|
| Alarm bells ring over British Columbia treaty override |
| Mukesh Butani / New Delhi Sep 21, 2009, 00:59 IST |
|
Last fortnight, Vancouver, British Columbia hosted the annual International Fiscal Association (IFA) Congress with over 1000 international tax experts representing large MNCs, international tax experts, academicians and tax administrators of several jurisdictions. Expectedly, the buzz centered on India’s Direct taxes code. Most participants expressed anxiety on DTC provisions impacting cross border investments, particularly on General anti-avoidance rules (GAAR) and were perplexed with a position that the Indian domestic law can override a double tax treaty (DTT).
Reversing the principles
As opposed to the present law well supported by judiciary pronouncements, wherein supremacy of DTT is unquestionable, the DTC has proposed an overriding provision as long as it (domestic tax) came into existence later. It codifies what is called “last enacted” rule, whereby conflict between the two shall lead to supremacy of the one entered later. This in effect puts into jeopardy slew of tax benefits that were hitherto enjoyed by residents of treaty partners having business operations in India. Take for instance a preferential treaty India has with Mauritius. Its an open secret that mild Mauritius tax regime coupled with financial services center status and a favorable tax treaty with India attracted several investors to resort to a Mauritius holding company structure for inbound and outbound investments. The DTC now empowers Indian tax administrators to override the DTT by way of an amendment to the domestic law.
Advocates for the introduction of override provisions argue that such step would help curb the menace of treaty shopping and ensure that slick cross border investment structures do not cause a revenue leakage. Treaty shopping as a concept is frowned upon wherein investors of third countries make use of beneficial treaty provisions, which are otherwise intended for residents of treaty Partners. This has lead to various countries insisting upon “limitations of benefit” clause in its treaties to prevent abuse.
Treaty Override: A last resort
While India is not the first country to resort to treaty override provisions, a critical difference is that countries often take such extreme steps as a measure of ‘last resort’ and not a routine administrative rule. For instance, tax law of the United States gives tax treaties the same force as federal tax law. The Supreme Court of the US has ruled that in case of a conflict between a tax treaty and a taxing statute, courts should always attempt to construe them so as to give effect to both the tax treaty and the conflicting statue. Only when such harmonious construction is not possible, would the “last enacted” rule apply. Further, treaty notification in the US and many jurisdictions requires senate approval unlike India where it is an executive decision.
Another case in point is Australia, wherein treaty is overridden in limited circumstances such as conflict with anti avoidance rules or where application of the treaty would lead to tax credits in excess of tax payable in Australia.
Violative of International legal principles
Countries have sparingly invoked such provision as it defeats the international law principle of pacta sunt servanda (i.e. pact is supreme) and breaches an obligation under an international convention. Further, countries resorting to non-adherence to convention risk retaliatory action against their residents. Treaties represent sovereign obligations beyond tax and tend to achieve an overarching objective of promoting greater level of cross border trade and investments. This principle was highlighted by the Indian Supreme Court in the famous Azaadi Bachao Andolan case, wherein the Union of India was itself defending its case on Mauritius treaty. Hence, restraint must be exercised before invoking override provisions through unilateral amendments in the domestic tax law. Not to forget that such unilateral amendments create uncertainty for investors since they can never be sure whether the legal or economic basis of their decision to invest is sound. The supremacy of treaty law and the legitimacy of use of tax treaties to minimize tax incidence besides receiving a judicial stamp has been a feather in India’s democratic system.
Carrot and stick approach
Yes, its true that we are living in a different world where global attention is focused on cracking tax havens and India should play a meaningful role in supplementing efforts of G-20 in partnership with OECD. For India to achieve the objective of preventing tax evasion, it is imperative that our efforts are in tandem with other countries — such steps would include strengthening of exchange of information clause with treaty partners. Whilst no democracy supports tax evasion, any step that disincentives all forms of foreign investment would in my view be counter-productive.
Isn’t proposed introduction of GAAR (albeit in a milder form) adequate to curb tax evasion? There is little justification for not allowing a taxpayer to organize his affairs in a manner that minimises his tax costs, particularly if such tax does not fall foul of anti avoidance rules.
India shall continue to be a capital importing nation and we ought to be mindful of such provisions. The provisions are uni-dimensional since the sole aim seems to be mobilization of additional tax revenues without regard to economic benefits as a result of foreign investment. A holistic view and analysis of impact is warranted before such provisions become the letter of law. If India is disgruntled with few of its treaty partners, why punish and raise anxiety levels with over 70 jurisdictions with whom we have tax conventions? When US introduced the law to override treaty, it grandfathered all treaties signed upto the date of legislation. Further, any treaty override requires vote from majority of senate members. I sincerely feel that we need more debate before embarking on this bold piece of legislation.
I am hopeful that the policy makers shall re-look at the provisions and the presence of India’s CBDT Chairman at the IFA Vancouver Congress merely enhances my confidence! (The author is a Partner with BMR Advisors and views are entirely personal)
|
|
|
|
|
|
|
|
|
|
 Read Business news in |  |
|
|
|
|
|
|
Advertisements |
|
|
|
|
|
|
|
|
|
|
Content Guide
