Tax Anti-Avoidance Recent Developments & Updates

1. AGN INTERNATIONAL ASIA PACIFIC MEET Tax Anti-Avoidance Recent Developments & Updates 19th to 21st June • INDIA PERSPECTIVE by CA R. BUPATHY Past President - ICAI Partner R Bupathy & Co., India

2. Measures to ensure Compliance of Tax Laws • Withholdingtaxation and robust monitoring systems • Transfer Pricing mechanism • Provisions to mitigate hardships • Assessment Procedures • Mutual Agreement Procedures (MAP) • Safe Harbour Rules (SHR) • Advance Pricing Agreement (APA) • General Anti-Avoidance Rules (GAAR)

3. Transfer Pricing – Practical Difficulties • Comparable Data – Availability & Reliability • Subjectivity in adjustments • High Demand • Penal provisions • Litigation • Documentation

4. Penal Provisions

5. Provisions to mitigate hardships 1. Assessment procedures 2. Mutual Agreement Procedure (MAP) 3. Safe Harbour Rules 4. Advance Pricing Agreement (APA)

6. ASSESSMENT PROCEDURE

7. 1. Assessment Procedures • Appln of TP provns, Addn to Income & Asst of Foreign Cos’ • Draft Assessment Order • Assessee can file objections with DRP • DRP to give directions • AO to pass Final Order • Tax payment not enforceable tillFinal Order

8. MUTUAL AGREEMENT PROCEDURE

9. 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 Limit • Parallel proceedings • Arbitration

10. 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

11. Time Limit • Application for MAP • Withholding Tax : within 3 years from date of payment • Others : Within 3 years from the date of tax notification

12. 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

13. Arbitration • No provision for arbitration in India tax treaties

14. SAFE HARBOUR RULES Applicable from 18th September 2013

15. 3. Safe Harbour Rules (SHR) • Eligible Assessee • Eligible transactions • Operating Margin - Operating Margin means Profit before Int & Tax and exceptional items

16. Operating Margins

17. Operating Margins (Cont….)

18. Operating Margins (Cont….)

19. Features of SHR • Concept of significant risk • For 5 years from AY’2013-’14 • Option for lesser period • Decision of assessee to opt out • Time bound Procedure

20. Time Bound Procedure • AO to refer to TPO within 2 months • Appln by Tax payer to AO • Tax payer could file obj to CIT within 15 days • TPO to pass order within 2 months • CIT to pass order within 2 months

21. Merits & Demerits (SHR) • Merits • Certainty • Specified years • Benefit to opt out • Demerits • No relief against double taxation • Persons in notified jurisdictional areas, tax havens and low tax countries kept out • MAP cannot be invoked

22. Issues • 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.

23. ADVANCE PRICING AGREEMENT Applicable from 01st July 2012

24. Advance Pricing Agreement • Applies only to Intl transactions • Voluntary • Tax-payer initiated • Not a time bound process • Any assessee • No threshold limit • Term – Max 5 years

25. APA - Types • Unilateral APA • Application to DGIT • Bilateral & Multilateral APA • Application to Competent Authority of India (CAI)

26. Advance Pricing Agreement - Procedure 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

27. 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

28. Merits of APA • Tax certainty on ALP of covered transactions • Reduced risk of double taxation through Bilateral/Multilateral APAs • Reduced compliance costs • Certainty on records & docs

29. APA – Application fees

30. 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)

31. APA - Issues • Withdrawal of application • Validity of APA when actual TO exceeds the amount specified in application • Can Unilateral APA be converted into Bilateral or Multilateral APA • Re-opening past assessments

32. GENERAL ANTI-AVOIDANCE RULE Applicable from FY 1st April 2015 AY 2016-’17

33. Impermissible Avoidance Arrangement (IAA) Consequences: • Disregarding, combining or re-characterising any step in, or a part or whole of the IAA; • Treating the IAA as if it had not been entered into; • Disregarding any accommodating party; • Deeming connected persons to be one and the same person; (contd.,)

34. Impermissible Avoidance Arrangement (IAA) 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.,)

35. Impermissible Avoidance Arrangement (IAA) 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

36. Definition of IAA Main purpose is to obtain a “TAX BENEFIT” and • Creates rights or obligations which are not ordinarily created between persons dealing at arms length; • Results directly or indirectly in the misuse or abuse of the provisions of the Act; • Lacks commercial substance; (contd.,)

37. Definition of IAA (Cont…) (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

38. 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

39. 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

40. Thank you