Round-tripped FDI from tax havens under OECD review

Written by Arun S | New Delhi | Updated: Apr 14 2009, 05:12am hrs
Days after G-20 nations agreed to crack down on tax havens where nearly $11 trillion is parked, the Organisation of Economic Cooperation and Development (OECD) has begun a review of Indias foreign direct investment (FDI) policy to suggest measures that will ease sector-specific ceilings as well as look into issues of round tripping.

The first-of-its-kind reviewOECD Investment Policy Review of Indiais expected to propose measures to make the FDI policy more open and transparent, methods to improve data maintenance, clauses on security, and also look into the dependence on investment that is round-tripped from tax havens.

Round tripping is a common system of tax evasion where an investor using the tax holiday advantage in Mauritius or some other countrywith which India has a double taxation avoidance agreementto take money out of India only to bring it back disguised as foreign investment.

The money is routed through firms set up in these tax havens. Tax havens such as Mauritius (43%) and Cyprus (3%) account for almost half of the total FDI equity flows into the country. The countrys revenue department has been monitoring the capital flow from these two countries and have routinely objected to FDI proposals from there on fears of tax evasion.

Last week, the OECD had also come out with a list of countries that act as tax havens including Mauritius, Cyprus, Switzerland, Luxembourg, Liechtenstein, Austria, Belgium, Chile, Brunei, Guatemala, Singapore, Cayman Islands, Bermuda, Netherlands, Liberia, Bahrain and Bahamas.

The study is significant as it comes at a time when the global financial crisis has slowed down foreign investment into the country. Although India is not bound to implement the measures the OECD review suggests, it is hoping to use it as an image-building exercise in order to attract more foreign capital in the coming years, commerce officials said.

This will be the first OECD Investment Policy Review of India, so there is no previous review to compare it with; the approach of the investment policy review will be wholly consistent with that adopted in the OECD Economic Survey of India, which focused to some extent on FDI inflows. The report will be published by November or December 2009, Spencer Wilson, media relations manager (public affairs & communications directorate) of OECD, said in response to an e-mail sent by FE .

He said OECD maintains and develops the OECD Benchmark Definition of FDI, so it will work together to help India improve its investment statistics in the same way as it works with OECD member countries.

On OECDs outlook of FDI inflows into India this fiscal, he said, No country is unscathed by the economic crisis, but the relatively small share of the external sector, including FDI, in Indias economy compared to other major players means the country is less vulnerable to fluctuations in trade and investment flows.

So far FDI inflows have held up better in India this year than in other major recipient countries, he said, adding, like all its investment policy reviews of other countries, the India review will not include forecasts of inward or outward direct investment.

But governments officials said OECDs investment committee has conducted several meetings, both in New Delhi and at its headquarters in Paris, with representatives from the commerce and industry ministrythe nodal department for FDI policy.

The organisation has also sought more details on Indias FDI data maintenance methods (on collection of FDI data from different centres across the country, the effectiveness of coordination between them and the level of usage of IT in reducing errors in computation) and how the policy has addressed all the issues relating to security (clauses on investment protection and how the policy looks into investment that is considered a security threat).