Sunday, March 3, 2013

It's enough of treaty shopping

Having lost billions in treaty shopping while honouring the clauses of the DTAA signed with other nations, India is now on a renegotiation spree. But as the government signs new treaties with other tax havens it must ascertain that the clauses are foolproof so that shell companies are prevented from taking undue advantage of the tax provisions. by Gyanendra Kumar Kashyap

Date: August 2, 2010. Venue: Bombay High Court. The prolonged tussle between Vodafone Plc and the income tax department, which dates back to 2007, started all over once again with Vodafone holding on to its ground about not being liable to pay the $2 billion tax demanded by the Indian government and the government toeing the line that it is the location of the assets and not the jurisdiction of transaction that is the primary issue.

For the uninitiated, the argument of Vodafone is based on the logic that as Vodafone International Holdings BV (a company registered in the Netherlands), CGP Investments (a Cayman Islands based company) and Hutchison International (HTIL) are all foreign companies and that the transaction was structured through Mauritius, capital gains cannot have been accumulated within India. What probably works in the favour of Vodafone is the fact that India and Mauritius have a double taxation avoidance agreement (DTAA) between them and hence it would not be possible for the Indian government to apply capital gains tax on transactions that are already taxed within Mauritius.

Consider yet another case wherein the Mumbai Income Tax Appellate Tribunal in July 2010 gave its verdict on a 15-year-old pending case whereby Linklaters (a UK based law firm) has been asked to pay tax to the tune of `230 million on its India related services after having debated for years whether the law firm was eligible for the Indo-UK DTAA or not.

The catchwords in the above cases are DTAA and tax havens like Mauritius. DTAA is an agreement between two nations based on the philosophy that corporates or individuals with businesses in two countries do not end up paying tax on the same income twice i.e. in the country of their origin as well as in the country where they are operating in. And tax havens are places or states where certain taxes are levied at low rates (Mauritius, Cyprus, Luxemburg, et al, are tax havens).


Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).

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