Cos routing funds to evade taxes face taxing times

Govt mulling new laws to bring these companies into tax net.

The government is mulling new laws to bring into the tax net domestic companies which deliberately route their overseas investments through tax havens to avoid paying taxes at home.

The inclusion of new provisions in the existing tax laws, called Controlled Foreign Corporation (CFC) laws, was also suggested by the Kelkar Task Force on tax reforms, said a senior finance ministry official.

In view of a spurt in overseas investment by Indian companies, it has become necessary to frame CFC laws to prevent loss to the exchequer, the official said, adding that several developed countries like the US, the UK and Germany have similar laws.

Some of the countries like China, Malaysia and Indonesia, too, have framed their own set of laws to tax companies which try to evade payment of tax by routing investments through tax havens.

India, however, is still debating on the modality of the CFC, though the Kelkar report, submitted to the government six years ago, had recommended “introduction of anti-abuse provisions in the domestic law, enacting of CFC regulations and the law relating to thin capitalisation”.

According to the official, the advantage of having CFC laws is that it will not be affected by the Double Taxation Avoidance Agreement (DTAA).

“As per the OECD and UN model Convention (on tax laws), CFC rules are not affected by the double tax treaty,” he added.

Currently, the profits of subsidiaries of Indian companies are currently not taxable in India, as there are no laws to bring them under the tax net. In fact, foreign subsidiaries do not declare their dividends to avoid being taxed in India.

In case such tax laws come into place, a rule will have to be inserted into the original tax laws of the country. Also, a change has to be introduced in the tax return forms to mention if any company has a foreign subsidiary, and if it does, which countries, the sources said.