Structure – 1 : Corporate restructuring by way of merger

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Transcript Structure – 1 : Corporate restructuring by way of merger

Indian General Anti-Avoidance Rules

An Overview

Dinesh Kanabar 7 July 2012

How it all Started?

Evolution

Pre-GAAR Era

Jurisprudence



Tax Planning vs. Tax Avoidance vs.

Tax Evasion / Form vs. Substance



Treaty Shopping



Thin Capitalization

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Specific Anti-avoidance Rules

Tax Planning vs. Tax Avoidance vs. Tax Evasion ‘Roller Coaster’ from “post-independence” to 2011…… 60+ years … 7 Apex Court decisions !!

Raman & Co.

1967

Arvind Narottam

1988 1985

McDowell

1989

Playworld Electronics Azadi Bachao Andolan

2003

Vodafone

2012 2010

Walfort

Tax Planning vs. Tax Avoidance vs. Tax Evasion

Raman & Co. (1967) “Avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not prohibited. A taxpayer may resort to a device to divert the income before it accrues or arises to him. Effectiveness of the device depends not upon considerations of morality, but on the operation of the Income-tax Act. Legislative injuction in taxing statues may not, except on peril of penalty, be violated, but it may lawfully circumvented ”

Tax Planning vs. Tax Avoidance vs. Tax Evasion

McDowell (1985)

: “Constitutional Bench” decision “Main” judgment of Ranganath Misra (on behalf of Full Court)



Permissible: Tax planning within legal framework

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Impermissible: ‘‘Colourable devices’, ‘dubious methods’ and ‘subterfuges’ under the guise of planning “Supplementing” decision by Chinappa Reddy ( post concurrence with “majority” decision!!)



Blurred distinction between “tax avoidance” and “tax evasion”



Dismissed observations in Raman & Co

Chinappa Reddy

’s view: Reopened debate of Ramsay vs. Duke of Westminister

Tax Planning vs. Tax Avoidance vs. Tax Evasion

Aftermath of “McDowell”: ‘Implied’ opposition to Chinappa Reddy’s view Arvind Narottam (1988) “....no amount of moral sermons would change people’s attitude to tax avoidance” Playworld Electronics (1989) “One should avoid subverting the rule of law” Battlelines drawn for “correct” reading of McDowell

Tax Planning vs. Tax Avoidance vs. Tax Evasion

Azadi Bachao Andolan (2003)

•

Chinappa

judgment Reddy’s “radical” view militates against the majority

•

Raman & Co (1967) “relevant even today” / Duke of Westminister “alive” & “kicking” Every arrangement reducing the tax burden not to be looked down Attempts to reverse Azadi

•

Review petition filed before the two member Supreme Court Bench: Dismissed in January 2004

•

Curative Petition placed before a five member Supreme Court Bench: Dismissed in limine in December 2004 Correctness of Azadi Bachao Andolan still doubted !!

Tax Planning vs. Tax Avoidance vs. Tax Evasion

Walfort (2010) reaffirms Azadi Bachao Andolan “Even assuming that the transaction was pre-planned there was nothing to impeach the genuineness of the transaction. With regard to the ruling in McDowell & Co. Ltd. v. CTO [1985] 154 ITR 1482 (SC), it may be stated that in the later decision of the Supreme Court in Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 it has been held that a citizen is free to carry on its business within the four corners of the law. That, mere tax planning, without any motive to evade taxes through colourable devices is not frowned upon even by the judgment of the Supreme Court in McDowell & Co. Ltd.

’s case (supra)”

Tax Planning vs. Tax Avoidance vs. Tax Evasion

Vodafone

(2012)….finally lays to rest “McDowell spirit”

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No conflict between McDowell and Azadi Bachao Andolan

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Chinappa Reddy’s views only in the context of “artificial and colourable devices”

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Reaffirmed Westminister: Courts cannot go behind a genuine document to some supposed underlying substance

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Preferred “look at” over “look through”

Tax Planning vs. Tax Avoidance vs. Tax Evasion -- Post Vodafone...

High Energy Batteries (Madras HC): “Sale and Lease Back”

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Transaction of sale and lease back not sham.

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“Look at” principle applied AAR Ruling: Buyback of shares

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“Tax Avoidance” / “colourable device”



Results in “dividend” and not “capital gains”

Debate intensifies ……rather than subsiding !!

Treaty Shopping / Thin Capitalisation

Treaty Shopping - Azadi (2003) / Vodafone (2012)

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Treaty Shopping permissible

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Treaty benefit to be denied only on account of LOB Article / Anti avoidance rules in the domestic law Thin Capitalization - Besix Kier (2010)

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Re-characterization of Debt as equity not permissible in absence of Thin Capitalization Rules

Pre GAAR Era - Specific Anti-avoidance Rules

Deemed Dividend Clubbing of Income Stamp duty value of land and building Deemed Gift Transfer Pricing Dividend / Bonus Stripping

GAAR – Around the world

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Growing international concern over tax evasion and tax avoidance

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Global economic slowdown resulting in lower tax collections – Governments looking to widen tax base

Australia

1981 1988

Canada

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South Africa

2006 2008

China UK (Proposed)

2011 2013

India

GAAR 14

Indian GAAR

Evolution of GAAR

Finance Minister in Budget Speech

“I propose to introduce GAAR in order to counter aggressive tax avoidance schemes….”

Doctrine of “substance over form” Finance Bill 2012 16 Mar 12

Modeled on South African GAAR

Vodafone’s “six factor test” nullified

Explanatory Memorandum to Finance Bill, 2012

….keeping in view the aggressive tax planning with the use of sophisticated structures, a need for statutory provisions so as to codify

the doctrine of "substance over form"

……

GAAR

-- Comparison of key provisions

Particulars DTC 2009 Implementation Date Onus of proof 1 April 2011 Taxpayer Scope Wide Reference to approving panel NO Final authority to invoke GAAR Option to obtain AAR ruling

Commissioner NO DTC 2010 1 April 2012 Taxpayer Wide NO Commissioner NO Finance Bill 2012 1 April 2012 Finance Act 2012 1 April 2013 Taxpayer Tax Authorities Wider than DTC Wider than DTC yes yes Approving Panel (Only Commissioners) Approving Panel (Commissioners + Jt.Secratary) NO YES

Indian GAAR – A Snapshot

“Main purpose” or one of the “main purposes” is to obtain a “tax benefit” AND Not at “arm’s-length” OR “Misuse/abuse" of tax provisions OR Lacks “commercial substance” OR Not for bona-fide purposes Impermissible Avoidance Arrangement (IAA) Consequences

Disregard / combine / re-characterize whole / part of the arrangement Disregard corporate structure Deny treaty benefit Re-assign place of residence / situs of assets or transaction Re-allocate income, expenses, relief, etc.

Applies to both Indian Residents and Non-Residents GAAR to override Treaties

Re- characterize Equity- Debt, Income, Expenses, relief, etc.

GAAR Guidelines

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Committee formed under the chairmanship of DGIT (IT) “Draft” guidelines

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Issued on 28 June 2012 with 21 illustration:

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PM’s review pending…. Will GAARs be….deferred....diluted…. or deleted?

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Positives

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Clarity in meaning of “connected person”

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GAARs to apply to FIIs and not to “P-Note” holders

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Obliterating fears on section 96(2): Consequences of treating part of an arrangement as “impermissible” “Tax Mitigation” permissible Thin Capitalisation applicable only qua “connected persons”



Overseas investments: Non-applicability of GAARs to parking of dividends 2% Rise in rupee… 439 points rise in BSE Sensex on 29 June!!

More to be done

Key: Implementation at “ground level” / Increase India’s attractiveness as an investment destination

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Increased objectivity Define “direct or indirect” / “misuse or abuse” / “bonafide purpose” / “commercial substance” Recommendation of Parliamentary Standing Committee: Interplay of GAARs and Tax Treaties Increased clarity on GAARs vs. SAARs Grandfathering: Non applicability to “pre-2013” structures

Hope is eternal…

Finance Minister’s Speech while introducing GAAR provisions “I propose to introduce a General Anti-Avoidance Rule in order to counter aggressive tax avoidance schemes, while ensuring that it is used only in appropriate cases, by enabling a review by a GAAR panel” Finance Minister during in Lok Sabha debate “… It is not made for harassment. It is not for harassing the honest taxpayers but we shall have to take action against those who are taking advantage to avoid taxes…” Parliamentary Standing Committee Report Due consultative process with all stakeholders would be followed before guidelines will be formulated Finance Secretary to ET (7 May 2012): "It won't be easy for assessing tax officers to invoke GAAR”

Questions …

Answers…

Thank You

The information contained herein is of a general nature. The content provided here treats the subjects covered here in condensed form. It is intended to provide a general guide to the subject matter and should not be relied on as a basis for business decisions. A detailed analysis of the tax and regulatory implications should be done prior to implementation in order to determine the feasibility of the transaction at the time of implementation.

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Structure – 1 : Corporate restructuring by way of merger

Transcript Structure – 1 : Corporate restructuring by way of merger

Indian General Anti-Avoidance Rules

An Overview

How it all Started?

Evolution

Pre-GAAR Era

Jurisprudence

Specific Anti-avoidance Rules

Tax Planning vs. Tax Avoidance vs. Tax Evasion ‘Roller Coaster’ from “post-independence” to 2011…… 60+ years … 7 Apex Court decisions !!

Tax Planning vs. Tax Avoidance vs. Tax Evasion

Tax Planning vs. Tax Avoidance vs. Tax Evasion

Chinappa Reddy

Tax Planning vs. Tax Avoidance vs. Tax Evasion

Tax Planning vs. Tax Avoidance vs. Tax Evasion

Tax Planning vs. Tax Avoidance vs. Tax Evasion

Tax Planning vs. Tax Avoidance vs. Tax Evasion

Tax Planning vs. Tax Avoidance vs. Tax Evasion -- Post Vodafone...

Debate intensifies ……rather than subsiding !!

Treaty Shopping / Thin Capitalisation

Pre GAAR Era - Specific Anti-avoidance Rules

GAAR – Around the world

Growing international concern over tax evasion and tax avoidance

Global economic slowdown resulting in lower tax collections – Governments looking to widen tax base

Indian GAAR

Evolution of GAAR

GAAR

-- Comparison of key provisions

Indian GAAR – A Snapshot

Applies to both Indian Residents and Non-Residents GAAR to override Treaties

GAAR Guidelines

More to be done

Hope is eternal…

Questions …

Answers…

Thank You

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