The OECD has waged a long and hard fought battle against the so-called tax havens, and although most of these countries have made some level of commitment regarding transparency and compliance, the battle is far from over. While OECD countries are requiring freedom of information, and also some sort of regulations for preventing rampant tax evasion by corporations and high net worth individuals, the fact remains that there are still many low-tax or tax-free havens available to maximise the profitability, and minimise the tax liability.
The April announcement by the G20 voiced strong concerns and promised a crackdown on non-cooperative jurisdictions that failed to implement international standards of transparency and exchange of banking information for tax purposes. Then, the OECD Secretary-General Angel Gurr?a in a recent article mentioned how compliance would ?mean an obligation to keep reliable books and records and provide access to information about beneficial ownership and banking transactions.?
Finally, on April 24, 2009, the G7 Finance Ministers and Central Bank Governors released a statement urging the OECD, FSB, and FATF to ?intensify their work in conducting objective peer reviews of countries? efforts to strengthen international standards in taxation, prudential supervision, and AML/CFT, respectively and to identify non-cooperative jurisdictions?.
Simply put, tax havens are a pervasive problem for most countries, and India is no exception. A tax haven is essentially a tax-free or low-tax jurisdiction where companies can incorporate for all non-resident transactions, while availing tax benefits and credits. Similarly, individuals can become residents of certain jurisdictions and similarly avail of tax-breaks on their personal income and capital gains. While the exotic locations such as the Cayman Islands, British Virgin Islands (BVI), Bermuda and Monaco have had an enduring relationship with European and North American corporations and High Net-worth Individuals (HNI?s), increasingly in the recent past there have been strong crackdowns on these tax-free venues with no real nexus to where the business stems from. However, there are also countries with legitimate business practices and reasonably solid corporate law structures such as Singapore, UAE, and Cyprus that offer much lower corporate income tax rates. They, however, have a clause in their Double Taxation Avoidance Agreement (DTAA) with most countries that limits the availability of tax benefits as a primary purpose, effectively eliminating the concept of a shell company. Whether this is enforced judiciously is unclear.
India has an effective corporate income tax rate of approximately 33.9%, and this is the bane of corporate India?s existence. Lower tax options are extremely attractive, but it is important that the country where another entity is established has a DTAA with India, to eliminate ambiguity in tax compliance, as well as to get the benefits of relocation. This reduces the attractiveness of BVI, Cayman, Bahrain, or even Hong Kong. While Cyprus is a location of choice for the EU and OECD countries, it isn?t as attractive for India, essentially leaving the UAE and its new tax-free economic zones as an attractive option. And then, of course, there is Mauritius. Mauritius is a jurisdiction that has perfected the art of doing business with India, in an above-board, regulated, and systematic manner. A strong DTAA in place, the authority of a Supreme Court verdict in its corner, the implicit and explicit understanding that it is a preferred jurisdiction, and the sheer quantum of business being done, makes Mauritius the sole piranha in a shark tank full of goldfish. It isn?t always easy to incorporate in Mauritius however, and stringent criterion must be met. Also, Mauritius is now more or less an anomaly and one wonders how much longer such a situation will be allowed to exist, although at present not much seems to be changing.
India, like the OECD, is waking up to the prevalent situation of tax avoidance and treaty shopping in tax havens. In countries with which it has DTAAs, it is renegotiating and amending the treaties to incorporate more stringent measures of tax assessment, a clearer idea of where the tax accrues and is payable, the criteria that need to be met to establish residency and permanent establishments, and as mentioned above, the limitation of benefits/ the primary purpose clause. The primary purpose clause especially opens the door to greater scrutiny, and interestingly, Mauritius does not appear to have such a clause in its treaty with India.
Treaty shopping is for the most part discouraged, but in today?s global scenario, it has become an unavoidable necessity to ensure competitiveness, and to prevent other entities from taking a first mover advantage. Rest assured that there will be more stringent criterion, and the OECD, EU, G20, and individual countries will do their best to reduce the effectiveness of these tax havens. How successful they will be would depend on the level of compliance these countries agree to, and the actual implementation. Until then, overseas investment vehicles?the colloquial escape clause invoked for the adrenalin rush a stagnant global business requires?will survive, thrive and evolve.
?The author is a sports & corporate attorney at J Sagar Associates. These are his personal views