In the wake of globalisation, MNCs are looking to expand their footprints across the globe. With the expansion of the business, companies also resort to various methods of tax planning. As far as the tax planning has been done to mitigate risk, it is acceptable. However, with MNCs resorting to avoidance techniques, governments have started introducing anti-avoidance measures. Various countries have introduced these measures in the form of Specific Anti-avoidance Rules (SAAR) or a separate set of anti-avoidance provisions in the form of General Anti-avoidance Rules (GAAR) under the respective tax laws.
In India, GAAR was originally introduced in the Direct Taxes Code (DTC) in 2009 to curb the ‘impermissible avoidance arrangement’ entered into by a person to avoid taxes. The Finance Act, 2012 introduced GAAR in the Income-tax Act, 1961. It appears that Indian GAAR provisions are based on GAAR provisions already existing in some of the countries, particularly South Africa. The GAAR provisions come into effect from April 1, 2017 i.e. Assessment Year (AY) 2018-19.
Similarly, the tax treaties have also been amended to focus on tackling aggressive tax avoidance and treaty abuse. In 2013, the OECD and G-20 countries adopted a 15-point Action Plan to address Base Erosion and Profit Shifting (BEPS) to ensure that profits will be reported where the economic activities that generate them are carried out and where value is created. One of the recommendations of the OECD requires the countries to agree to include anti-abuse provisions in their tax treaties, including a minimum standard to counter treaty shopping. It is under this agenda that the bilateral tax treaties are to be modified. The modification would be carried out through the Multilateral Instruments (MLI). It would be interesting to see how countries would adopt this instrument to incorporate the BEPS measures.
As per news reports, the government is likely to soon issue guidelines on GAAR to provide clarity on various aspects. It would be interesting to see whether the guidelines would provide detailed clarifications along with various illustrations or it would only provide broad-based principles for the taxpayers and the tax department to interpret. One would expect that the guidelines would deal with, inter alia, the following issues relating to the GAAR provisions:
A concern was raised with respect to the applicability of GAAR to the existing investment / structure. In June 2016, the government extended the date for grandfathering of investments for the purposes of GAAR to April 1, 2017 as compared to the earlier date of August 30, 2010. However, GAAR will apply to any arrangement, irrespective of the date on which the arrangement was entered into, if the tax benefit from that arrangement is obtained on or after April 1, 2017. It would be apt if after the introduction of GAAR provisions, the tax benefit arising out of arrangements entered into before April 1, 2017, would also be grandfathered. This would be in line with government’s intention to introduce laws with prospective effect and attract foreign investments into India.
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The provisions of GAAR contain a non obstante clause due to which GAAR will override all other provisions of the Act. Accordingly, it will also override specific SAAR provisions under the Act. It is a well-settled principle that where there is a specific provision, the general provision will not apply. The Shome Committee had also in its final report on GAAR discussed the concerns arising out of interplay between GAAR and SAAR highlighting that in many countries, GAAR does not apply where SAAR is applicable.
One may expect further clarity on the issues revolving around the prescribed threshold limit of R30 million and also on the manner of determination of the said limit in the hands of the taxpayer for the purpose of determining the amount of ‘tax benefit’. Further, it would be apt if the guidelines provide clarity on some of the subjective terms used in the GAAR provisions, e.g., ‘significant’ ‘lacks commercial substance’, etc.
As highlighted by the Shome Committee, there is a thin line of differentiation between tax mitigation and tax avoidance; therefore, an illustrative list of tax mitigation or a negative list for the purpose of invoking GAAR should be provided in the guidelines or by way of amendments in Budget 2017.
The clarity provided in the guidelines and/or Budget 2017 amendments with respect to GAAR will reveal much about various aspects such as investors’ faith in the tax system, judicial perspectives on taxation and legal interpretation, legislature’s inclinations towards drafting the laws and willingness to confront politically sensitive issues or their tendency to delegate the tough decisions to administrators and courts.
The author, Girish Vanvari is national head of tax, KPMG in India. Views are personal