Treaty Shopping


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  • Many developed countries tolerate or encourage treaty shopping, even if it is unintended, improper or unjustified, for other non-tax reasons, unless it leads to a significant loss of tax revenues. Moreover, several of them allow the use of their treaty network to attract foreign enterprises and offshore activities. In developing countries, treaty shopping is often regarded as a tax incentive to attract scarce foreign capital or technology
  • Unilateral relief : Under this system of taxation whether the income is subject to tax abroad or not is immaterial. In Unitary system, relief is given by way of tax credit for the taxes paid abroad
    Bilateral relief : the treaty may provide relief from double taxation by reducing the tax ordinarily due in one or both of the contracting parties on that income which is subject to double taxation.
    Multilateral relief : same as bilateral but many countries
    Non-Tax treaties : No direct tax treaties but treaties of freindship
    Transfer pricing:MNCs are manipulation of price in intra-firm exchange. The basic objective in this method is to maximize the company’s overall after-tax profit rather than the profit of individual subsidiaries. The prices charged by the subsidiary on sale to another located in different countries is popularly known as Transfer of pricing
    Tax haven countries : A tax haven nation means a nation with nil or moderate level of taxation and /or liberal tax incentives for undertaking
    specific activities such as exporting.
  • “Treaty shopping” is a graphic expression to describe the act of a resident of a third country taking advantage of a fiscal treaty between two contracting nations.
    Quite a few nations view such practices as “treaty abuse” and are seeking to incorporate anti-treaty shopping provisions such as `Limitation of Benefits’ in the tax treaties as well as their domestic tax laws in order to prevent such practices
    The basic feature of treaty shopping is the establishment of base companies in other states solely for the purpose of enjoying the benefit of a particular treaty rules existing between the state involved and the third state. An example of treaty shopping can be the India-Mauritius double Taxation agreement where various companies have been incorporated in Mauritius to take advantage of the Indo-Mauritius DTAA in which capital gains are to be assessed as per the law of the state of residence of the entity
  • It covers all sources of income arising out of inflow of technology, industrial equipment & direct investment.
    It encourages flow of technology, equipment and professional services which India is capable to transfer or offer.
  • 1..As per tax dept the overseas transaction was related to assets in india and hence vodafone should have deducted capital gain tax at source before paying HTIL
  • 2. is not an innocuous acquisition of the shares of CGP.
  • Treaty Shopping

    1. 1. Treaty Shopping
    2. 2. Double Taxation “Nothing is certain but death and taxes.” Benjamin Franklin Double taxation is imposition of two or more taxes on same income. e.g. a person is obliged to pay tax on some gain locally and pay again in the country in which the gain was made. Hence the need for elimination of Double Taxation
    3. 3. Double Taxation Avoidance Agreement To protect payers from Double taxation To encourage free flow of International Trade & Investment To prevent discrimination between tax payers in international field To provide reasonable level of legal & fiscal certainty to the investors and traders
    4. 4. Global Scenario
    5. 5. Methods of DTA Unilateral Relief Bilateral Relief Multilateral Relief Non-Tax Treaties Methods of abuse of DTA Transfer Pricing Treaty Shopping Misuse of DTAA’s in tax haven countries
    6. 6. Treaty Shopping Where a national or resident of a third country seeks to obtain the benefit of a double tax agreement between two other countries by interposing a company or other entity in one or the other of them.
    7. 7. Tax Haven A tax haven is a country or territory where certain taxes are levied at a low rate or not at all Enterprises use conduit companies in tax haven to rout income arising in one country to another Benefits of tax havens used in treaty shopping: - Tax incentives and favorable tax treatment of revenue streams both corporation tax and withholding taxes - Favorable double tax treaties network - Limited exchange control restrictions - Easy entry and exit options
    8. 8. Global Scenario 15% of countries in the world are Tax Haven (US National Bureau of economic research) Some states of USA offer incentives for business to locate there as well favors Non US entities typically allowing taxation at 0% Cyprus as Treaty Haven helped capital inflows into the eastern Europe Portugal is attractive for investments in European Union Singapore is developing itself as a base for investment in South-East- Asia & China Mauritius is a gateway to funnel foreign investments into India Business Standard Sep 03, 2009
    9. 9. Double Taxation Agreements (In Force)
    10. 10. Highlights of Indian Tax Treaties Objectives - Avoidance of Double Taxation - Exchange of Information to prevent evasion of taxes - Recovery of Income Tax under the two countries Treaties with Developed Countries – Cover all sources of income arising out of inflow of Technology, industrial equipments and direct investments Treaties with Developing Countries – Encourage flow of technology, equipments and professional services Some Tax Treaties contain favorable capital gain tax clause for making investments in India
    11. 11. OUTBOUND INBOUND Netherlands Dividend withholding tax of 10% to apply on dividends declared by Dutch subsidiary to Indian parent For routing investments to foreign countries, especially in the EU Singapore Tax holiday for periods from 5 to 15 years Foreign source income of can either be retained outside or remitted to Singapore No Tax liability for Indian parent Singapore Holding Singaporean Holding Company can declare dividends to Indian parent Luxembourg For investment in EU and other countries with which Luxembourg has a Double Tax Treaty Indian parent would suffer withholding tax @ 20% Ireland Dividends received by Irish company subjected to a 25% tax Spain Allows Indian entrepreneurs to remit profits earned in operating companies in EU to parent in India without any tax incidence in Spain Singapore Comprehensive Economic Co-operation Agreement (CECA) signed between India and Singapore Double tax treaty between India and Singapore for tax exemption Mauritius No withholding tax on distribution of dividends to parent No capital gains tax in Mauritius enabling Mauritian tax residents to earn completely tax free capital gains Cyprus Full exemption from tax on capital gains income under the Indo-Cyprus Double Tax Treaty No withholding tax on distribution of dividends to parent Corporate rate of tax of 10 per cent UAE Under the Indo-UAE Double Tax Treaty, no tax in India on capital gains income No corporate tax and capital gains tax in UAE No withholding tax on distribution of dividends to parent
    12. 12. India Outbound Investments Deferral of Indian corporate income tax 0% CIT on dividends (Participation Exemption) 0% WHT on Dividends Reduced WHT on Dividends (Treaties / EU Directive)
    13. 13. Cash Flows of Dividends Into India Particulars Amt in $ Gross income 1,00,000 Taxes in Netherlands @30.5% (app) 30,500 Net after-tax income in Netherlands 69,500 Dividend w/tax in Netherlands (10%) 6,950 Dividend Distributed 62,550 Grossed up div. income in India 69,500 Indian income tax @33.66% (app) 23,394 Less: Credit for taxes withheld in Netherlands 6,950 Net Indian taxes paid 16,444 Net after tax cash flow in India 46,106 Dutch WOS / JV Dutch WOS / JV Indian Parent co Indian Parent co Debt Equity
    14. 14. Foreign Direct Investment Impact of FDI on country economy – Infrastructure development – Generates new jobs – Transfer of technology – Increase productivity Government liberalized economic policies Uses FDI as developmental tool
    15. 15. FDI Equity Investment  56 % FDI equity investment from Mauritius during Apr-May 09 – Total FDI - Rs. 21,876 Crore, $ 89,840 Million – Mauritius - Rs. 12,428 Crore, $ 2,515 Million Source: Cumulative Inflow April 2000 to May 2009
    16. 16. Indo Mauritius - Double Taxation agreement Signed in 1983 Capital gains on sale of shares of Indian companies by investors resident in Mauritius taxed only in Mauritius and not in India Objective - avoid double taxation and not pave zero-tax regime Till 1992 - FII not allowed to invest in Indian stock markets Mauritius passed Offshore Business Activities Act – Allows foreign companies to register in island nation for investing abroad – Total exemption from capital gains tax Valid tax residency certificate from Mauritius
    17. 17. Indo Mauritius - Double Taxation agreement 10 to 30 % Capital Gain Tax 0 % Capital Gain Tax 0 % Capital Gain Tax USA Company Indian Company Fictitious Company
    18. 18. Round Tripping • Indian companies hold assets abroad • Re-route money stash abroad Fictitious Company Indian Company Swiss Institution’s
    19. 19. Anti –Treaty Measures Current • India financial intelligence unit – tracks bank transactions exceeding Rs. 10 lakh • Capital gains tax - Cross-border M&A deals Negotiation • In Dec.09 - 1St round of negotiations with Swiss government – To evolve a legal system - enabling India to trace black money stashed in tax haven countries • Re-negotiating tax treaty with Mauritius
    20. 20. Anti –Treaty Measures New Processes • Information Tracking System - Austrac (Australian Transaction Reports & Analysis Centre) and Australia’s anti-money laundering agency – Collecting data on use of tax havens and abuse of DTAAs by overseas investors entering India – Keep tabs on Indian investments round-tripping • Government is considering – Controlled Foreign Corporation (CFC) laws – Framing anti-abuse rules • Direct Tax Code 2009 - proposes to introduce General Anti- Avoidance Rule (GAAR)
    21. 21. It’s Your Place.. Vodafone Group The communications leaders in an increasingly connected world
    22. 22. across 30 countries Vodafone Group served by 79,000 employees (31 Mar 09) 315 million(30 Jun 09) proportionate customers Vodafone majority owned Partner Markets / Subsidiaries
    23. 23. Vodafone-WAKE UP CALL
    24. 24. Vodafone-Deal  A Non-Resident of India (Hutchison) sold the shares of a Foreign Co. (Cayman Island Co.) to another Non-Resident – Vodafone.  Hutchison transferred 100% of its shareholding in Cayman Islands (CGP) to Vodafone Netherlands for USD 11.2 billion.  HEL - a joint venture of Hutch group (Foreign group )with the Essar group (Indian Partner) was engaged in the biz of mobile telephony services.  Through CGP investments, Hutch group directly or indirectly owned 67% controlling interest in an Indian entity, Hutch Essar Ltd. (HEL)  In Nov 1994 Indian Entity Hutch Essar Ltd. obtain telecom license to provide cellular service in India  On Feb 2007 Vodafone NL entered into an agreement with HUTCH group for acquisition of Indian Interest of HEL  Vodafone also applied to FIPB (India’s Foreign Promotional investment Board) for direct acquisition of nearly 52% stock in the Indian entity, HEL.
    25. 25. Transaction Vodafone HTIL CGP HEL Outside India India 100% Shareholding (direct & Indirect) Transfer of stake in CGP 67% Shareholding
    26. 26. Show Cause notice was served to Vodafone to explain why it dint deducted capital gain tax on payment made to Hutchison The Transfer of CGP Shareholding from Hutchison to Vodafone constituted the transfer of business operation. Whose shares were ultimately held by Hutchison through CGP Court Response to the Deal
    27. 27. Vodafone and Govt. Arguments Vodafone Transfer of foreign company’s shares Controlling Interest not separate from share Sec 9 can only apply when there is direct transfer No nexus in India  No Business connection Government Transfer of business interest in India Transfer of group co. in India Capital gains accrued to HTIL and not CGP Dominant purpose of transaction Signing of agreement - nexus with India Bound to comply with all laws
    28. 28. Decision The Court rejected all Vodafone Arguments The transaction between Vodafone and Hutchison is the transfer of tangible and intangible interests in Indian companies of the Hutch Group in favor of Vodafone Hutchison, earned income liable for capital gains tax in India because the income was derived as the sole consideration of the transfer of its business/economic interest as a group, in favor of Vodafone Vodafone is a successor in interest in the joint venture between Hutchison and the Essar Group and is a co-licensee with the Essar Group to operate mobile telephony in India
    29. 29. Final Verdict • If Vodafone losses in Supreme Court they will have to pay 1.7 billion Dollar as a tax liability and a penalty of an equal amount and tax on these at 18% p.a., this implies the total outgo for Vodafone will be over 4 billion Dollar.
    30. 30. Thank You