TAX NEWS - June 2010

General Anti Avoidance Rule (GAAR) provisions for tax avoidance by foreign firms

The second draft of the Direct Taxes Code (DTC) has put an end to complaints and controversies that had emanated for foreign companies on the issue of treaty override or the change in criterion for taxing their income as resident if they do a part of their work in India for a certain period.

The discussion paper on the DTC put in public domain on Tuesday said that between the treaty and the tax code, the one more beneficial to the tax payer would be applicable while on taxing as resident, it said, the company would only be treated as resident if the place of effective management is in India.

However, the discussion paper is not only a bag of goodies for the foreign firms as it has empowered itself by introducing the General Anti Avoidance Rule (GAAR) provisions for tax avoidance by foreign firms and also Controlled Foreign Corporation Rules for companies that are held by foreign firms in India.

In the paper, the government said, "it is proposed to provide that between the domestic law and relevant Double Tax Avoidance Agreements (DTAA), the one which is more beneficial to the taxpayer shall apply."

The first discussion paper had, however, said that between the treaty and the tax code, the one that comes at a later stage would hold good. This had raised serious concerns among the foreign firms as the tax treaties between their resident country and India could be rendered null and void in that case.

Experts feel the introduction of CFC rules may upset corporates. "There may be concerns for Indian MNC with the proposed introduction of controlled foreign corporation (CFC Rules), resulting in current taxation of passive income of foreign subsidies," Sudhir Kapadia of Ernst and Young said.

Another expert, KR Sekar of Deloitte said it is good that the apprehensions of the industry and the tax-payers on GAAR have been recognised. "The change in the definition of impermissible arrangement is a welcome change. The proposed safeguard is good but needs to be seen with reference to the guidelines proposed to be introduced by CBDT."

He also added that the revised discussion paper is silent on the constitution of GAAR panel on the lines of international jurisdictions.

The paper also said the DTAA would not have preferential status over the domestic law in case the GAAR provisions were invoked or when Controlled Foreign Corporation provisions were invoked.