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
(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
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