Budget 2015: With BEPS on the anvil, GAAR may be an overlap
The economic downturn across the world and rising public debt seems to have led various governments, globally, to focus on curbing erosion of the tax base by shifting profits to overseas jurisdictions.
Several revenue authorities, globally, were of the view that companies have structured their intra-group contractual arrangements in a manner which enables lower income capture in a country even though the value addition therein is significantly higher. Mindful of the above, in 2013, the OECD and G20 countries, including India, together identified 15 specific action steps necessary to prevent Base Erosion and Profit Shifting (‘BEPS’) on account of the aforesaid mismatch in value addition vis-a-vis income disclosed.
The Indian revenue authorities may possibly adopt some of the action steps, especially in relation to documentation requirements, in administering taxes during audits / assessments. Presently, certain tax circulars issued in India do provide for examination by the revenue authorities of the actual conduct of the parties rather than the contractual functions / risk allocation; the impact of which seems to be evident in the transfer pricing audit / assessment experience in India.
The BEPS action plan, among others, provides for a Country by Country (‘CbC’) Report to be submitted by various groups globally, containing jurisdiction-wise information on global allocation of income, number of employees and entity-wise details, which would reveal the entire value chain of inter-company transactions.
The aforesaid focus of the Indian revenue authorities on the conduct of the parties rather than contractual terms coupled with the possible CbC report filing requirements may result in:
“A step-up in the level of scrutiny by the revenue authorities on the global allocation of income vis-a-vis value addition across the supply chain; “Revenue authorities alleging reallocation of the global profits through a profit split mechanism.
General Anti-Avoidance Rules (‘GAAR’) was introduced in the Indian tax law in 2013 with effect from Financial Year 2015-16. GAAR provides the tax authority a mechanism to deny the tax benefits of transactions or arrangements believed not to have any commercial substance or purpose other than to generate the tax benefit(s) obtained. The Finance Minister had indicated recently that the government would re-examine GAAR. Given this, it appears that not only the effective date of the GAAR provisions may be postponed but also, there may be a revision in the GAAR provision itself.
The aforesaid action steps under BEPS may provide adequate tools to the revenue authorities in ensuring appropriate capture of income in respective countries. Given this, a primary question which comes to the forefront is would GAAR be an overlap? Since, BEPS is a phenomenon created and accepted globally, implementation of BEPS in India and in any other country may not lead to tax uncertainty and economic double taxation. On the flipside, GAAR would be more India centric, and hence income imbalance and consequential tax uncertainty may ensue.
Mindful of this, given BEPS, a rethink on GAAR is the need of the hour. Further, in the upcoming budget or in future regulations, the government could do well in providing appropriate guidance in law as to the manner of implementation of any profit split mechanism it desires to apply.
The government’s vision of transforming India into a tax and business friendly jurisdiction can be achieved if a tax practice like BEPS is administered in an efficient and fair manner which provides the much needed tax certainty to taxpayers to enable them to focus on business and growth.
