2. Double Taxation
“Nothing is certain but death and taxes.” Benjamin Franklin
Double taxation is imposition of two or more taxes on same income.
e.g. a person is obliged to pay tax on some gain locally and pay again in
the country in which the gain was made.
Hence the need for elimination of Double Taxation
3. Double Taxation Avoidance Agreement
To protect payers from Double taxation
To encourage free flow of International Trade & Investment
To prevent discrimination between tax payers in international
field
To provide reasonable level of legal & fiscal certainty to the
investors and traders
5. Methods of DTA
Unilateral Relief
Bilateral Relief
Multilateral Relief
Non-Tax Treaties
Methods of abuse of DTA
Transfer Pricing
Treaty Shopping
Misuse of DTAA’s in tax haven countries
6. Treaty Shopping
Where a national or resident of a third country seeks
to obtain the benefit of a double tax agreement
between two other countries by interposing a
company or other entity in one or the other of
them.
7. Tax Haven
A tax haven is a country or territory where certain taxes are levied
at a low rate or not at all
Enterprises use conduit companies in tax haven to rout income
arising in one country to another
Benefits of tax havens used in treaty shopping:
- Tax incentives and favorable tax treatment of revenue streams both corporation tax and
withholding taxes
- Favorable double tax treaties network
- Limited exchange control restrictions
- Easy entry and exit options
8. Global Scenario
15% of countries in the world are Tax Haven (US National Bureau of
economic research)
Some states of USA offer incentives for business to locate there as well
favors Non US entities typically allowing taxation at 0%
Cyprus as Treaty Haven helped capital inflows into the eastern Europe
Portugal is attractive for investments in European Union
Singapore is developing itself as a base for investment in South-East-
Asia & China
Mauritius is a gateway to funnel foreign investments into India
Business Standard Sep 03, 2009
10. Highlights of Indian Tax Treaties
Objectives
- Avoidance of Double Taxation
- Exchange of Information to prevent evasion of taxes
- Recovery of Income Tax under the two countries
Treaties with Developed Countries – Cover all sources of income
arising out of inflow of Technology, industrial equipments and
direct investments
Treaties with Developing Countries – Encourage flow of
technology, equipments and professional services
Some Tax Treaties contain favorable capital gain tax clause for
making investments in India
11. OUTBOUND INBOUND
Netherlands
Dividend withholding tax of 10% to apply on dividends declared
by Dutch subsidiary to Indian parent
For routing investments to foreign countries, especially in the
EU
Singapore
Tax holiday for periods from 5 to 15 years
Foreign source income of can either be retained outside or
remitted to Singapore
No Tax liability for Indian parent Singapore Holding
Singaporean Holding Company can declare dividends to Indian
parent
Luxembourg
For investment in EU and other countries with which
Luxembourg has a Double Tax Treaty
Indian parent would suffer withholding tax @ 20%
Ireland
Dividends received by Irish company subjected to a 25% tax
Spain
Allows Indian entrepreneurs to remit profits earned in operating
companies in EU to parent in India without any tax incidence in
Spain
Singapore
Comprehensive Economic Co-operation Agreement (CECA)
signed between India and Singapore
Double tax treaty between India and Singapore for tax
exemption
Mauritius
No withholding tax on distribution of dividends to parent
No capital gains tax in Mauritius enabling Mauritian tax
residents to earn completely tax free capital gains
Cyprus
Full exemption from tax on capital gains income under the
Indo-Cyprus Double Tax Treaty
No withholding tax on distribution of dividends to parent
Corporate rate of tax of 10 per cent
UAE
Under the Indo-UAE Double Tax Treaty, no tax in India on
capital gains income
No corporate tax and capital gains tax in UAE
No withholding tax on distribution of dividends to parent
12. India Outbound Investments
Deferral of Indian
corporate income tax
0% CIT on dividends
(Participation Exemption)
0% WHT on Dividends
Reduced WHT on Dividends
(Treaties / EU Directive)
13. Cash Flows of Dividends Into India
Particulars Amt in $
Gross income 1,00,000
Taxes in Netherlands @30.5% (app) 30,500
Net after-tax income in Netherlands 69,500
Dividend w/tax in Netherlands (10%) 6,950
Dividend Distributed 62,550
Grossed up div. income in India 69,500
Indian income tax @33.66% (app) 23,394
Less: Credit for taxes withheld in Netherlands 6,950
Net Indian taxes paid 16,444
Net after tax cash flow in India 46,106
Dutch
WOS / JV
Dutch
WOS / JV
Indian
Parent co
Indian
Parent co
Debt Equity
14. Foreign Direct Investment
Impact of FDI on country economy
– Infrastructure development
– Generates new jobs
– Transfer of technology
– Increase productivity
Government liberalized economic policies
Uses FDI as developmental tool
15. FDI Equity Investment
56 % FDI equity investment from Mauritius during Apr-May 09
– Total FDI - Rs. 21,876 Crore, $ 89,840 Million
– Mauritius - Rs. 12,428 Crore, $ 2,515 Million
Source: www.dipp.nic.in/fdi_statistics/india_FDI_May2009.pdf
Cumulative Inflow
April 2000 to May 2009
16. Indo Mauritius - Double Taxation agreement
Signed in 1983
Capital gains on sale of shares of Indian companies by investors resident in
Mauritius taxed only in Mauritius and not in India
Objective - avoid double taxation and not pave zero-tax regime
Till 1992 - FII not allowed to invest in Indian stock markets
Mauritius passed Offshore Business Activities Act
– Allows foreign companies to register in island nation for investing abroad
– Total exemption from capital gains tax
Valid tax residency certificate from Mauritius
17. Indo Mauritius - Double Taxation agreement
10 to 30 % Capital Gain Tax
0 % Capital Gain Tax
0 % Capital Gain Tax
USA
Company
Indian
Company
Fictitious
Company
18. Round Tripping
• Indian companies hold assets abroad
• Re-route money stash abroad
Fictitious
Company
Indian
Company
Swiss
Institution’s
19. Anti –Treaty Measures
Current
• India financial intelligence unit
– tracks bank transactions exceeding Rs. 10 lakh
• Capital gains tax - Cross-border M&A deals
Negotiation
• In Dec.09 - 1St
round of negotiations with Swiss government
– To evolve a legal system - enabling India to trace black money
stashed in tax haven countries
• Re-negotiating tax treaty with Mauritius
20. Anti –Treaty Measures
New Processes
• Information Tracking System - Austrac (Australian Transaction
Reports & Analysis Centre) and Australia’s anti-money laundering
agency
– Collecting data on use of tax havens and abuse of DTAAs by overseas
investors entering India
– Keep tabs on Indian investments round-tripping
• Government is considering
– Controlled Foreign Corporation (CFC) laws
– Framing anti-abuse rules
• Direct Tax Code 2009 - proposes to introduce General Anti-
Avoidance Rule (GAAR)
22. across
30 countries
Vodafone Group
served by
79,000 employees (31 Mar 09)
315 million(30 Jun 09)
proportionate customers
Vodafone majority owned
Partner Markets / Subsidiaries
24. Vodafone-Deal
A Non-Resident of India (Hutchison) sold the shares of a Foreign Co. (Cayman
Island Co.) to another Non-Resident – Vodafone.
Hutchison transferred 100% of its shareholding in Cayman Islands (CGP) to
Vodafone Netherlands for USD 11.2 billion.
HEL - a joint venture of Hutch group (Foreign group )with the Essar group
(Indian Partner) was engaged in the biz of mobile telephony services.
Through CGP investments, Hutch group directly or indirectly owned 67%
controlling interest in an Indian entity, Hutch Essar Ltd. (HEL)
In Nov 1994 Indian Entity Hutch Essar Ltd. obtain telecom license to provide
cellular service in India
On Feb 2007 Vodafone NL entered into an agreement with HUTCH group for
acquisition of Indian Interest of HEL
Vodafone also applied to FIPB (India’s Foreign Promotional investment Board)
for direct acquisition of nearly 52% stock in the Indian entity, HEL.
26. Show Cause notice was served to Vodafone to explain why it
dint deducted capital gain tax on payment made to Hutchison
The Transfer of CGP Shareholding from Hutchison to
Vodafone constituted the transfer of business operation.
Whose shares were ultimately held by Hutchison through CGP
Court Response to the Deal
27. Vodafone and Govt. Arguments
Vodafone
Transfer of foreign company’s
shares
Controlling Interest not separate
from share
Sec 9 can only apply when there
is direct transfer
No nexus in India
No Business connection
Government
Transfer of business interest in India
Transfer of group co. in India
Capital gains accrued to HTIL and
not CGP
Dominant purpose of transaction
Signing of agreement - nexus with
India
Bound to comply with all laws
28. Decision
The Court rejected all Vodafone Arguments
The transaction between Vodafone and Hutchison is the transfer
of tangible and intangible interests in Indian companies of the
Hutch Group in favor of Vodafone
Hutchison, earned income liable for capital gains tax in India
because the income was derived as the sole consideration of the
transfer of its business/economic interest as a group, in favor of
Vodafone
Vodafone is a successor in interest in the joint venture between
Hutchison and the Essar Group and is a co-licensee with the Essar
Group to operate mobile telephony in India
29. Final Verdict
• If Vodafone losses in Supreme Court they will have to pay 1.7
billion Dollar as a tax liability and a penalty of an equal amount
and tax on these at 18% p.a., this implies the total outgo for
Vodafone will be over 4 billion Dollar.
Many developed countries tolerate or encourage treaty shopping, even if it is unintended, improper or unjustified, for other non-tax reasons, unless it leads to a significant loss of tax revenues. Moreover, several of them allow the use of their treaty network to attract foreign enterprises and offshore activities. In developing countries, treaty shopping is often regarded as a tax incentive to attract scarce foreign capital or technology
Unilateral relief : Under this system of taxation whether the income is subject to tax abroad or not is immaterial. In Unitary system, relief is given by way of tax credit for the taxes paid abroad
Bilateral relief : the treaty may provide relief from double taxation by reducing the tax ordinarily due in one or both of the contracting parties on that income which is subject to double taxation.
Multilateral relief : same as bilateral but many countries
Non-Tax treaties : No direct tax treaties but treaties of freindship
Transfer pricing:MNCs are manipulation of price in intra-firm exchange. The basic objective in this method is to maximize the company’s overall after-tax profit rather than the profit of individual subsidiaries. The prices charged by the subsidiary on sale to another located in different countries is popularly known as Transfer of pricing
Tax haven countries : A tax haven nation means a nation with nil or moderate level of taxation and /or liberal tax incentives for undertaking
specific activities such as exporting.
“Treaty shopping” is a graphic expression to describe the act of a resident of a third country taking advantage of a fiscal treaty between two contracting nations.
Quite a few nations view such practices as “treaty abuse” and are seeking to incorporate anti-treaty shopping provisions such as `Limitation of Benefits’ in the tax treaties as well as their domestic tax laws in order to prevent such practices
The basic feature of treaty shopping is the establishment of base companies in other states solely for the purpose of enjoying the benefit of a particular treaty rules existing between the state involved and the third state. An example of treaty shopping can be the India-Mauritius double Taxation agreement where various companies have been incorporated in Mauritius to take advantage of the Indo-Mauritius DTAA in which capital gains are to be assessed as per the law of the state of residence of the entity
It covers all sources of income arising out of inflow of technology, industrial equipment & direct investment.
It encourages flow of technology, equipment and professional services which India is capable to transfer or offer.
1..As per tax dept the overseas transaction was related to assets in india and hence vodafone should have deducted capital gain tax at source before paying HTIL
2. is not an innocuous acquisition of the shares of CGP.
