India Economy

‘MNCs that follow tax rules shouldn’t be criticised’

Anand Kalyanaraman Meera Siva | Updated on December 28, 2013 Published on December 28, 2013

DANIEL S. LANGE, Global Managing Partner-Tax, Deloitte Touche Tohmatsu

M. LAKSHMINARAYANAN, Managing Partner-Tax, Deloitte Haskins & Sells

Balancing the objectives and rights of taxpayers and Governments is a key element of the responsible tax debate. DANIEL S. LANGE, Global Managing Partner-Tax, Deloitte Touche TohmatsuInvestors seek certainty and consistency in tax laws and speedy resolution of disputes. M. LAKSHMINARAYANAN, Managing Partner-Tax, Deloitte Haskins & Sells

Multinational companies are increasingly finding themselves in the crosshairs of taxmen in various countries. While companies are locating and structuring their businesses to make the most of tax incentives, countries want to maximise tax revenues.

We spoke to Daniel S. Lange, Global Managing Partner-Tax, Deloitte Touche Tohmatsu, and M. Lakshminarayanan, Managing Partner-Tax, Deloitte Haskins & Sells, to get their perspectives on how companies and countries are approaching this issue.

Edited excerpts from an interview:

What is the relevance of ‘responsible tax’?

Lange: Governments have the right and responsibility to make tax laws that establish a sustainable revenue base to support government services and functions. Countries also want to attract a growing and sustainable business base.

However, taxpayers make competitive commercial investment decisions on a wide range of factors, of which tax is just one.

Balancing the objectives and rights of taxpayers and Governments in a transparent manner in a particular country is a key element of the responsible tax debate.

What steps are companies taking to be responsible taxpayers?

Lange: Many companies are taking a fresh look at their tax affairs to ensure that they remain compliant with the rapidly changing tax policies and laws around the globe.

Many companies are struggling with the concept of having to pay their “fair share” of income tax while they are already complying with the tax laws. The term, fair share, is impossible to define and is not viewed as helpful in the debate.

Shouldn’t the tax policies of countries provide incentives to both pay and stay?

Lange: Yes. Almost all countries use their tax policy to provide incentives to attract and encourage certain economic activity in their country. This policy is typically implemented through specific tax incentives to retain existing companies and attract new investments.

For example, in the US, tax incentives related to R&D and accelerated depreciation stand at over $800 billion.

In the UK, even as there are concerns about companies shifting their operations to countries with more favourable tax regimes, the UK Government has recently enacted various tax incentives to attract businesses into the country. In fact, the issue of base erosion and profit shifting (BEPS) has become a key point in the UK.

Which are the major countries raising objections?

Lange: Given the large pressure for additional tax revenue, there are a substantial number of countries looking to BEPS to raise income collections.

Many European countries have raised objections regarding the operations of digital companies. For example, France has expressed specific concern over digital companies and Germany over lower-tax European countries.

Big markets such as China and India are also getting vocal about BEPS, since they believe that a higher value of profit is attributable to the local market place and workforce.

Hi-tech multinationals have been criticised by countries where they do business but pay negligible income tax. What are your views?

Lange: Criticising multinationals that follow the income tax rules is not a solution.

Yes, digital companies with large value attributable to intellectual property are increasingly under the spotlight.

These multinationals are receiving government incentives to locate certain activities around the globe. Countries, especially in Europe, are closely looking at the value proposition attributable to intellectual property of digital companies to determine how much profit is due to them.

The objecting countries want a larger piece of the tax pie. The work by the Organisation for Economic Cooperation and Development (OECD) to harmonise tax rules will provide more guidance on how multinationals should determine the taxable profit between countries.

Is India on the wrong path when it comes to tax policy?

Lakshminarayanan: The retrospective amendment of the tax law in the Vodafone case after the Supreme Court ruling in favour of the company did send out wrong signals and affected investment flows into the country. The Shome Committee has given helpful recommendations and while the Government has been receptive, it is yet to retract the retrospective amendments with regard to indirect transfers.

That said, the move toward a reconciliatory settlement between the Government and Vodafone is welcome.

What is your view on the Government’s moves to plug loopholes, which allow those based in tax havens to avoid taxes in India?

Lakshminarayanan: The issue really pertains to foreign direct investments (FDI), which emanate from these tax havens and enjoy favourable treatment.

There have been instances of shell companies being set up in tax havens and the Government is right in plugging loopholes, which allow non-genuine investors to take advantage of form over substance.

The changes being suggested in the double-tax treaty in the form of limitation of benefits with Mauritius should be concluded immediately, so that the tax laws have certainty and consistency, something most investors seek, along with speedy resolution of tax disputes.

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Published on December 28, 2013
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