Albert Einstein has reportedly said that the hardest thing to understand in the world is income tax. In the half century since this famous quip, there is precious little to counter it. Not only have tax laws and rules grown exponentially in size and complexity, with tax morality becoming an important aspect of policy, taxpayers are facing more complicated challenges.

Historically, it has been established that taxpayers can arrange their affairs to minimise tax liability so long as their actions are within law. However, this principle has been steadily eroded over the past few years, especially in the aftermath of the economic slowdown. Countries everywhere are struggling to balance budgets, and are closely monitoring multinational companies, which are widely perceived as not paying their fair share of taxes.

Civil society groups have argued that the burden of financing the government has fallen disproportionately on them due to the actions of such companies, and have joined the calls for a new approach to tax planning/ avoidance. The recent outcry over the tax practices at global corporations such as Amazon, Starbucks and Apple highlight this trend. India, too, has had its share of high-profile tax matters, including Vodafone, Nokia and Shell.

The tax morality debate revolves around the premise that corporations should pay their fair share of tax. While this is clearly justifiable, the real challenge is in determining what is fair. One would ordinarily assume that a corporation has paid its fair share of tax so long as it has not violated regulations. However, this is seen as inadequate in today’s context as corporations stand accused not of violating the law but planning their affairs to minimise their tax burden, all within the law. This leads to significant challenges in compliance, as well as administration and dispute resolution.

The need for concerted global action is widely recognised. However, with the inherent delays in forging an international consensus, several countries, including India, have sought to partly address the issue through unilateral measures such as general anti-avoidance rules. In the Indian context, there are two separate but connected trends that highlight this debate.

On one hand, the General Anti-Avoidance Rules has been enacted (although deferred to 2015). This gives tax authorities wide powers to ignore or re-characterise abusive arrangements. The wide-ranging GAAR provisions have generated apprehension in the taxpayer community, including concerns over uncertainties, especially related to the India-Mauritius treaty. In fact, the expert committee under Parthasarathi Shome has acknowledged this concern and emphasised the need to distinguish between legitimate tax planning and abusive avoidance arrangements.

On the other, there has been a perceptible shift away from the principle that taxpayers can arrange their affairs to minimise tax liability. Courts are taking an increasingly nuanced approach, where substance and intent are becoming more relevant. There are several cases where courts and tribunals have considered these factors in determining the tax consequences of a transaction.

Rapid changes are underway internationally too.

The Organisation for Economic Co-operation and Development’s recently released action plan on base erosion and profit shifting marks a paradigm shift in the debate over tax morality. This was prepared at the request of the G20 countries, and identifies 15 specific actions, with deadline ranging from one to two years.

This action plan has potential to achieve a fine balance between the government’s revenue needs and the certainty needed by taxpayers.

On one hand, there is recognition that gaps in the international regime should be suitably addressed to block any aggressive planning by multinational corporations.

On the other, there appears to be an implicit recognition that specific and targeted steps may prove more effective in the long run, rather than subjective standards of morality.

The changes brought about by this initiative will be nothing short of revolutionary and, if implemented, has potential to modernise the global tax system — one where clarity and stability will go hand in hand with increased revenues for governments.

The author is Partner - Tax, KPMG in India

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