Senior Indian IRS Officer Rajat Bansal opens up on Singapore Protocol rationale, domestic abuse provisions, MAP timelines

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1 India and Singapore have amended their two-decade-old DTAA, which will allow the tax department to impose capital gains tax on investments routed through the island nation and plug a possible misuse of benefits. Earlier in 2016, the government managed to get Mauritius and Cyprus to amend their tax treaties along similar lines. In the words of Finance Minister Arun Jaitley, The year 2016 has been historic for the three DTAAs concluded with the countries that provided the routes for tax evasion [...] these have been blocked. While the India-Singapore Protocol fine print may not leave too much scope for hairsplitting, there might yet be areas open to more than one interpretation. We cleared the air with one of the senior IRS officers involved in the treaty negotiations, Rajat Bansal (Joint Secretary, Ministry of Finance, Government of India) In an exclusive interview, Taxsutra Group Editor Arun Giri spoke to Mr Bansal on several topics surrounding the path-breaking protocol the process, rationale, clarifications on domestic abuse provisions, GAAR vs. LoB, MAP cases (pending inventory and timelines), bilateral vs. unilateral APAs, implications of the multilateral instrument for treaty renegotiations and the fate of preferential treatment in a DTAA.* Arun Giri: The amendments to India-Singapore DTAA were much awaited and came as a new year s gift. Could you take us through the process and how the negotiations happened and what was the main rationale or the common thread behind many of these amendments that have taken place? Rajat Bansal: Yes, the amendments were long awaited and have happened well before April 1, 2017, the date from which source-based taxation starts under Mauritius treaty. As far as process is concerned, India has been revising its tax treaties to bring in source based taxation for capital gains on shares. Mauritius, Singapore and Cyprus were the major ones remaining, and this year, all the three could be amended, beginning with Mauritius. Amendment of Singapore treaty was linked with Mauritius treaty through Article 6 of 2005 India-Singapore Protocol, which provided that residence-based taxation of capital gains on shares will be surviving till it is there in the Mauritius treaty. After amendment of Mauritius treaty, amendment of Singapore treaty was taken up and, after negotiations and discussions, Protocol has been signed on 30th December. Arun Giri: Of course, most of the amendments are on par with the Mauritius treaty, but if you could take us through some critical amendments, especially the capital gains one? Rajat Bansal: Sure. Major one is the capital gains amendment in respect of shares. Source-based taxation would commence with effect from April 1, 2017, and capital gains on shares acquired after April 1, 2017 will be taxed in India, unlike the situation prevailing before. For shares which were acquired before April 1, 2017, grandfathering has been provided. The grandfathering concept is that whatever was

2 in companies acquired before April 1, 2017, taxation of capital gains will be in the country of residence only, subject to fulfillment of conditions as were there in 2005 Protocol. If one fulfills the LoB conditions of 2005 Protocol, then grandfathering will apply, i.e. taxation will be in the country of residence only. The other provision is about two-year transition period. In order to provide smooth transition from purely residence-based to purely source-based taxation, a two-years transition period has been provided, during which the taxation will be at 50% of the domestic tax rate in the source country, subject to fulfillment of conditions in LoB article. Similar to Mauritius case, here also, two-years transition period has been provided, subject to fulfillment of LoB conditions. These are the changes in respect of capital gains article. Then Article 9(2) has been inserted to facilitate relieving of economic double taxation and mutual agreement procedure in transfer pricing cases. This is going to help in MAP in transfer pricing cases as well as bilateral APAs under India-Singapore treaty. And the third one is a provision which says that the domestic anti-abuse rules will apply to check treaty abuse. These are the three major changes about this Protocol. Arun Giri: You talked about domestic abuse provisions taking care of treaty abuse. Could you elaborate that further? How do you envisage that? Rajat Bansal: Internationally, understanding is that the domestic general anti-abuse rules are to check the abuse through treaty provisions. To make it clear, this provision has been inserted explicitly in the treaty. As you know, GAAR provisions already provide under the domestic law that it ll prevail over the treaty. Arun Giri: But, Sir, in case of an entity that satisfies all the LoB provisions, will GAAR still be applied, or will it be applied only in the rarest of rare cases? Rajat Bansal: First of all, let us keep in mind that LoB provision in Singapore Protocol is applicable for grandfathering and two-year transition period in respect of capital gains on shares. LoB provision has a primary purpose test, bona fide business test, shell company concept and an expenditure threshold-based test. Indian GAAR provides main purpose test, not one of the main purpose test. If the primary purpose test for LoB purposes is satisfied, it is quite likely that main purpose test is also met.

3 Arun Giri: In terms of Article 9(2), the Government press release stated that it is a taxpayer-friendly measure in line with India s BEPS commitments and to meet the minimum standards. Since it is a minimum standard, there is a huge thrust now on solving MAP cases within a time-bound manner. There are going to be MAP peer reviews now starting very soon, and India too is going to be a part of these peer reviews. Sir, is there any time frame that you have in mind to resolve this, and if you could throw a little bit of light on the pending inventory of MAP cases under the Singapore treaty? Rajat Bansal: Under the Singapore treaty, in the absence of Article 9(2), transfer pricing MAP has not commenced so far. Now with 9(2) insertion, transfer pricing MAP cases are expected. Inventory of MAP cases varies country-wise. As far as your query about the time taken to resolve the cases, some cases get resolved quickly, while some take longer time. So it varies, but in last two and a half years, there has been good progress in resolution of MAP cases with Japan and USA. MAP cases with China and UK have also been resolved. Arun Giri: Sir, as you mentioned, bilateral APAs are likely to get a fillip with the introduction of Article 9(2). Over 95% of the APAs that have been concluded so far are unilateral APAs. Going forward, is there going to more of a thrust on bilateral APAs? Rajat Bansal: Bilateral APAs are better in the sense that they relieve economic double taxation. In unilateral APA, double taxation per se may not be relieved. While there may be an agreement under UAPA for ALP between the taxpayer in one country and the tax administration there, this ALP may not be binding on tax administration of the associated enterprise. Advantage in bilateral APA is that ALP is agreed between tax authorities and economic double taxation gets relieved. So while bilateral APA is superior in this way, due to involvement of four parties, (the taxpayers of two countries as well as the tax administrations of two countries), procedure may be more involved and may also take more time, as agreement has to be reached between two competent authorities. Unilateral APAs may be faster due to this reason. Therefore, both BAPAs and UAPAs have pluses and minuses, and both have utility in their own way. Arun Giri: With regard to indirect transfer provision, there is a question mark, if indirect transfer happens via Singapore, which Article of the India-Singapore DTAA will apply? Rajat Bansal: This issue is at present sub judice and hence better not be commented upon. It cannot be said categorically now as to which clause would apply. Arun Giri: Immediately after signing of the protocol, the Indian Finance Ministry hailed it as a historic moment, with Singapore, Cyprus and Mauritius DTAAs being revised in Did the ushering-in of transparency era, courtesy BEPS and automatic exchange of information, being the new global norm,

4 put pressure on Singapore, Mauritius and Cyprus to come to the negotiating table and agree to revise the treaty? Rajat Bansal: BEPS Action Plan 6 seeks to change the preamble of the DTAAs. It would now be clearly stated in all the treaties that double non taxation is not the objective of the tax treaties. In line with this, instances of double non-taxation, which were the driving force behind the routing of investments through a third-country jurisdiction, may lose charm. Certainly, the transparency brought in through BEPS Action Plan has affected the negotiations positively, and this must have been taken into account by countries. Arun Giri: Sir, there have been so many treaties that have been amended in the last months. We had an announcement regarding Sweden treaty. The Kazakhstan treaty too has been renegotiated. So how many more treaties should we expect to be renegotiated in the new year? Rajat Bansal: That is difficult to say because of the nature of process of treaty negotiations. It cannot be said in advance how much time will be taken to finalize a particular treaty. If two sides cannot reach agreement on even one single point, it may take years. Arun Giri: The multilateral instrument text has been unveiled. In Paris, in less than six months time, we expect over 100 countries to sign on the dotted line. The OECD is touting it as a historic moment. Once the multilateral instrument is in place and India is a signatory and 100 more countries are signatories, what is the fate of all the treaties renegotiated? How would that sync in with the multilateral instrument? Rajat Bansal: Multilateral instrument is only targeting change in a limited number of articles and not all the articles. Further, MLI would affect only the covered tax treaties and, even for covered tax agreements, MLI would not affect Articles not covered specifically under MLI. Particular Articles in recently negotiated covered treaties would not be affected by MLI if there is no overlap. Interplay between the two would need to be seen only to the extent overlap is there. Arun Giri: Everyone wants to put an end to double non-taxation. That s one of the stated objectives of the BEPS action plans. At the same time, there is a lot of impetus to attract investments. Are we saying that only the era of double non-taxation is over or are we also saying that the era of preferential treatment in a DTAA is coming to an end? Rajat Bansal: Objective of DTAAs has always been avoidance of double taxation. In the past, also, DTAAs were not intended to give rise to situations of double non-taxation. While relieving double taxation, DTAAs have allocated taxing rights and share of tax between two countries in respect of a cross-border income. This has stimulated flow of cross-border investments due to creating certainty and also due to avoiding double taxation. There may be differentiation in sharing of taxes on a particular kind of cross-border income vis-à-vis two treaty partner countries. This is an inherent feature of tax treaties globally and would continue even while treaties are amended to prevent double non-taxation. This

5 differentiation or preferential treatment would continue to have effect on country-wise investment flows. As far as impetus on investments due to check on double non-taxation is concerned, cross-border investment flows, like any other investment flows, are governed by risk and return. If a source country is attractive investment destination globally in terms of return and risk, investments which were coming through a conduit or a third country will, in all likelihood, now come directly from the originating country. Arun Giri: Thank you so much for your time, Sir. * The views expressed are in a personal capacity.