General Anti-Avoidance Rules (GAAR) Kuntal Sen Friday, 28 February 2014

Transcription

1 General Anti-Avoidance Rules (GAAR) Kuntal Sen Friday, 28 February 2014

2 Content Scheme and Architecture of GAAR Illustrations on GAAR by the Expert Committee International Perspective of GAAR GAAR Approaches

3 Scheme and Architecture of GAAR

4 Backdrop: GAAR Provisions... DTC Bill 2010 contained GAAR provisions but no progress in implementation Judicial GAAR SC observation in Vodafone case: - Lack of clarity and absence of appropriate provisions in statute regarding the circumstance in which judicial GAAR would apply has generated litigation in India - Legal doctrines like LOB and look through are matter of policy and it is for the government to have them incorporated in treaties and law to avoid conflicting views Result: Statutory GAAR - Introduced in the statute book vide Finance Act 2012 Deferred by two years vide Finance Act 2013 effective from FY Main purpose to obtain tax benefit Onus on tax-payer! Treaty override Independent Approving Panel February 2014 GAAR Slide 4

5 ...GAAR Provisions Arrangement to be Impermissible avoidance arrangement if passes: Primary Test Main purpose is to obtain tax benefit Any one of Secondary Tests Creates rights/obligation unlike parties at Arm s Length Or Results in direct/indirect misuse/abuse of tax provisions Or Lacks/deems to lack commercial substance in whole/part Or Entered into/carried out not for bonafide purpose Commercial substance of utmost importance

6 GAAR Arrangement deemed to lack commercial substance Substance or effect is inconsistent with form of individual steps Does not have a significant effect upon the business risks Arrangement deemed to lack commercial substance Involves: a. round trip financing; b. accommodating party; c. Disguising the value, location, etc Without any substantial commercial purpose February 2014 GAAR Slide 6

7 GAAR Consequences Disregarding or recharacteri sing any step Disregarding the corporate structure Major consequences Disregarding the parties Recharacteri sing the residence Disregarding the accrual, receipt or expenditure February 2014 GAAR Slide 7

8 GAAR Adjudication Process 1. Suomoto 1month 2. Taxpayer reply 2 months 3. No objections with 1 month 4. Approving panel within 2 months Disagrees Assessing Officer Reference Commissioner Agrees No GAAR Commissioner satisfied Tax-payer objects Commissioner not satisfied No Objection GAAR applicable Reference to Approving Panel Favourable Direction by Approving Panel Adverse Alternative AAR route available Binding Writ? Tax-payer can appeal to Tax Tribunal Scope of appeal? February 2014 GAAR Slide 8

9 GAAR Rules for Application... Monetary Threshold of exemption Tax benefit to all parties exceeds INR 3 crore Exemption to FIIs SEBI registered No treaty benefit availed Whole v. Part Applicable only to the alleged part of impermissible avoidance arrangement Forms and Time limits prescribed February 2014 GAAR Slide 9

10 ...GAAR Rules for Application Grandfathering provisions GAAR not to apply to any income from transfer of investments made before August 30, 2010 GAAR to apply to any arrangement in respect of tax benefit obtained on or after April 1, 2015 Arrangements involving payment of interest, royalty, etc., irrespective of date of agreement GAAR applicable Forms and Time limits prescribed February 2014 GAAR Slide 10

11 Illustrations on GAAR by the Expert Committee

12 GAAR Illustrative Cases Example 1 of Expert Committee Report Main purpose to obtain tax benefit India Chem Ltd sets up a unit in a SEZ in FY to manufacture chemicals Claims deduction u/s 10AA upto FY Whether GAAR applicable on setting up of SEZ? o A tax mitigation case, hence revenue should not invoke GAAR India Chem has another non-sez unit and diverts production to SEZ, while doing only packaging there and claims as manufacture in SEZ. Whether GAAR applicable? o A clear case of tax evasion. Can be dealt with directly. GAAR not to be invoked India Chem transfers the product of non-sez unit at a price lower than FMV and does only insignificant activity in SEZ. Thus, shows higher exempt SEZ profits that the non-sez unit. Whether GAAR applicable? o Dealt by TP provisions - hence, GAAR not to be invoked SEZ and non-sez unit work independently. India Chem gets new orders for SEZ unit only, work in non-sez gradually declines. No shifting of any equipments. Can GAAR be invoked, on the ground of reconstruction of business? o Issue of SAAR u/s 10AA. GAAR not to be invoked February 2014 GAAR Slide 12 February 2014 GAAR Slide 12

13 GAAR Illustrative Cases Example 11 of Expert Committee Report Commercial substance/purpose Y Ltd Country Y Funding WOS A Ltd Country A Invests in Ind Co India IND Co Treaty between India-Country A provides exemption for capital gains in India i.e. source country and nil capital gains tax in Country A A Ltd sells shares of IND Co after 5 years and claims exemption for CG Whether GAAR invoked to deny A Ltd the treaty benefit? o Arrangement created to avoid capital gains tax in India be routing investments through a favourable jurisdiction - GAAR can be invoked, except for cases where Circular 789 is applicable or specific LOB clause in the Treaty February February GAAR GAAR Slide Slide 13 13

14 GAAR Illustrative Cases Example 15 of Expert Committee Report Abuse of tax laws A Ltd Country A WOS WOS K Ltd L Ltd India 9.95 % 9.95 % IND Co Treaty between Country A & India Capital Gains taxable only in Country A if resident holds less than or equal to 10% in Ind Co. Subsequently if K Ltd & L Ltd sell shares of IND Co whether GAAR can be invoked? o An arrangement of splitting the investments - GAAR can be invoked o Deny treaty benefits to K&L or treat them as one Company for tax computation February 2014 GAAR Slide 14 14

15 GAAR Illustrative Cases Example 17 of Expert Committee Report SAAR v GAAR Country P Purc Co India Z Co Country Q Sell Co Country A (Low Tax Jurisdiction) WOS A Ltd Director of Z CO finalises contracts in India but shows purchase / sale in Country A. Day to day operations of A Ltd are carried out in India Goods move directly from Country P to Q and transactions recorded in A Ltd s books. Can GAAR be invoked? o Z Co misrepresents facts, a case of tax evasion and not GAAR o If any activity is being carried out by Z Co for A Ltd., then Z Co is required to be compensated at arm s length SAAR applicable and GAAR not to be invoked February February GAAR GAAR Slide Slide 15 15

16 International Perspective of GAAR

17 How GAAR is Perceived Internationally Ongoing debate between illegal evasion and legal avoidance, or what is termed as acceptable and unacceptable GAAR should not be relied upon to address foreseeable methods of tax avoidance Study on whether GAAR to be introduced in UK stated that that introducing a broad spectrum GAAR would not be beneficial for the UK tax systems. This would carry a real risk of undermining the ability of business and individuals to carry out sensible and responsible tax planning and that on the other hand introducing a moderate rule which does not apply to responsible tax planning, and is targeted at abusive arrangements would be beneficial for the UK tax system.. February 2014 GAAR Slide 17 February 2014 GAAR Slide 17

18 GAAR Canada Background o Canadian tax laws contain GAAR provisions since 1988 Trigger event o GAAR will apply only if the transaction results in misuse or abuse of the provisions of tax laws Case law findings Canada Trustco Mortgage Co. [2005] SCC 54 o Abuse not established if its reasonable to conclude that an avoidance transaction was within the object, spirit or purpose Copthorne Holdings Ltd. v. Canadar [2011] SCC 63 o Determining whether a transaction is an abuse or misuse of the Act o Transaction may have a tax purpose but not necessary for it to be the primary reason for the transaction o Transaction may have a secondary tax benefit purpose will not trigger the GAAR February 2014 GAAR Slide 18 February 2014 GAAR Slide 18

19 GAAR - Canada Procedural requirements The onus is on the taxpayer to refute the following (on a balance-of-probabilities basis): o The assertion that a tax benefit results from the transaction. o The assertion that the transaction was an avoidance transaction. The taxpayer might be able to refute this assertion by showing a bonafide and primary non-tax purpose for the transaction. If there is a tax benefit and an avoidance transaction, the burden then falls on the CRA to establish that there is abusive tax avoidance February 2014 GAAR Slide 19 February 2014 GAAR Slide 19

20 GAAR Australia Background and legislation o Australian GAAR introduced in 1981 o Proposed provisions in a new Part IVA seek to give effect to a policy that strike down blatant, artificial or contrived arrangements o 3 conditions to be satisfied for Part IVA to apply are: (i) scheme required, (ii) tax benefit required under scheme; and (iii) reasonableness to conclude that at least one person entered into the scheme for sole or dominant purpose of obtaining tax benefit o Is there a scheme? o Is there a benefit? o What is the purpose? To ascertain purpose of scheme 8 matters require consideration February 2014 GAAR Slide 20 February 2014 GAAR Slide 20

21 GAAR Australia Background and legislation o What is the purpose? To ascertain purpose of scheme 8 matters to be considered 1. Manner of entering the scheme 2. Form and substance of scheme 3. Time of entering and duration of the scheme 4. The income tax result that, but for Part IVA would be achieved by the scheme 5. Change in financial position of taxpayer that resulted, will result or may reasonably expect to result from the scheme 6. Change in financial position of any person who has, or has had any connection with taxpayer that resulted, will result or may reasonably expect to result from the scheme 7. Any other consequence for the taxpayer or any person when entered into or carried out scheme 8. Nature of connection between the taxpayer and any person February GAAR GAAR Slide Slide 21 21

22 GAAR Australia Case law findings British American Tobacco Services Ltd. v. Commissioner of Taxation [2010] FCAFC 130 o Facts BAT (taxpayer) disposed of 9 cigarette brands to a Rothmans Group» under regulatory compulsion» And part of a wider merger Brands were subsequently sold to competitor» Enabling BAT (taxpayer) and Rothmans to take advantage of accrued capital losses» Corresponding enabled rollover relief against capital gains made by taxpayer and Rothmans group on sale of brands February GAAR GAAR Slide Slide 22 22

23 GAAR Australia Case law findings British American Tobacco Services Ltd. v. Commissioner of Taxation [2010] FCAFC 130 o Held No commercial or legal reason for disposition to be effected by single vendor Manner of scheme formulated and carried out explicably only by taxation consequences Correspondence mandated to complete merger prior to entering into any contractually binding arrangements for the sale of relevant brands which created the framework for claiming rollover relief February GAAR GAAR Slide Slide 23 23

24 GAAR Australia Case law findings AXA Asia Pacific Holdings Ltd. v. Federal Commissioner of Taxation [2009] FCA 147 o Facts Taxpayers s structured its disposal of AXA Health through an interposed entity» Resulting in scrip-for-scrip rollover relief» Indefinite deferral of AUD 122 million in capital gain tax Held» No tax benefit could be found to exist» Tax Authorities contention was contrary to the evidence adduced not supported by the facts February GAAR GAAR Slide Slide 24 24

25 GAAR China Background China tax law includes GAAR provisions with effect from 1 January 2008 Trigger event o Article 47 If an enterprise engages in a business arrangement without bonafide commercial purposes that results in reducing its taxable revenue or taxable income, the tax bureau has the right to make adjustments based on reasonable methods. February GAAR GAAR Slide Slide 25 25

26 GAAR South Africa Background During 2006, the Income Tax Act 50 of 1962 was amended to combat tax avoidance more effectively Trigger event o An impermissible avoidance agreement has been entered into o Tax consequences o The legal substance of the arrangement as a whole is inconsistently with, or differs significantly from the legal form of its individual steps February GAAR GAAR Slide Slide 26 26

27 GAAR United Kingdom Background Currently no GAAR like provisions in UK statues Features o Abnormal arrangements o Contrived to achieve o Abusive tax result Case law Barclays Mercantile Business Finance Limited v. Mawson [2004] UKHL 51 o Facts» BMBF (taxpayer), member of Barclays Group» Taxpayer carried on the trade of finance leasing or providing asset based finance February GAAR GAAR Slide Slide 27 27

28 GAAR United Kingdom Case law o Barclays Mercantile Business Finance Limited v. Mawson [2004] UKHL 51 o Facts o Taxpayer borrowed from Barclays Bank» Purchase a pipeline from BGE, on Irish statutory corporation for GBP 91 million o Held Taxpayer granted as lease back to BGE GBP 91 million eventually went back to Barclays Bank through versions transactions Consequently taxpayer claimed capital allowance o Transaction be it circular/ pre-ordinated, not affecting the necessary element of statute» not a relevant factor n the determination of any tax entitlement under the tax statute February 2014 GAAR Slide 28

29 GAAR United States Background o There is no provision like GAAR Features o US courts have applied five main common law doctrines to deny taxpayers desired tax benefits, i.e. o Economic substance o Substance over form o Step transaction o Business purpose; and o Sham transaction February 2014 GAAR Slide 29

30 GAAR United States Third Party After 1 ½ year Direct repayment Financial & Affiliate of Taxpayer Canadian Subsidiary Layman Subsidiary Antilles Subsidiary Netherland Subsidiary Taxpayer Loan USD 18 million Loan USD 14 million Loan USD 14 million Loan USD 14 million Loan USD 14 million Loan USD 14 million Repaid Held Transaction analysed under step transaction doctrine Step ignored in series of transactions if not affecting taxpayer s beneficial interest To enjoy treaty benefits transaction to have sufficient business or economic purpose Del Commercial Properties Inc. v. Commissioner, 251 F.3d 210 [DC Cir. 2001] February 2014 GAAR Slide 30

31 GAAR Approaches

32 GAAR Approaches Purposive approach South Africa GAAR o Purpose test is more objective where the sole or main purpose of the arrangement is the relevant purpose and not the subjective purpose of the taxpayer. o Although provision indicates that establishment of main purpose is essential, methodology to determine the same is unclear. o Absence of simultaneous business purpose or a bonafide purpose test, and mere presence of tax benefit provides that avoidance arrangement was entered into solely or mainly for tax benefit. Misuse or abuse test - Canada GAAR o The test involves two-party inquiry» Provision interpretation giving rise to tax benefit» Factual content February 2014 GAAR Slide 32

33 Thank You