Direct Taxes Code a step towards stable, clear & uncomplicated tax policy

The draft Direct Taxes Code with its proposals to cut the corporate tax to 25% and trim exemptions has generated a lot of interest among domestic companies.

However, Wilbert Kannekens, partner and head of Global International Tax Group, KPMG feels that for multinational companies in India, the draft code fell a little short. In a conversation with FE?s Surabhi, Kannekens discussed the issues along with the impact of Obama administration?s tax proposals. Excerpts:

What are your views on the draft Direct Taxes Code released by the Indian government?
It contains some interesting proposals like reducing the corporate income tax rate for both domestic and foreign companies to 25%, which is a good and competitive rate. But Indian authorities also wanted to at least keep their revenue at the same level and so have tried to broaden the tax base by cutting exemptions to companies.

Another interesting proposal is that it allows advance pricing agreements (APAs). This is a good step as multi-national corporations operating in the country would like to have certainty on transfer pricing and their tax liability in India. APAs would help in this. But having said this, it is also necessary that the tax authorities have the necessary experience to handle such agreements. They should also have efficiency and speed in their working.

How far do you think would the Direct Taxes Code help improve India?s investment climate?
Well that would be a little difficult to establish. While tax is one of the reasons that govern a company?s investment into a country, it is not the only reason. It, however, does play a role. But more important than policies and legislations is that the tax system should be clear and uncomplicated. Companies also look for stability in tax policies. I think that the Direct Taxes Code has taken a few steps towards these goals.

What is your view on the Code?s proposal to allow domestic law to override the double tax avoidance agreements?
Let me ask if you think that it is correct that domestic law overrides tax treaties? In theory, it is not correct. But in practice, many countries are doing this and India has decided to follow them. The move actually won?t have much of an effect on foreign companies working in India. Rather it will impact Indian multinational companies that invest abroad.

From an international perspective, what do you think are the shortfalls in the Direct Taxes Code?
I think from an international perspective, allowing domestic law to override the tax treaties will probably may scare off foreign companies even though it may have not have much impact on them. The other issue is around the residency of foreign countries in India depending on the level of their management and control. Unless it is clearly defined, it is an open norm and there is going to be lengthy litigation for companies.

What impact will Obama?s tax proposals have on Indian businesses?
I think the whole world is looking at the Obama proposals, simply because of its tax aspects. I don?t think it will have any major impact on Indian companies. The $200 billion additional tax bill is going to be paid by American companies in America. It looks like it is not going to have a direct effect on their investments abroad or on companies in India unless they have in very specific circumstances invested in the US or investments outside the US that are held by a US company. For example a company in India, and will have a company in the US that holds all its operations then it s going to impact. But that?s something that won?t happen very often.

On concerns of outsourcing activities for US companies in India- we believe it is unlikely it will affect those activities. One of the effects may be US companies sell their India outsourcing business and just become its customers.

The OECD last year came out with a list of countries that act as tax havens. How effective do you think has it been in mobilising global support on the issue?

It?s certainly had an effect but it also depends on how you look at it because in the whole tax haven debate I think, you need to make a distinction between tax evasion, which is mainly around individuals and taking their money offshore, which is absolutely not allowed. All governments are trying to work on this. We are seeing huge developments are taking place on the exchange of information and bank secrecy. Almost all countries in have announced that they will change their rules and adapt to international standards for exchange of information. Whether it will happen for banks as well or not is debatable, but they are clearly under pressure with cases going on in Switzerland and Liechtenstein.

This doesn?t interest companies that much. But there?s also a discussion around tax havens. It may be interesting for corporates to have legal entities there. But there?s debate going on this as well. I do expect some pressure on smaller tax havens with small local economies that don?t have much basis of their own. On the other hand, in international law it is a widely expected principle that countries are sovereign in how they set up their tax system and tax their residents.