Indian Tax Authority Considers Ways To Reduce Use Of Tax Havens

by Mary Swire, Tax-News.com, Hong Kong

17 April 2009

The Indian Central Board of Direct Taxes is investigating ways of acting against roundtripping and treaty shopping, capitalizing on concerted attempts worldwide to force greater disclosure on tax havens.

In the present climate of opinion among world leaders where greater transparency is demanded of all the tax havens, India is examining its own financial relationships with Mauritius and Cyprus in particular, which together account for 46% of total inward direct investment into India in the last decade. In fact Mauritius overtook the US in this period as the largest direct investor in India.

The Canadian High Commissioner to India acknowledged last week that, while Canadian investment into India over the last ten years was USD 239m according to official statistics, the actual figure, including money routed through the tax havens, was more like USD 10bn (both inward and outward investment). The Indian Tax authorities, buoyed by successful court decisions in their favour, including billion dollar plus capital gains assessments on Mauritian companies such as in the case of the Vodaphone Essar/Hutchison sale, are confident of generating more tax revenue through enhanced disclosure of business activities in such tax havens as Mauritius and Cyprus.

Investigations will centre on two main tax avoidance activities - 'roundtripping' and 'treaty shopping'.

The Central Board of Direct Taxes has initiated a study of techniques around the world for stemming the loss of tax revenue through tax havens. Countries such as Singapore and Canada have negotiated general anti-avoidance rule (GAAR) clauses in their tax treaties which provide for scrutiny in detail of transactions and a limitation of treaty benefits to those investors who fail to comply with anti-tax avoidance criteria. The US has legislation that allows it to set additional taxes on investment income paid out to tax havens where it deems that the recipient's ownership structure was set up purely for tax avoidance reasons. The Indian Government may also consider a limitation of benefit clause in its tax treaties. Through this clause, the government can impose specific conditions to ensure that income recipients in tax havens are something more than brass plate operations.

Amendments to the UAE-India tax treaty came into force in 2008 covering, for example, capital gains tax (to be applied in the country where the majority of physical assets are situated). However Mauritius has resisted strongly amendments to its double taxation avoidance treaty with India until now. After failing in its attempt to amend the tax treaty, the Indian government has sought other ways to prevent abuse of tax treaties, which may eventually lead to new tax laws in the next Budget. “We should endorse sharing information and bringing tax havens and non-cooperating jurisdictions under closer scrutiny,” Prime Minister Manmohan Singh said at the G-20 dinner. Politicians from other parties have also expressed agreement in taking measures to stop excessive tax evasion through tax havens.

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