There may be no hiding from the taxman?even in offshore havens. Hoping to milk M&As some more, the finance ministry is firming up plans to go after entities set up by Indian companies in offshore tax havens to either finance buyouts or to park the profits of a target company.
To do this, the finance ministry is planning to rewrite the tax laws to bring in the concept of controlled foreign corporations (CFCs). This could be the biggest innovation in the taxation regime involving domestic companies, as they move to become multinationals.
OECD countries, where M&As are fairly routine, have made the CFC tax route popular. CFCs are offshore subsidiaries in low tax jurisdictions or tax havens such as Mauritius, through which companies route their profits or acquisitions to lower their tax burden in their country of origin.
Sources said CFC laws?or at least their definition?are likely to be introduced in the Direct Tax Code, which is set to replace the existing Income-Tax Act. The issue was also discussed at an international tax conference held by the ministry of finance recently. The move would also help fill government coffers, as a number of recent M&As by Indian companies have escaped the tax net because they were carried out by their offshore subsidiaries.
A case in point is the recent Hutch-Vodafone deal. The stake sale was carried out by Hong Kong-based Hutchison International and routed through CGP Investment (Holdings) in the Cayman Islands to Vodafone. The controlling companies of Hutch Essar Ltd are Mauritius-based, which has a double taxation avoidance agreement (DTAA) with India. So, there is no tax liability in India, Hutchison has said.
Sources pointed out that such an overarching provision in domestic tax laws would also help tide over the provisions in DTAAs that India has with over 50 countries. Rahul K Mitra, partner, international taxation and transfer pricing, PricewaterhouseCoopers, said, ?CFC rules would discourage setting up artificial buffers to escape tax on passive income such as dividends and capital gains by a number of Indian companies.?
Mukesh Butani, partner, BMR & Associates, however, said, ?It is too early for India to think of a CFC regime. If such a regulation is being considered as anti-tax avoidance, it has to be very clearly caliberated to understand the tax leakages.? CFC regulations should also be brought about through a consultative process, he added.