Casting the net wider

Being highly dependent on foreign investors for its prodigious capital needs, India has always been on the back foot when it comes to enforcing its tax laws on multinational corporations (MNCs) and foreign investors. Ambiguities in law and public face-offs between the taxman and global corporations have also sullied India’s image as a friendly place to do business. It is therefore welcome that India has become a signatory to the OECD’s Convention on Base Erosion and Profit Shifting (BEPS). By standardising tax and compliance rules across countries and over-riding more than 3,000 bilateral tax treaties, the anti-BEPS framework arms governments with the tools to crack down on MNCs which exploit tax arbitrage to shift profits to low or zero-tax regimes. By “looking through” fictitious holding structures to tax firms in the country where the bulk of their value creation originates, the anti-BEPS initiative is broadly expected to improve tax revenues for large consumer economies such as India.

Specific action points of the agreement that are likely to have a high impact on India-based enterprises are those that plug treaty abuse, tax digital transactions and intangibles, and expand the ambit of permanent establishment and transfer pricing rules. Pharma, consumer and chemical MNCs in India which vest their patents and marketing operations with overseas arms in an effort to redirect revenues to low-tax regimes may fall foul of the new rules. So will e-commerce players with a substantial domestic presence. Nor is the anti-BEPS initiative a one-way street which only impacts MNCs. Indian companies with cross-border operations must also expect enhanced scrutiny of their web of foreign subsidiaries, treasury operations and royalty/dividend transactions. Country-by-country reporting, which requires all global companies with over €750 million in revenues to share a geography-wise breakup of operations, is expected to affect over 150 Indian companies. With a significant proportion of FDI, private equity and FII flows routed via low-tax regimes, there is the possibility of interrupted flows to India. The Centre has taken many preparatory steps to reduce the shock value of this transition. It has renegotiated tax treaties with Mauritius and Cyprus, started taxing online transactions and implemented the General Anti Avoidance Rules.

As a signatory to the multilateral agreement, India is obligated to ensure seamless tax information sharing with other signatories. This may pose challenges for the tax administration which is under-staffed and under-invested in ICT. By sweeping more cross-border transactions into the tax ambit, the regime is bound to escalate disputes on issues such as transfer pricing. Resolving these will require India’s dispute resolution mechanism to function effectively. But this is sorely lacking. Building skills and capacity in the tax department may ultimately hold the key to India reaping large payoffs from this landmark agreement.

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