Column : Shell-shocked

Written by Menaka Doshi | Updated: Feb 21 2013, 07:31am hrs
Much has been said about the Indian tax departments attempt to tax an issue of shares by Shells Indian subsidiary to its foreign parent. This forced conversion of a capital receipt into an income comes unfortunately at a time when India is still struggling with the Vodafone matter.

Despite a many-year court battle and a resounding victory at the Supreme Court, Vodafone lost the war on retroactive amendments to tax law. Now, a government embarrassed by its own actions doesnt know what to doto tax Vodafone or not. The tax department is clearit wants to win a lost case. But ruling politicians are struggling to find a solution that brings in revenue without denting Indias image.

Interestingly, many foreign tax experts, who were once firmly opposed to India taxing Vodafones offshore transaction, have in recent times softened their stance. Thats because their own countries are facing a similar Hobsons choicebetween encouraging investments and garnering revenue.

So, when one newspaper headline positioned India as anti-FDI, on account of its tax actions against Vodafone, Nokia, Shell and others, I thought you would find it interesting to know that other countries are being accused of the same.

A few months ago, events in the UK eclipsed Indias Vodafone moment of shame. Starbucks UK, compelled by public and political pressure, committed to pay a voluntary tax of 10 million pounds each year for the next 2 years. Whats a voluntary tax, you ask Well, Starbucks UK will not claim the deductions for royalties and inter-company charges that UK tax law entitles it to. Critics say these charges are a big reason why Starbucks declared a profit (and hence paid tax) only 3 times in its 14-15 years in the UK.

Before you get all righteously indignant about a company being forced to pay a voluntary tax, sample this excerpt from the UK Parliamentary Accounts Committee hearing:

Committee Chair Margaret Hodge: It just doesnt ring true. The two are inconsistent. You have run the business for 15 years and you are losing, and you are carrying on investing here. It just doesnt ring true.

Troy Alstead (Starbucks): We are committed to this marketplace and to our customers. We know that to be a successful...

Committee Chair Margaret Hodge: Yes, but you are losing money.

Troy Alstead (Starbucks): To be a successful global company we have every intention to make this market successful and profitable.

Committee Chair Margaret Hodge: And you have tried for 15 years and failed, and you have promoted the guy who failed over 15 years and succeeded in one year only. That just doesnt ring true, Mr Alstead. That is what frustrates taxpayers in the UK. Youve got to give us a better explanation.

In the same hearing transcript, theres a bordering-on-comic conversation between Committee Chair Margaret Hodge and Amazon rep, Andrew Cecil. She says, since she shops at amazon.co.uk and pays Royal Mail charges on delivery, she expects the books are being purchased from a UK company. Cecil says that Amazon.co.uk is a trading name for a Luxembourg company, Amazon EU Sarl.

Committee Member Stephen Barclay: Who owns the Luxembourg company

Andrew Cecil (Amazon): is owned by a holding company, which is a subsidiary of our group companies.

Committee Member Stephen Barclay: Where is that located

Andrew Cecil (Amazon): holding company is also in Luxembourg.

Committee Member Stephen Barclay: It is also in Luxembourg. seems a slightly artificial arrangement, doesnt it

Andrew Cecil (Amazon): I am not familiar with the details of the holding company, but I would be very happy to come back to the Committee.

In Australia, assistant treasurer David Bradbury raised many a corporate eyebrow last November when he publicly described Googles double-Dutch Irish sandwich structure (exporting profits to lower tax jurisdictions such as Netherlands and Ireland) as an instance of digital disruption that is challenging some of the concepts that form the building blocks of our current international tax architecturesource, permanent establishments and residency.

Similar sandwich structures have drawn the ire of American politicians as well. Late last year, the Senator Carl Levin-headed Permanent Sub-Committee on Investigations delved into the issue of profit shifting to investigate how a US company games the transfer pricing process to sell or license valuable assets that it developed in the United States to its subsidiary in a low tax jurisdiction for a price that is lower than fair market value. Levins statement details structures used by Microsoft and HP to demonstrate how some multinationals use our current tax system to engage in shams and gimmicks to avoid paying the taxes they owe.

In short, MNCs everywhere are under scrutiny like never before. Notice nowhere are they being accused of evasion or breaking the law. Instead the accusations are gaming the system, engaging in gimmicks, challenging existing tax architecture and tax immorality. Nor am I suggesting that they all use similar methods of avoidance, whether in India or abroad. Or that existing laws are completely powerless. For instance, India has used MAT effectively in order to tax seemingly loss-making companies. And at no point am I defending Indian Revenues aggressive tax demand on Shell. The broader point this column makes is, in their efforts to protect and expand their tax base, many countries are actively risking the anti-FDI label!

Ironic isnt it, the same UK asking India not to tax a British company for what was essentially the transfer of an Indian asset, is now asking a US company to pay tax on profits it does not make in the UK!

So, is what Indias doing very different In principle, no (think Vodafone, not Shell)! But Indias manner of going about it is distinct.

UKs tax department did not ask Starbucks to pay a voluntary tax, the company caved to public and political pressure. In the UK, the US and Australia, the battle against non-tax paying MNCs is being led by politicians. Politicians that are influenced by occupy campaigns, under pressure to repair country balance sheets and looking for ways to assuage out-of-work constituents and level the playing field. And they are doing all this by working to change laws.

So, moments after David Bradbury exposed Google, he issued an exposure draft containing amendments to Australias transfer pricing laws and anti-avoidance rules. The UK will bring GAAR into effect soon. The UK Public Accounts Committee has proposed further legislative changes to curb avoidance/profit shifting and has called for the HMRC to be more aggressive in confronting corporate tax avoidance. The US is working its might against tax havensfrom lifting Swiss secrecy to trying to blocking profit sheltering in Cayman Islands (Senator Sanders & Rep Schakowsky have introduced the Corporate Tax Dodging Prevention Act). FATCA is another instance of US legislative action to curb avoidance.

The key point is that, in most of these countries, the focus is first on tightening laws and then enforcement. But in India its the other way roundParliament often lags behind the ambition of the tax department.

India is peculiar in that it says one thing and does another. Ahead of every Union Budget politicians and businessmen lobby for lower taxes and corporate concessions and soon after, tax officials work hard to deny the samebecause we are always short of revenue. The Finance Minister tours the world promising a fair and stable tax regime and while hes away his tax officers are busy recharacterising equity into debt.

Nowhere is this disharmony more evident than in our treatment of the Mauritius tax benefit. In 2000, the government issued Circular 789 to allow those investing in India the advantage of lower taxes in Mauritius, if they had a Mauritius tax residency certificate (TRC). Since then many in the tax department have opposed this tax benefitin spirit and action. So investors are confused by a treaty that has for the longest time been on the brink of re-negotiation, a tax benefit that stands till the treaty is amended and a tax department that would like to wish away the TRC.

Indias weakness lies in its tactical approach. We are always looking for short-term fixes to crises. As a result, baseless tax demands to temporarily boost collections far outnumber genuine efforts at preventing base erosion. Thats why the latest transfer pricing controversies are blamed more on the pressure to meet annual revenue targets than tax vigilance. A change in approach to longer term tax reform and clearer laws would make it easier for other countries to include us in their multi-lateral efforts to protect tax borders. This weekend at the G20 meet, the UK, France and Germany decided to combine forces against tax avoidance. Can any investor afford to avoid the US, the UK, France, Germany, Australia and India

The author is corporate editor, CNBC TV18. Views are personal

Equal & Opposite is a column that explores business practices prompted by legal & regulatory action and vice versa