Friday, April 29, 2011

Law Street - Economic Times (April 2011) -Overseas investors need certainty in tax laws

Dear Readers,
Zenobia Aunty's neice has shifted to a new office premise, which is at present very dusty and crates of files are being unpacked --- hence she is down with a terrible allergic cold. Please do not mind if she goes on a sneezing spree while typing this. So without much further ado, for now she is just linking the column to the online version of The Economic Times.
Zenobia Aunty has been meeting lots of overseas visitors and this column covers what they are saying: India needs certainty in tax laws to attract serious investments.
Have a great weekend.
PS: She managed to copy and paste the column below.

Ho-Hum, the comfort factor is missing

• Investors require certainty in tax policies and administration
• Introduction of safe harbours would help
• The process of drafting APAs must kick-start without delay

Zenobia Aunty is a staunch advocate of clean governance. Yet, in the backdrop of the stir relating to the Lok Pal Bill, she says: “The change begins with us. Only if each one of us takes a pledge not to participate in corruption – by vowing not to give a bribe, even if it is the easy way out, will we see a change”.

It is true the change begins with us. But legislations, if properly drafted, after a dialogue with all sections of stakeholders, do bring about some certainty. Punitive legislations can also effectively act as a deterrent. Yet legislations without a change in the mind set or fair administration are of no use.

Zenobia Aunty has lately been hob-knobbing with a lot of overseas visitors, who are looking at cross-border trade opportunities or for setting up India operations. Zenobia Aunty takes these visitors through various regulatory changes which have made us a much more investor friendly country. Take for instance, the recent step deleting the FIPB approval requirements for foreign investments, even in those cases where joint ventures and technical collaborations exist in the same field.

Yet, the expressions on the faces of these visitors reflect that they are thinking: “Ho-Hum”, even as they are too polite to voice their opinion vocally. Yes, there is a lot of interest in our country, but at times such interest does not devolve into action. Investment figures are clearly reflecting this. FDI inflows during the ten month period ended January 2011, were INR 77, 902 crore showing a decline of 29% over the previous corresponding figure of INR 109,668 crore.

On digging deeper, Zenobia Aunty finds that uncertainty in tax policies as well as in the administration of such policies is causing a lot of anxiety. While cross border M&A deals have caused a lot of apprehension owing to heavy tax demands on a few buyers, today there is growing uncertainty in other areas as well.
Today, the scope of the transfer pricing officers stands widened. They have the powers of survey to conduct on-spot enquiry and verification. There has been a mention of introduction of ‘safe harbour’ provisions in the Finance Bill, 2011-12, but guidelines are yet to be issued. The dispute resolution mechanism, which was introduced sometime ago, hasn’t been able to alleviate the tax payers’ woes fully.
What is needed is certainty. We still haven’t been able to put in place an advance pricing mechanism (APA), even as it has been given lip service for quite some time. An APA is an arrangement between the tax authorities and a tax payer that determines in advance of intra-group transactions, an appropriate transfer pricing methodology for a fixed period of time. This finds mention in the DTC, but one remains uncertain of whether we will have an APA mechanism in place even on introduction of the DTC.

India is entering into exchange of information pacts with a host of tax havens (with whom India does not have tax treaties), such as Cayman, British Virgin Islands etc. This is a good step. Yet, new provisions on the transfer pricing (TP) front provide that: If a tax payer enters into a transaction, where one of the parties to the transaction is located in a notified jurisdiction (one which does not effectively exchange information with India), all parties to that transaction shall be deemed to be ‘related parties’ covered by Indian transfer pricing regulations. While the intent of this anti-avoidance provision maybe justified, it will create complexities in doing business with India.

The Supreme Court, has directed the Central Board of Direct Taxes (CBDT) to issue directions to tax authorities including transfer pricing officers to take the opinion of technical experts and bring on record technical evidence in cases involving complex issues and substantial tax revenues. The CBDT has accordingly issued instructions. The instructions provide that the evidence would be made available to the concerned tax payer whose case is being scrutinized and a reasonable opportunity would be given to the tax payer before finalization of its assessment proceedings. One hopes, that a reasonable opportunity is indeed given and it is also open to the tax payer to submit the reports of its own technical experts, if need be. There is a fear that if these instructions are not judicially applied, it will not ease the situation but result in prolonged litigation.

Safe harbours (wherein transactions meeting the criteria are not subject to scrutiny), finalization of advance pricing agreement procedures to ensure that there is no delay come April 1, issuance of revenue rulings on important legal issues having wide ramifications, judicious application of provisions and instructions will provide a comfort factor to investors. Certainty in tax policies and judicious administration is required to help us emerge victorious in the global market arena.

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