TAXED INDIA TAKES ON THE WORLDIndia is bracing itself for another major
row against a global tax rule to ensure it gets a fair share of the tax
pie, even as the dust it yet to settle over its tax dispute with British
mobile giant Vodafone. Last month, the government shot off a missive to
the United Nations saying it cannot be forced to accept
transfer-pricing rules of the Organisation for Economic Cooperation and
Development
(OECD) the club of rich countries as the norms restrict
Indias taxation rights. The letter was sent barely two weeks after the
government proposed sweeping changes in tax laws to target companies
that effectively do not pay tax anywhere. Most MNCs enter into a series
of transactions to move funds to their arms in tax havens and other
countries where income tax rates are far lower than India. One way to do
this is to buy services from their arm in India at less than the market
price or fair value and sell it at a higher price outside, thereby
booking profits overseas. Such transfer prices between related parties
are used to shift profits out of India, eroding our tax base. India has a
transfer pricing law to figure out how international transactions
within a group company must be priced. Rich countries, on the other
hand, have accepted OECDs guidelines on transfer prices which ostensibly
ensure that every country gets its fair share of tax. These rules are
set to become simpler as complex rules can be a barrier to crossborder
trade and investment. Simple rules make sense. But that does not resolve
Indias fundamental problem over OECDs norms being skewed in favour of
the developed world, especially when these countries are desperate to
retain their taxing rights in an uncertain economic environment. The
OECD model tax convention and transfer pricing guidelines have been
developed on the basis of consensus arrived at by the government of 34
countries (all developed countries). These guidelines only protect
countries that are party to such convention. Since governments of
developing countries are not party to the guidelines, it is improper to
suggest that they represent international agreed guidance knowing
fully-well that the concerns of developing countries have not been taken
care of , said Sanjay Kumar Mishra, joint secretary in Indias foreign
tax division in a letter to the United Nations Department of Economic
and Social Affairs last month. The communication articulated governments
concern over accepting OECDs standard of sharing of revenues between a
source country where income is generated and a residence country where
the company is housed. The worry is legitimate. Lets say a soap brand is
registered with a parent company in the US that has a subsidiary in
India. And Indian consumers largely use the brand. The question is who
gets to tax a larger share of profits India that is the source of
profits or US where the brand is registered. India fears it could be
deprived of getting its fair share of tax if OECD rules on transfer
prices are accepted as the benchmark. Increasingly, allocating profits
across countries are a challenge in transactions involving trade-marks,
trade names, patents, know-how, design and so on. Tax practitioners
reckon that India needs to strike a fine balance. MNCs that take on key
entrepreneurial risks would expect to earn a commensurate reward. If
Indian subsidiaries are set up as low-risk service entities, it would be
farfetched to expect disproportionate returns. So, the government needs
to have a conciliatory approach to avoid disputes, reckons Shefali
Goradia, Partner BMR Advisors. For now, the United Nations appears keen
that all developing countries should accept OECDs transfer pricing rules
based on the recommendations made by a group of non-governmental
experts way back in 1999. However, the government is clear that such a
panel does not have the remit to decide whether developing countries
should adopt OECDs guidelines and hence it should be revoked
immediately. Taxation is a sovereign right and India cannot be blamed
for taking an aggressive position to protect its own interests. A
research paper authored by Bret Wells and Cym Lowell of University of
Houston acknowledges that India has become a significant thought leader
on how to protect source-based taxation in the context of the
international treaty network. It is doing this to defend its tax base.
In fact, safeguarding the tax base has been the thrust of Indias Budget
this time round. The proposals target companies that effectively pay
taxes no-where researchers have coined the term state-less or homeless
income. A key proposal says that companies should pay tax on capital
gains if they derive value from an economic activity in India even if
their ownership changes hands in tax havens. Tax authorities went by
this principle when British mobile giant Vodafone bought a controlling
stake in Indias Hutchison Essar for nearly $11 billion. The argument was
that tax ought to be paid as the deal making involved an Indian asset.
The Budget has now proposed to change past laws to make Vodafone pay
tax. The global business community is obviously miffed. The government
though is in no mood to relent and has gone a step further to curb sharp
tax practices. Overall, budget proposals reflect Indias commitment to
the so-called sourcebased system of taxation to bring nonresidents under
the tax net. The message to the world at large is India cannot be taken
for granted at least on key tax matters. We are not bit players, after
all. – www.economictimes.indiatimes.com