Shifting sands and tackle tips

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Shifting sands and tackle tips superadmin Fri, 07/03/2014 - 10:04

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This 'Woman's Day' activity is one that feels particularly good to participate in, for in writing a professional piece on taxation there is no room for gender specific discussions on why a woman needs to applauded, celebrated etc, even if for a day!

In this piece therefore, two tax professionals in the industry (who merely happen to be women), take stock of the current situation that taxpayers/ tax managers find themselves in today. At a time when the world has been besieged by a virtual seismic shift of plates with the economic downturn, when a set of stable and familiar regulations may have been a useful factor to get by, we are witnessing several moving parts in terms of tax regulations, many of which are consequential to the present times, which leave us trying to grapple with several challenges simultaneously.

Globally speaking, the financial crisis forced policy makers to frame new laws to protect their tax base, countries are re-negotiating tax treaties, the mode and pace of information exchange between countries has been enhanced, transfer pricing rules are being tightened, and international agencies like OECD are actively working on formulating a world order in terms of base erosion and profit sharing between countries. In India, the economic crisis combined with political uncertainty, policy delays and frequent changes in tax laws continue haunting investors doing business in India.

This changing landscape in tax regulations mandates us to equip and adapt, or melt into irrelevance. Some of the significant tax developments and the new terms that we need to understand and deal with:

Transfer Pricing - As most survey reports would suggest 'Transfer Pricing' continues to top the charts among the tax risks faced by businesses world over. Managing transfer pricing compliance and more so, with countries like India having introduced domestic transfer pricing rules has resulted in increased cost and time commitment of tax professionals. Transfer pricing litigation and controversy is surmounting, sometimes relating to seeming non-issues. For instance transfer pricing adjustments to the tune of over Rs 70,000 crores was made in FY 2012-13 alone.

The Government has definitely helped in the mitigation of a burdensome phenomenon by introducing APA mechanism and Safe harbor rules. This year alone around 150 odd APA applications have been filed and the outcome, which is awaited by many with bated breath, will determine future response by taxpayers to this facility.

The Safe harbour rules have brought in some element of certainty to taxpayers; however, the level of prescribed thresholds and the all-encompassing definitions pose an element of deterrent, thus not providing the extent of relief that may have been intended.

BEPS - Are companies paying their share of taxes in the countries where they have presence, has been the key area of debate internationally. Or have they been able to, howsoever legitimately, been able to minimize tax costs by taking advantage of differences in tax laws in various countries. An outcome of this discussion is the report by OECD addressing Base Erosion and Profit Shifting. The report outlines the underlying causes of base erosion and profit shifting and highlights the need for a comprehensive approach. India too has been actively participating in BEPS program. The country by country reporting requirement as contemplated in the draft BEPS report on transfer pricing would mean onerous disclosure requirements for companies. It is imperative to track developments, understand implications and prepare for compliance in terms of documents and resources and modify existing systems to take care of the reporting requirements.

GAAR - General anti-avoidance rules ('GAAR') have been part of the tax regulations of countries like South Africa, Canada, Australia, China. In India, GAAR was introduced as part of DTC bill in 2010, since then it has undergone several iterations before finding its way into the Income tax Act, to be effective wef 1 April 2016. The sincere efforts of the Government of India to resolve concerns surrounding various aspects in GAAR such as main purpose test, shifting proof of burden from the taxpayers to tax authorities, non applicability to SAAR situations, etc , notwithstanding, apprehensions regarding the manner in which these provisions would be administered by tax authorities continues to worry businesses. Pre- empting the coming into force of GAAR with anti- avoidance provisions in successive Finance Acts adds to concerns and the need of the hour is to be ever vigilant while planning transactions. Apart from understanding the legal position, the likely interpretations, approach and possible amendments to law with retrospective effect require to be factored.

FATCA - Foreign Account Tax Compliance Act slated to be effective from 1 July 2014, is a US law which aims to reduce the tax avoidance by US citizens through the use of offshore accounts. FATCA laws require financial institutions having US based accounts to enter into agreement with US Tax authorities for providing information on certain US persons invested in accounts outside US and for certain non-US entities to provide information about any US owners. As such, the coverage of FATCA is wide. Failure to meet with the FATCA norms would subject financial institutions to tax withholding on US sourced payments paid by US corporations, as well companies entering into transactions with such companies. Apart from assessing compliance requirements, there is a need to understand the law as inevitably, loan agreements with banks, procurement agreements with US persons, for example, include a FATCA clause to protect themselves from a potential withholding on income in the event of a US sourced income.

The path ahead for tax professionals in the industry promises to be a maze rather than a highway, involving navigation of a clutch of emerging laws to regulate and address a challenging economic situation. A ear to the ground, a proactive approach together with update skill sets is the order of the day to manage the changing environment.

The Gurumantra for tax professionals today would be to closely track business activities, major and minor, identify risks, align with new regulations or prepare defense strategies well in advance in order to ensure minimal potential disputes.

And in the midst of all this, dare to hope for the possible stability that a new Government could bring, of reduced taxes, simplified laws, et al!

Nature of issues

BEPS

FATCA

transfer pricing

International - Others

GAAR

Senior VP & Group Head, Essar Investments Limited

S Gayathri

Shifting sands and tackle tips

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