Tax Anti-Avoidance Recent Developments & Updates
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1
Tax Anti-Avoidance Recent Developments & Updates
by CA R. BUPATHYPast President - ICAI
AGN INTERNATIONAL ASIA PACIFIC MEET
19th to 21st June
INDIA PERSPECTIVE
Partner R Bupathy & Co., India
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Withholding taxation and robust monitoring systems
Transfer Pricing mechanismProvisions to mitigate hardships
◦Assessment Procedures◦Mutual Agreement Procedures (MAP)◦Safe Harbour Rules (SHR)◦Advance Pricing Agreement (APA)
General Anti-Avoidance Rules (GAAR)
Measures to ensure Compliance of Tax Laws
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Comparable Data – Availability & Reliability
Subjectivity in adjustments High Demand Penal provisions Litigation Documentation
Transfer Pricing – Practical Difficulties
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Penal ProvisionsParticulars Penalty
Non-Maint of info or doc 2% of the Transaction ValueNon Furn of info or doc 2% of the Transaction ValueIncorrect Maint of info or doc 2% of the Transaction ValueIncorrect furn of info or doc 2% of the Transaction ValueNon-submission of audit report Rs. 1 LakhAddition to income – treated as concealment
Min penalty – tax sought to be avoided.Max penalty – thrice the tax avoided.
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1. Assessment procedures2. Mutual Agreement Procedure (MAP)3. Safe Harbour Rules4. Advance Pricing Agreement (APA)
Provisions to mitigate hardships
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Appln of TP provns, Addn to Income & Asst of Foreign Cos’
Draft Assessment OrderAssessee can file objections with DRPDRP to give directionsAO to pass Final Order Tax payment not enforceable till Final Order
1. Assessment Procedures
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2. Mutual Agreement Procedure
Permissible only if Treaty contains MAP clause◦Article 25 of UN Model or OECD Model◦Interpretation Issues◦CAs “shall endeavor” to reach a solution.
No obligation to reach a solution Time LimitParallel proceedingsArbitration
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Interpretation Issues
Benefits of Treaty denied to a resident of a State
CAs on their own initiative resolve questions of interpretation or application of the treaty
No specific provision to avoid double taxation in treaty
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Time Limit
Application for MAP◦Withholding Tax : within 3 years from
date of payment◦Others : Within 3 years from the date
of tax notification
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Parallel Proceedings
Application made for MAP Other proceedings can continue under
Indian tax laws Agreement reached under MAP To be implemented notwithstanding any
time limits in the domestic laws
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Eligible Assessee Eligible transactions Operating Margin
- Operating Margin means Profit before Int & Tax and exceptional items
3. Safe Harbour Rules (SHR)
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Operating Margins Sl.No
Eligible Intl Transaction Circumstances
(i) Software Dev Services TV <= Rs.500 Cr : OM min 20% of OETV > Rs.500 Cr : OM min 22% of OE
(ii) ITES TV <= Rs.500cr : OM min 20% of OETV > Rs.500cr : OM min 22% of OE
(iii) KPO OM min 25% of OE(iv) Intra Grp loan<=Rs.50 Cr INT min Base rate of SBI as of
30th June (PY) + 150 basis points(v) Intra Grp loan >Rs.50Cr INT min Base rate of SBI as of
30th June (PY) + 300 basis points
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Operating Margins (Cont….) Sl.No
Eligible Intl Transaction Circumstances
(vi) Corporate Guarantee (a) Commn/Fee min 2% p.a. on AG
(vii) Corporate Guarantee (b) Commn/Fee min 1.75% p.a. on AG
(viii) Contract R&D – Software Dev(wholly or partly)
OM min 30% of OE
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Sl. No
Eligible Intl Transaction Circumstances
(ix) Contract R&D – generic pharma drugs (wholly or partly)
OM min 29% of OE
(x) Mfre & export of core auto components OM min 12% of OE(xi) Mfre & export of non-core auto
componentsOM min 8.5% of OE
OM – Operating Margin INT - InterestTV – Transaction Value OE – Operating ExpenseAG – Amount guaranteed
Operating Margins (Cont….)
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Concept of significant risk For 5 years from AY’2013-’14 Option for lesser period Decision of assessee to opt out Time bound Procedure
Features of SHR
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Tax payer could file obj to CIT within 15 days
Time Bound Procedure
TPO to pass order within 2 months
AO to refer to TPO within 2 months
Appln by Tax payer to AO
CIT to pass order within 2 months
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MeritsCertaintySpecified yearsBenefit to opt outDemerits No relief against double taxation Persons in notified jurisdictional areas, tax
havens and low tax countries kept out MAP cannot be invoked
Merits & Demerits (SHR)
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Categorization of services Definition of KPO
Business process outsourcing provided mainly with the assistance or use of information technology requiring application of knowledge & advanced analytical & technical skills.
Issues
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Applies only to Intl transactionsVoluntaryTax-payer initiatedNot a time bound processAny assesseeNo threshold limitTerm – Max 5 years
Advance Pricing Agreement
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APA - Types
Unilateral APA◦Application to DGIT
Bilateral & Multilateral APA◦Application to Competent Authority of India
(CAI)
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Request for pre-filing consultation to be filed by taxpayers
Pre-filing consultation bwn taxpayer and revenue
Filing APA appln with applicable fees
Preliminary processing and removal of deficiencies in appln
Application proceeded with
Processing by APA Team/ Competent Authority• Meetings• Calling for docs• Visit to applicants business premises• Enquiries
Manually agreed drafts of APA
Central Govt. approval
APA agtt
Advance Pricing Agreement - Procedure
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Request for Bilateral or Multilateral
A tax treaty exists between India & other country(ies)
The tax treaty contains an article on MAP In case of double taxation there should be
an enabling clause in the tax treaty.◦Refer Art 9(2) of OECD Model Convention
The corresponding APA program exists in the other country
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Merits of APA
Tax certainty on ALP of covered transactions
Reduced risk of double taxation through Bilateral/Multilateral APAs
Reduced compliance costsCertainty on records & docs
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APA – Application fees
Amount of international transaction
Fee
Not exceeding Rs.100 crores 10 lacs
Not exceeding Rs.200 crores 15 lacs
Exceeding Rs.200 crores 20 lacs
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Compliances
Annual Compliance Report (ACR) ◦Within 30 days from due date of filing
ITR◦Non-furnishing of ACR – cancellation of
APA by CBDT◦Mandatory Compliance Audit by
jurisdictional TPO (6 months)
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APA - Issues
Withdrawal of applicationValidity of APA when actual TO exceeds
the amount specified in applicationCan Unilateral APA be converted into
Bilateral or Multilateral APARe-opening past assessments
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Consequences:a) Disregarding, combining or re-characterising any
step in, or a part or whole of the IAA;b) Treating the IAA as if it had not been entered into;c) Disregarding any accommodating party;d) Deeming connected persons to be one and the
same person;(contd.,)
Impermissible Avoidance Arrangement (IAA)
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Consequences: (e) Re-allocating amongst the parties;
(i) Any accrual, or receipt of a capital or revenue nature; (ii)Any expense, relief or rebate
(f) Treating place of residence or situs of an asset or of a transaction at a place other than the; (i) place of residence; (ii) location of the asset; (iii)location of the transaction;as provided in the arrangement.
(contd.,)
Impermissible Avoidance Arrangement (IAA)
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Consequences:(g) Looking through any arrangement by lifting the
corporate veil;For the purpose of this section:(i) any equity may be treated as debt or vice versa;(ii) any accrual or receipt of a capital nature may be treated as revenue in nature or vice versa;(iii) any expenditure, deduction, relief or rebate may be re-characterised
Impermissible Avoidance Arrangement (IAA)
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Main purpose is to obtain a “TAX BENEFIT” and
(a) Creates rights or obligations which are not ordinarily created between persons dealing at arms length;
(b) Results directly or indirectly in the misuse or abuse of the provisions of the Act;
(c) Lacks commercial substance;(contd.,)
Definition of IAA
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(d) Entered into or carried on by means or in a manner which are not ordinarily employed for bonafide purposes;(e) Burden of proof is on the assessee to establish that the arrangement is not an IAA
Definition of IAA (Cont…)
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GAAR Procedure
AO – Reasons to believe IAA – Notice to Assessee Referral to CIT with reasons Assessee files objections (max 60 days) CIT considers the reference and objection:
◦If CIT rejects reference, to issue directions to AO within 1 month from end of month notice expires
◦If reference of AO accepted, reference to Approving Panel within 2 months
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GAAR Procedure
Approving Panel to issue directions to AO within 6 months
AO to pass Orders as per directions of Approving Panel
The directions are binding on –◦the assessee; and◦the CIT and his sub-ordinates
No appeal under the Act lies against such directions