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Bombay Chartered Accountants’ SocietyFire Side Chat on BEPS
19th October, 2016
Part – 3Explaining BEPS Action Reports
CA Rashmin Sanghvi chatting with
CA Sushil Lakhani
Mumbai
www.rashminsanghvi.com
Rashmin Sanghvi BEPS
Part - 3
BEPS Action Reports
1
Action Reports
Subject
1 E-Commerce Taxation, e.g. Google.
2 Hybrid Mismatch Arrangements.
3 CFC – Apple Computers.
4 Base Erosion via Payment of interest, etc.
5 Transparency & Substance.Vodafone. Cayman Island Company had no substance.
6 Treaty Abuse, Mauritius, UAE, etc.
Rashmin Sanghvi BEPS
Part - 3 2
BEPS Action Reports
Action Reports
Subject
7 Artificial Avoidance of PE
8 – 9 – 10 Transfer Pricing – Apple Computers
11 Measuring & Monitoring BEPS
12 Tax Payers to disclose Aggressive Tax Planning
13 Documentation
14 Dispute Resolution MAP
15 Multilateral Instrument - With one action, a few thousand treaties will be amended.
Rashmin Sanghvi BEPS
Part - 3
Proposals - to - Actions
All BEPS Action Reports are proposals. OECD ModelTreaty & its Commentary will be amended.
Then UN Model may be amended with or withoutmodifications.
Then if individual countries have to renegotiate theirtreaties (total over 3000 treaties); it may take time.
Hence a Multilateral Treaty is being drafted: Action 15.
Once a nation signs the Multilateral Treaty it will bedeemed that ALL its treaties have been amended withPost Facto effect.
3
Rashmin Sanghvi BEPS
Part - 3
We discuss only a few Subjects
Out of the 15 Action Reports - We will discuss briefly –
1. Action 1 – E-Commerce
2. Action 3 – CFC
3. Review Apple Computers
4. India – FII Tax Avoidance
5. Action 7 – Avoidance of PE
6. GAAR
7. Action 8-9-10 Transfer Pricing
8. EU & USA
9. Overall Impacts
4
Rashmin Sanghvi BEPS
Part - 3E-Commerce
Action 1 – Vs. Action 3
5
Google USA / Ireland
Face BookUSA
40 Crore users in India.
Revenue Rs. 5,000 Cr.
16 Crores usersin India
Revenue Rs. 100 Cr.
Action 1 – No tax in India.Action 3 – All profits taxable in USA.
Rashmin Sanghvi BEPS
Part - 3
After implementing all 15 Action Reports, willIndia be able to tax these corporations?
Except for Equalisation Levy – No.
And some professionals claim that EL is not as perBEPS report.
So essence is BEPS actions do not protect Indiantax revenue.
Even EL, as legislated so far, only forces Indianpayer to pay the tax. There is no obligationwhatsoever on Google or Facebook.
6E-Commerce
Action 1 – Vs. Action 3
Rashmin Sanghvi BEPS
Part - 3
Action 3 will support US taxing Google, Facebook,Apple etc. But these reports do not support Indiataxing all these Co.s despite the fact that they doearn billions of rupees from India.
OECD Model – Article 5 – Definition of PermanentEstablishment has 7 clauses.
We need to add 8th clause: Significant EconomicPresence.
Revenue exceeding a threshold: It can beRs. 10,00,000 or any other amount.
7E-Commerce
Action 1 – Vs. Action 3
Rashmin Sanghvi BEPS
Part - 3 BEPS Action 1 ReportEqualisation Levy E-commerce Taxation
Some critics of Equalisation Levy say:
BEPS Action Reports state that -
Some E-Commerce MNCs pay no tax.
By amending TP & CFC provisions,
this situation will be corrected.
They will pay COR taxes.
That should be fine.
Why impose Equalisation Levy?
8
Rashmin Sanghvi BEPS
Part - 3
Consider Apple & Google
Apple deals mainly in products/Goods
Google deals in services.
Both sell by E-commerce,
Both avoid – COR & COS taxes by basingoperations in Tax Havens. Apple - Ireland.
Google – Ireland, Netherlands & Bermuda.
Apple has accumulated more than $ 200 Bn.outside USA.
Google has accumulated $ 70 Bn. in Tax Havens.
Action 1 - Equalisation Levy9
Rashmin Sanghvi BEPS
Part - 3
Now BEPS proposes -
Amend TP so that more profits will beallotted to COR- USA.
No profits will be allotted to COS – India,UK, France & rest of the world other thanUSA.
Note: This is at the root of US - EU Tax War.
Action 1 - E-Commerce TaxProtect US Tax Revenue
10
Rashmin Sanghvi BEPS
Part - 3BEPS Action 3
CFC Rules
11
US Holding Co
European SubBrazilSub
Indian Sub.
Tax Haven CFC
COR
COSAll profits shifted
to CFC
Action 3 will ensure that all these profits will be taxable in –COR.
Rashmin Sanghvi BEPS
Part - 3
CFC
Pre BEPS. US could not tax Apple Ireland.
Post BEPS –
Action 8-9-10 Attribute larger incomes to AU
Action 3 – Whole income of AI taxable in USA.
12
Apple USA (AU) US Holding Co.
Apple Ireland (AI)Corporate Structure
100% Sub.
Rashmin Sanghvi BEPS
Part - 3
CFC Apple
13
Apple USAHolding Co.
Apple Ireland100% Subsidiaries
Irish Tax Rate 12.5%Actual Tax paid 0.005%
The Credit that Apple USA will get for taxpaid in Ireland will be 0.005% & not 12.5%.
Rashmin Sanghvi BEPS
Part - 3
US has proposed to amend CFC provisionswith RETROSPECTIVE effect to tax all theprofits stored outside USA by US MNCs.
Action 3 BEPS Report on CFC recommendsthis.
Clearly, US will gain. India & rest of the worldwill continue to suffer.
And Indian tax consultants say –
“This is all fine. Let this continue”.
Action 3 - CFC Protect U.S. Tax14
Rashmin Sanghvi BEPS
Part - 3
1. Control over CFCLegal ControlEconomic ControlDe Facto ControlConsolidation of AccountsActing in Concert
2. CFC Income. Not just Passive income.Any Income.
3. Whole of CFC Profits to be taxed in the hands of Holding Co. – Proportionate to control.
15
CFC Action 3
How are you going toprove that you doNOT control a foreignCo.?
Rashmin Sanghvi BEPS
Part - 3
US has proposed a law to change domestic CFCprovisions.
BEPS Action Report 3 should help USA. It permitsUSA to change law.
US is ready with draft law. US internal politics iswhat may prevent such rules.
16
CFC
Rashmin Sanghvi BEPS
Part - 3
Understanding Jurisdiction to tax and attributionof profits by some illustrations.
1. Jurisdiction - Tata Group has the registeredoffices of most of the Tata Group Companies inBombay House. Hence it pays all its income-taxin Mumbai.
TELCO’s factories are in Pune etc.
TISCO’s mines & factories lie in Jamshedpur, etc.Similarly almost all Tata Companies have theirbusiness units outside Mumbai.
17Review Apple ComputersJurisdiction & Attribution
Rashmin Sanghvi BEPS
Part - 3
TCS has staff of more than 4,00,000 softwaredevelopers. Only a small number works inMumbai.
Mumbai boasts of contributing highest income-taxrevenue in the country.
Who should have jurisdiction to tax the profits –Pune / Jamshedpur or Mumbai? Where the profitsshould be attributed?
18Review Apple ComputersJurisdiction & Attribution
Rashmin Sanghvi BEPS
Part - 3
If we had detailed rules of Attribution of Profitsamongst – Head Office, mines, factories & salesoffices etc. then probably 90% of Tata Groupprofits would be attributed outside Mumbai.
You can select any illustration from a wide rangeof Indian MNCs.
State Bank of India, Infosys, Wipro, ONGC, IndianOil & so on.
Same issues of Jurisdiction & Attribution can beraised.
19Review Apple ComputersJurisdiction & Attribution
Rashmin Sanghvi BEPS
Part - 3
We never think of it. India is one country.Within India, Government has a fair system ofcollecting taxes & spending the revenue.
2. Imagine the huge amount of litigation that wehave avoided by having a system where –
(i) Throughout India – all income-tax is collectedby one Central Government.
20Review Apple ComputersJurisdiction & Attribution
Rashmin Sanghvi BEPS
Part - 3
Then
(ii) Allocation of the tax to various States &Union Territories is Government’s look out.Even if the State Governments have adispute with the Central Government – thetax payers is least bothered.
21Review Apple ComputersJurisdiction & Attribution
Rashmin Sanghvi BEPS
Part - 3
3. Supposing we had a single Global tax; andfurther supposing –the allocation of revenuecould be done fairly all over the world –
- How much litigation would be avoided?
It is an ideal dream.
People who see dreams –
are first ridiculed & ignored;
Then criticised; and then at some point oftime …. …… Dreams become realities.
22Review Apple ComputersJurisdiction & Attribution
Rashmin Sanghvi BEPS
Part - 3
4. Attribution of Profits
I am coming back to the illustration of BombayHouse. How much profits you would attributeto the following parts of Tata Group: Myestimates are given. You give your estimates.
23Review Apple ComputersJurisdiction & Attribution
Rashmin Sanghvi BEPS
Part - 3 24
Tata Group Organisation
Percentage of Value
Addition.
Hence Profit Attribution.
Hence Tax Collection.
Mining & Manufacturing operations
outside Mumbai.50%
Sales organisation outside Mumbai. 40%
Head office – ownership of all
finance, Intellectual Property, Risk
taking etc. etc.
10%
Total 100%
Review Apple ComputersJurisdiction & Attribution
Rashmin Sanghvi BEPS
Part - 3
Notes: There is no scientific attribution of profits inthe above table. I have no knowledge of real facts.You can have your own estimates. This is just anillustration.
The key issue in this illustration is – Not – howmuch profits to attribute to different functions,assets, risks & market. Issue is, profits can beattributed to all the functions / profit centers of anMNC and not just to Head office / COR.
25Review Apple ComputersJurisdiction & Attribution
Rashmin Sanghvi BEPS
Part - 3
In case of Apple Ireland the attribution of profits is as under:
And this is perfectly legal. Now consider this query:
5. Don’t you think OECD model of DTA; and severalOECD reports need significant changes?
26
Production 0%
Sales 0%
Irish Branch 0.005%
Non-Existent HO 99.995%
Total 100%
Review Apple ComputersJurisdiction & Attribution
Rashmin Sanghvi BEPS
Part - 3
FIIs avoid Indian Taxes
27
US FII
Singapore SPV
Funds from Foreign Investor
Rest of the World
India
Indian Black Money
Round Tripping
Invested in India
Rashmin Sanghvi BEPS
Part - 3 28
US FII
Singapore SPV
Funds from Foreign Investor
Rest of the World
India
Indian Black Money
Independent AgentsStock Exchange Brokers
Buys Securities within India. Sells securities within India
As per Actions 8-9-10;Probably No profits will be attributed to India.
As per plain logic, 90% profits should be attributed to India.
Research Analysts
Banks Custodian
FIIs avoid Indian Taxes
Rashmin Sanghvi BEPS
Part - 3
FIIs avoid Indian Income Tax
1. They fragment their activities amongstseveral players.
Will Action 7 on Artificial Avoidance ofPE help India?
If all Indian operators are independentthird parties; it will not help.
If Indian parties are “Controlled RelatedParties,” Action 8-9-10 will helppartially.
29
No.
Rashmin Sanghvi BEPS
Part - 3
FIIs avoid Indian Income Tax
2. Since FIIs are doing their Indianbusiness on the internet, it is ElectronicCommerce.
Will Action 1 help?
Will Equalisation Levy help?
3. After all 15 Actions Reports areimplemented, will Round Tripping ofBlack Money Stop?
BEPS are not targeted against BlackMoney.
30
No.No.
No.
Rashmin Sanghvi BEPS
Part - 3
BEPS Action 7 Avoidance of PE
31
Sale of Goods
Order concluded in USAMNC
Business with India.
Indian Importer Unrelated Party
MNC has No presence in India
MNC’s profits are not taxable in India. Article 7 of OECD Model.NO PE. No Tax.
Note 1 - If MNC sets up a PE in India for localmarketing & sales; the profits attributable to Indian PEwill be taxable in India.
Note 2 – Existing injustice of no profit attribution to theCountry of Sales continues even after BEPS.
Rashmin Sanghvi BEPS
Part - 3
BEPS Action 7 Avoidance of PE
32
Sale of Goods
Order concluded in USA
MNC
Indian Importer of goods
“Closely Related Parties”New Definition
Indenting Agent
Warehouse Service
Canvassing / Liaison office
Habitually plays principal role inconclusion of contract. Subjectivematter. Difficult to prove either way.
Pre BEPS Post BEPS
No PE in India A PE shall be deemed
No profits taxable in India Profits shall be attributed to
deemed PE & taxable in India.
Mere conclusion of orders
outside India won't help
Rashmin Sanghvi BEPS
Part - 3
BEPS Action 7 Avoidance of PE
1. Fragmentation of Activities - Several parties.
2. Splitting up of Contracts – To remain under the threshold of Period.
If these are artificial, they shall be ignored & PE shall be deemed to exist.
However all the amendments still require a“Place of Business” in India.
Hence E-Commerce Companies will still escape.FIIs – not having Closely Related Parties willalso escape.
33
Rashmin Sanghvi BEPS
Part - 3
GAAR
34
1. Will any of the BEPS Action Reports prevent thisTax Avoidance? No.
2. Will the 2nd part of action – InformationExchange Agreements avoid this tax avoidance?No.
Hutchison Essar Indian Company
Hutchison of Hong Kong sold 67% shares in
To Vodafone UK
Sale price $ 11 BillionTax Payable Rs. 11 Billion.
Rashmin Sanghvi BEPS
Part - 3
The Anti – Tax Evasion measures - InformationExchange Agreements work if there is secrettax avoidance.
Hutchison & Vodafone did it openly.
India will have to rely on GAAR.
Explanations 4 & 5 added to S.9 (1) (i) still donot help as DTA overrides ITA.
35
GAAR
Rashmin Sanghvi BEPS
Part - 3
BEPS 8-9-10 Transfer Pricing
TP 8-9-10 Reports – See Pages 22-24.
Emphasis is laid on several factors.
- Capacity to take decisions
SPV in Tax Haven – Directors won’t have capacityto take decisions.
- Actual Performance.
Assuming that the SPV director has the capacity.In reality he is not going to actually perform.
36
Rashmin Sanghvi BEPS
Part - 3
If this is applied to POEM,
then most planning will fail.
That is the purpose of BEPS.
G20 wants Reality. No planning.
37
BEPS 8-9-10 Transfer Pricing
Risk Taking, Holding meeting of executives, Maintaining Minutes Books & Setting up policy environment.Is this direct attack on Apple’s planning?
All these are not adequate for profit attribution .
Rashmin Sanghvi BEPS
Part - 3
BEPS 8-9-10 Transfer Pricing
Risk, Intellectual Property etc. were allocated tocompanies with zero economic activities but cashboxes.
Now these are to be connected to economicactivities. Indian CBDT has for long taken a stand–If foreign television companies broadcast theirprogrammes in India; If goodwill and intellectualproperties are used in India, the same are taxablein India. Now BEPS Reports accept this positionbut for COR.
38
Rashmin Sanghvi BEPS
Part - 3
Today tax practitioners are comfortable with alegal position that Written Documents – contractsetc. would prevail. “Form prevails uponSubstance”.
However BEPS Action Reports state that ActualConduct of the Controlled Relatives willsupplement or even replace contractualarrangements
We have huge litigation in EPC & FTS splitbetween supply of goods & FTS
39
BEPS 8-9-10 Transfer Pricing
Rashmin Sanghvi BEPS
Part - 3
These action reports state that Post – BEPStax departments will look at actual conduct,real transactions.
If contracts are not in line with actualconduct, then the contracts will be ignored.See Executive Summary Page 10, ActionReports 8 to 10.
40
BEPS 8-9-10 Transfer Pricing
Rashmin Sanghvi BEPS
Part - 3
Written contracts may or may not mean much.Company will have to prove actual performances,capabilities etc.
When an MNC group has executed several contractsamongst several AEs, will they have to go on provingthe truth behind every contract?
41
BEPS 8-9-10 Transfer Pricing
Rashmin Sanghvi BEPS
Part - 3
Every sales & purchase invoice is a contract.
Every year assessment will take 10 years.
So far, the emphasis was – on Tax Compliance.Meaning paying taxes & complying with legalrequirements.
Now every assessment can be a massive job.
How Indian CBDT actually administers BEPS is animportant matter to observe.
42
BEPS 8-9-10 Transfer Pricing
Rashmin Sanghvi BEPS
Part - 3
OECD is known for drafting theoretical reports.One can write fine reports on attribution of profitsbased on FAR analysis. But all that is subjective &theoretical. Making the law impractical.
After Action Reports 8, 9 & 10 it will be even moreimpractical.
All of the following - Tax Payer, Tax Administrator& Judiciary - can have different opinions on thesame set of accounts.
43
BEPS 8-9-10 Transfer Pricing
Rashmin Sanghvi BEPS
Part - 3
Substance Over Form
Let me submitGolden Rules of Taxation.
There can be no conflict between Form & Substance.Form must always represent substance.If form does not represent substance –
the form has to be rejected.The Tax Payer who submitted incorrect form – corporate
structure etc. - is liable to action for telling lies on verification in his tax returns.
Whether you like my theory or reject it, please note that tax laws & Treaties are changing.
Be prepared.
44
Rashmin Sanghvi BEPS
Part - 3
There is an analogy.
A King is always expected to act right. King is anauthority – acting for the benefit of the people. Just& Fair.
Hence it is said: “King Can do No Wrong”.
Now this is no licence for Kings & Governments todo anything & then claim that “whatever I did hasto be right”.
45Substance to be disclosed in Tax Returns
by Assessee
Rashmin Sanghvi BEPS
Part - 3Substance to be disclosed in Tax Returns
by Assessee
Correct – King must do only right.
Wrong – Whatever King does is right.
Correct – Similarly, the tax return & auditedaccounts & all attachments must tell true & fairtaxable profits.
Wrong – Whatever papers are presented by taxpayer are right.
46
Rashmin Sanghvi BEPS
Part - 3
Substance shall prevail over Form
All Treaty shopping;
All Use of Tax Havens is Wrong.
They spoil the True & Fair view.
Assessees are liable to action under
existing law. Now BEPS will make it clear in Domestic Law & Treaty Models
47
Rashmin Sanghvi BEPS
Part - 3
Since 1987 we (BCAS + ICAI + others) havepopularised FEMA & International Taxation. At thattime I used to say – “International Taxation is easy.Understand the concepts & any CA can practise it”.
Now I say:
“International Taxation has become too complex.
After implementation of BEPS it will be Complex & Complicated.”
48
International Tax After BEPS
Rashmin Sanghvi BEPS
Part - 3
Reasons:
Every Regulator – be it RBI + DOE, ROC, SEBIconsiders that-
“His Regulation is most important.
All businessmen are out to violate the regulations.
Because of loopholes in the regulations, the rich &powerful people escape the regulations.”
49
International Tax After BEPS
Rashmin Sanghvi BEPS
Part - 3
So Each Regulator demands extensive powers to deemviolation - where none may exist + very highpunishment provisions.
Parliament at highest levels is passing these laws.
What PM & others at highest levels ignore are thesefacts:
Corruption exists at all levels – business & industry,bureaucracy & politics. Corruption is not eliminated &cannot be eliminated. And to such a system you aregiving very wide discretionary powers.
50
International Tax After BEPS
Rashmin Sanghvi BEPS
Part - 3
The corrupt businessman will escape the rigours of regulations.
Honest businessman cannot afford to do business.
Business Friendly Environment
goes for a Toss.
GDP can’t grow. It can fall.
51
International Tax After BEPS
Rashmin Sanghvi BEPS
Part - 3
European Union is acting
European Commission is taking action/ has taken action against:
Countries Companies
Ireland Apple Computers Inc.Belgium 35 MNCsLuxembourg FiatNetherlands StarbucksLuxembourg Amazon
There are two root issues/ Systemic Weaknesses:
1. Why don’t you isolate Tax Havens? When they are part of the system, whole system gets complicated.
52
Rashmin Sanghvi BEPS
Part - 3
European Union is acting
2. Apple, Amazon, Google etc. sell billions of dollarsworth of goods & services into Europe. And theydon’t pay any income-tax in Europe. What needsto be changed is – fundamental basis of currentInternational Tax system.
European Commission ignores both root causes &fights at a different level.
53
Rashmin Sanghvi BEPS
Part - 3
Coming back to BEPS
1. Some nations, are only looking at theirrevenue losses. Not concerned with lossessuffered by others.
Remember Vested Interest Lobbies ScuttlingGATT talks & delaying WTO agreements.
Same story for Nuclear Non-Proliferation;and Environment Control.
European Union Vs. US
54
Rashmin Sanghvi BEPS
Part - 3
Similar vested interest actions can be seen in BEPSAction Reports.
2. Now a Tax War is emerging between US &European Union.
If US is loosing tax revenue, Amend the OECDDTA model & change domestic law.
If India is losing tax revenue, ignore it.(E-commerce Action 1)
And if US MNCs are avoiding taxes of rest of theworld, don’t allow any changes in DTA & domesticlaw.
EU & US - Tax War ?55
Rashmin Sanghvi BEPS
Part - 3
Consequences of BEPS
Consequences have been stated in Part 1 itself.
Tax Compliance & Tax Administration will beimpossible. Corruption will increase.
There can be a break down of the system.
Taxation will hurt Global GDP.
56
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