where
payment for international leased circuits were held taxable in India as royalty. He added that
Court ruled payment to be royalty on both front: equipment royalty and process royalty.
According to him, the Court was very much carried away by retro amendment expanding the
term ‘process’. The Court observed that the definition of royalty in Act and DTAA are pari
materia. According to him, the Mad HC did not consider Nokia case wherein it was held that
retrospective amendments do not travel to treaties. In this sense, Mad HC had gone
overboard.
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Mr. N. C. Hegde, also added that Madras HC decision needs reconsideration, as this trend
is very threatening.
Ms. Bijal Ajinkya, discussed cases of Delhi HC in Angeilqu Intl [TS-498-HC-2013(DEL)]
and Allahbad HC in Allied Exim [TS-574-HC-2013(ALL)] on export commission. The courts
have held that circular no. 7 of 2009 withdrawing earlier circulars to operate prospectively. It
was held that assessee not in default for non-deduction of tax since payments were made
prior to issue of such circular no. 7 / 2009.
This hand-out briefly summarizes a selection of opinions and observations expressed by individual
participants at the FIT event. The synopsis has been brought to you by Taxsutra.com, which is a one
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