Forget Tax Planning; Get Ready For GAAR in Direct Tax Code 2010

I. INTRODUCTION

The new Direct Tax Code1 (hereafter DTC) is all set to replace the Income-tax Act, 1961 with effect from 1st April, 2012, the basic objective behind its enactment being simplification of the language so as to enable better comprehension thereby reducing the number of law suits. Significant among the provisions that it introduces are the provisions aimed at tackling the problem of tax avoidance since this has been resulting in a major loss of revenue for the government. Certain legislative amendments2 had been made earlier to counter this particular problem but did not prove very effective since the tax payers found sophisticated methods to get passed them thereby necessitating further changes.

II. MAJOR CHANGES IN DIRECT TAX CODE RELATING TO TAX AVOIDANCE

The DTC has proposed the following changes so as to counter tax avoidance in our country. These have been summarized as follows:

a.        Introduction of the General Anti Avoidance Rules3 (hereafter GAAR) under which a transaction can be nullified by the concerned authorities if they are of the opinion that the central motive of the transaction is to obtain tax benefit4.

b.       The distinction between tax evasion and tax avoidance has been revoked. Prior to this tax avoidance was considered lawful. However, under the new code, tax avoidance will be considered on the same lines as tax evasion.

c.        Introduction of thin capitalization5 rules which provide that if the tax authorities are of the opinion that a company has raised its capital by debts with the motive of obtaining tax benefits then in such a case the authorities can declare the interest which is paid on the loan as dividend and deduct tax on it.

d.       Transfer Pricing6 Rules have been made more stringent under which certain new provisions like Safe Harbour Rules and Advance Price Agreement have been proposed. Also the penalties for not complying with the concerned provisions have been increased by almost hundred per cent.

e.        Introduction of the concept of Controlled Foreign Corporations which provides that if it is established that the transaction has been entered into with the purpose of avoiding tax, in such a case the passive income shall deemed to have been distributed and thus, would be liable for tax at the hands of the shareholders.

III. TAX EVASION AND TAX AVOIDANCE – EXPLAINED

As mentioned above, the position of the Government was relatively different earlier since tax avoidance7 was considered legal. The courts also in a number of cases held that it is the right of a tax payer to do everything he can so as to attract upon himself the least amount of tax. Thus, tax avoidance was not treated on the same lines as tax evasion.

The series of events which led to this conclusion have been discussed below –

a.        IRC vs. Duke of Westminster8

           The House of Lords held that a tax-payer has a legal right to attract upon him the least amount of tax and that tax evasion is different from tax avoidance. Thus, tax avoidance was declared legal.

b.       W. T. Ramsay vs. Inland Revenue Commissioners9

           The House of Lords in this case had to consider a series of transaction which, though permitted under the law, eventually resulted in tax avoidance. The House of Lords held that in cases where a transaction involves a number of steps not serving any commercial purpose but whose main objective is to save tax only, the most suitable approach would be to tax the transaction as a whole. This decision marked a significant change in the stance of the House of Lords.

c.        Inland Revenue Commissioners vs. Burmah Oil Co. Ltd10

           This case reiterated the principle laid down in W. T. Ramsay v Inland Revenue Commissioners. Burmah Oil suffered major losses on sale of an investment. This loss was not deductible for tax, which made the company enter into a series of transactions, the effect of which was that due to the liquidation of one of the subsidiaries in the group, the loss that was incurred became a deductible capital loss. The court relying on the Ramsay principle held that in cases where a transaction whose primary purpose is to avoid tax and it involves a series of transactions, the tax authorities have the power to tax the transaction as a whole.

d.       CIT vs. A. Raman & Co11

           The Supreme Court of India observed that avoiding tax liability by engaging in commercial affairs with the motive that charge of tax gets distributed is not prohibited. It is up to the taxpayer to resort to a method by which his income gets diverted before it accrues or arises to him.

e.        McDowell vs. Commissioner of Income Tax12

           The judges held that for tax avoidance to be legitimate, it is required to be within the framework of law. Colourable devices13 cannot be part of tax avoidance. This was the first time that the Indian courts used the term colourable device. Thus, the court approved tax minimization but stated that the transaction could be nullified in case this was done through colourable devices.

f.        Azadi Bachao Aandolan vs. Union of India14

           In this landmark judgment, the court held that even if a transaction has been entered into with the primary motive of avoiding tax, such transaction would not become a colourable devise and thus, not result in disqualification. Here, the courts relied on the judgment of the Westminster case which laid down the principle “an act which is otherwise valid in law can be treated as non est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interests, as perceived by the respondents”. The court in this case has also attempted to make a distinction between tax planning and tax avoidance. However, this distinction has very little relevance in the present era because of the varying and conflicting court views.

           But the DTC introduced by the Government makes an attempt to eliminate the distinction that exists between tax avoidance and tax evasion. The discussion paper on DTC has justified the inclusion of GAAR on the grounds that “tax avoidance just like tax evasion seriously undermines the achievements of the public finance objective of collecting revenues in an efficient, credible and effective manner”15.

IV. GENERAL ANTI AVOIDANCE RULES

GAAR may be defined as a concept under which a transaction whose primary purpose is to avoid tax can be invalidated if the concerned authorities are of the opinion that the object and purpose of applicable tax laws would be violated.

Presently the Income-tax Act, under sections 90 {16} and 91 {17}, contains a provision for an agreement for avoidance of double taxation. A need for such a provision was felt so as to protect the individual or a corporate entity against the risk of being taxed twice in cases where the same income is taxable in two states. Such a situation arises when the country of residence is different from the country in which the income is generated. To prevent this, the individual is provided with the option of choosing whether to be governed by the domestic laws or by the tax treaty, whichever one is more favourable for him18. However, it was observed that in many cases residents of a third country were taking advantage of this even though the agreement was meant for the resident of the contracting countries only. This process has been termed as treaty shopping and though it has been declared as lawful by the courts, the Government considers it to be a source of losing major public revenue resulting in the introduction of GAAR.

IV.1    Conditions under which GAAR may be invoked

The DTC contains the following provisions under which these rules can be invoked:

a.        It is required that the tax payer must have entered into an arrangement.

b.       The basic purpose for which the arrangement has been entered into must be to obtain tax benefit provided

i.         The arrangement is such which is not normally applied for bona fide business purposes.

ii.        The transaction is in conflict with the code.

iii.       The transaction lacks commercial substance either in whole or in part.

iv.       The transaction creates an obligation which is not normally created between people at arm’s length19.

           However, these conditions were not considered exhaustive20 enough and so the revised paper on the new code added some more provisions under which these rules could be invoked. These rules have been mentioned below21.

i.         A threshold limit will be prescribed and if the tax avoidance in an arrangement is above this threshold limit, only then will the rules be applicable.

ii.        A Dispute Panel Resolution22 will be set up under which the aggrieved parties can approach the panel.

iii.       The Central Board of Direct Taxes has also been given the power to issue guidelines under which these rules could be invoked.

IV.2    Criticism against GAAR

The GAAR invoked a lot of criticism after its introduction and several representations have been made for diluting the GAAR proposal. Some of the criticisms have been summarized below –

a.        As stated earlier, the Income-tax Act, 1961 permitted minimization of taxes. However, the new code withdraws this benefit and now describes tax minimization as an offence. This provision will now be in conflict to the decision given by the Supreme Court under Union of India v Azadi Bacho Andolan23, once again pitting the Judiciary vs. the Legislature. This will result in further complication of the matter eventually leading to an increase in lawsuits. The very objective of the DTC will, thus, get defeated.

b.       Under these rules, powers have been given to the Commissioner of Income Tax to declare any transaction illegal if he is of the opinion that the primary purpose of the transaction is to obtain tax benefit. Such a provision has been made to prevent third parties taking advantage of the Double Taxation Avoidance Agreement24. However, there are concerns that providing an individual person with such great powers may back fire and defeat the very purpose of such provision. Taking note of this, the Government under the revised discussion paper has been requested to introduce legislative and administrative safeguards with regards to this. Also, the Central Board of Direct Taxes has been asked to issue guidelines under which GAAR may be imposed to provide a certain degree of clarity to the process. However, it remains to be seen whether these safeguards, once enacted, prove to be effective or not.

c.        A proposal has been made for codification of the GAAR since, according to the Government, this would help in bringing in uniformity while dealing with cases relating to tax evasion. However, many tax experts believe that codification of these rules may lead to penalizing those who have a genuine reason of entering into bona fide transaction. This may also result in limiting the scope of application of these rules thereby leaving scope for interpretation which will eventually result in increase in law suits.

d.       Whether these rules will have a retrospective effect or not is not very clear from the provisions that have been laid down. If these rules do have a retrospective effect i.e. the transactions which have already been entered into prior to the introduction of DTC will also come under its ambit, this will lead to an increase in litigation eventually defeating the purpose for which DTC was enacted.

e.        These rules may act as a deterrent to the foreign investors and may lead to the lowering of Foreign Direct Investment25 into India. Foreign investors may become reluctant about investing in India due to uncertainties as to how the Commissioner of Income Tax may deal with a case since the rulings may differ from case to case as these rules do not have statutory standings.

IV.3    General Anti Avoidance versus Specific Anti Avoidance

The DTC along with GAAR also contains a provision for Specific Anti Avoidance Rules (hereafter SAAR). SAAR can be defined as those rules which specifically lay down the provisions under which these can be invoked. These rules have a limited application but a major advantage of these rules is that these rules are certain and do not leave any scope for interpretation

unlike the GAAR. SAAR have been recognized in certain countries like the UK26, Australia27, Netherlands, etc. and now with the introduction of the DTC in India, SAAR and GAAR will exist simultaneously.

The various conditions under which these rules can be invoked have been laid down below.

i.         Payment to associated persons in respect of expenditure.

ii.        International transactions not at arm’s length.

iii.       Transactions resulting in transfer of income to non-residents.

iv.       Avoidance of tax in certain transactions in securities.

The code, however, fails to answer the basic question regarding the extent and scope of the SAAR. It is ambiguous regarding whether these rules will have an overriding effect on GAAR or vice versa. This is likely to pose problems for the tax payers. The tax laws of certain countries like that of Germany lay down that in case of a conflict between the two, SAAR will prevail. But there are also countries that have tried to balance the two and none have been given an overriding effect over the other. It is, however, important that necessary provisions are laid down with regards to the extent and scope of SAAR.

One of the most important questions that have been raised in this context is whether enactment of SAAR instead of GAAR would have been more appropriate. Some countries like the UK, Denmark and Mexico do not have any provisions regarding GAAR but instead prefer to have SAAR only. They have justified this decision by explaining that these rules are more specific and thus, help reduce litigation. Also, these ease the process of companies entering into a transaction. However, there is a flip side to this. These rules, being specific, have a very limited scope of application and this may provide tax payers an opportunity to find loopholes in the provisions which could then be exploited by them for their own benefit. GAAR, on the other hand, have a broader application resulting in them being interpreted in a more extensive manner. Thus, the appropriateness of SAAR and GAAR needs to be reexamined and clear administrative guidelines need to be drafted as to when and how SAAR and GAAR can be implemented. Otherwise, the ambiguity would just lead to an increase in litigation.

IV.4   General Anti Avoidance Rules in various countries

The GAAR provision as prevalent in different countries has been summarized below –

a.        USA:

           The Economic Substance Doctrine28 is what GAAR is known as in the United States of America. The courts have been using these rules for the past seventy years but the effort to codify them has been made only in the last ten years. It was only in 2010 that legislation was passed in this regard imposing a penalty for all those transactions whose main purpose was to avoid tax. However, one of the biggest flaws of this legislation is that it does not lay down the transactions which would fall under its purview and it is left for the courts to determine the same leading to ambiguity for the courts and the tax payers alike29.

b.       Canada:

           Canada is one of the few countries to have a well laid down GAAR. These rules give immense powers to Canadian Revenue Agency to question the transaction, which according to them, has been entered into for the primary purpose of avoiding tax30. For these provisions to be applicable, one of the following conditions must be fulfilled:

i.         The transaction must have been entered into for the purpose of obtaining tax benefit.

ii.        The transaction must directly or indirectly result in the abuse of the Income-tax Act or the treaty.

iii.       Some kind of tax benefit must be arising out of the transaction or the series of transactions.

c.        UK:

           The United Kingdom’s tax laws have provisions only for SAAR. However, the GAAR have been developed in the country through the various judgments of the courts. A prominent decision in this regard was made in the W. T. Ramsay vs. Inland Revenue Commissioners case. The court in this case had to deal with a situation where in a series of transactions was entered into, which though permitted under law, resulted in tax avoidance. The House of Lords held that in cases where a transaction had a series of steps not serving any commercial purpose but carried out with the objective of saving tax, the proper approach would be to tax the transaction as a whole. This decision marked a significant change in the stance of the House of Lords. This principle has also been widely used in other countries including India.

However, the government is considering a proposal for the introduction of the GAAR31.

d.       China:

           It was with the introduction of Enterprise Income Tax Laws32 in the country that GAAR principles were introduced for the first time33 under section 47 giving power to the State Administration of Taxation to apply the same. However, the Chinese tax laws provide for “substance over forms” and “reasonable commercial purpose” tests to determine whether an offshore transaction will be considered as void or not34. The Chinese Income Tax laws go on to explain as to what constitutes an offshore transaction. An offshore transaction is one which is without a legitimate commercial purpose or an offshore holding structure devoid of economic substance35.

V.  THIN CAPITALISATION RULES

Thin capitalization refers to a situation in which a company consists of a high proportion of debt36 as compared to equity. It was being observed that a large number of companies were acquiring loan with the primary purpose of obtaining tax benefit. This is because when a company acquires a large loan, high interest is required to be paid on it but this interest is tax free and this is now being used by the companies as a tax saving instrument. This coupled with the fact that dividend37 gets distributed to the shareholders only after some amount of income tax has been deducted from it has made it preferable for companies to raise capital through loans rather than through equity capital. It is because of this that the Government plans to introduce Thin Capitalization Rules. These rules empower the income tax department to declare the interest which is paid on the loan as dividend and deduct tax on it. However, these rules can only be invoked by a Commissioner rank officer and a final order can be passed only after a ruling by a Dispute Resolution Panel.

Most of the countries in which these rules exist such as US, Poland, Hungary, Germany, etc. have laid down the maximum debt to equity ratio beyond which the excess interest that is paid is either disallowed or a penalty is imposed or interest is reclassified as debt. In case of India, the Foreign Investment Promotion Board38 presently lays down the debt to equity ratio through the automatic route. This limit, however, can be increased provided an approval is obtained from the Foreign Investment Promotion Board. But these rules are only meant to keep a check on foreign investment and do not apply to domestic investors. Thin Capitalization Rules, once introduced, will be applicable to investment from all sources.

The tax department will be able to invoke Thin Capitalization Rules under the following situations-

i.         The code introduces a subjective approach under which terms and nature of contribution are analyzed to decide whether the contribution has been disguised as equity.

ii.        If an arrangement is entered into under which a situation is created where in a step or a combination of steps is predominantly aimed at obtaining tax benefit which otherwise would not have been created had the parties been dealing with each other at arm’s length, then in such a case the tax authorities can declare the transaction as void.

iii.       If an arrangement has been entered into which lacks commercial substance39 but results in tax benefit for either of the parties, then these rules can be invoked.

Recently in Besix Kier Dabhol SA vs. DDIT (ITAT Mumbai)40, a controversy arose regarding the application of Thin Capitalization in India as the revenue department wanted the debt of the assessee to be treated as equity and thus, liable to be taxed. The Tribunal, however, held that Thin Capitalization is not applicable in India as of now since the DTC has not yet come into force.

VI.      TRANSFER PRICING

Transfer pricing refers to the price at which physical goods and intangible property is transferred between related business entities which includes transfer of tangible loans and other financing transactions. It was seen that many a times a company transferred its profits to its Associated Enterprise41 outside the Indian jurisdiction with the purpose of avoiding tax which resulted in a great loss of revenue for the government. This resulted in the introduction of Transfer Pricing Regulations in the Income Tax Act, 1961 whose motive was to ensure that the profits of a company are not shifted outside India through cross border transactions.

VI.1    Transfer Pricing under the Income Tax Act

The Income-tax Act, 1961 through section 92 has laid down provisions relating to Transfer Pricing which necessitates that all international transactions that happen between Associate Enterprises be at Arms Length Price. Arm’s Length Price has been defined as the price which would have been charged if unrelated partied under similar conditions entered into a transaction. For the purpose of determining such price, section 92C specifies the methods that can be used to compute this price:

i.         Resale Price Method

ii.        Profit Split Method

iii.       Transactional Net Margin Method

iv.       Comparable Uncontrolled Price Method

v.        Cost Plus Method

It is open for the tax payer to choose any method provided he does so as per the rules laid down. A variance of 5% has been laid down under provision (2) of section 92 with the motive of providing some amount of flexibility while determining the Arm’s Length Price.

The section also provides that if the tax authorities are of the opinion that a particular transaction has resulted in less than ordinary profit for a resident as a result of his close connection with a non-resident, then the taxable income between the two can be recomputed by the concerned authorities. However, these provisions did not prove to be effective which resulted in the introduction of more stringent provisions through the DTC.

VI.2    Transfer Pricing under Direct Tax Code

The basic objective behind the enactment of these rules have been laid down by the Central Board of Direct Taxes42 under Circulars 12 and 14 which provides that the purpose of these regulations is to prevent the shifting out of the profit by companies by way of manipulating the prices paid or charged in an international transaction. For this purpose the DTC has introduced certain new concepts which have been summarized below-

a.        The penalties under the code have been made much more stringent. As per the new code the penalty for not filing the accountant report and for the non-maintenance of documents has now been increased from fifty thousand to two hundred thousand. Also, the penalty for non-furnishing of documentations has increased from five thousand to hundred thousand.

b.       Safe Harbour Rules have been introduced which will be used to determine the Arms Length Price. In other words these rules will specify the level up to which the authorities will permit the cost of goods or service. Also, they will help in providing certainty. However, the issue of double taxation remains unresolved as there might be cases under which the percentage level of Safe Harbour Rules will not be accepted by the other country thereby resulting in Double Taxation.

c.        Advance Price Agreement has been proposed between the tax payer and tax assessor. Thus, if an agreement has been entered into by the tax payer and the tax assessor, then the price will be determined by the agreement. This procedure will help in bringing certainty to such transactions.

d.       The term Associated Enterprise has been amended and now for a transaction to fall under this only 26% of shareholding is required as compared to 51% under the previous Act

VII.     CONTROLLED FOREIGN CORPORATION

Controlled Foreign Corporations are those companies which have been established in countries with low tax jurisdiction43 with the purpose of avoiding tax by accumulating the income. Such companies are controlled directly or indirectly by residents. The DTC defines the term Controlled Foreign Corporation under Clause 5 of Schedule 20. It provides that for a company to be classified under this, following conditions need to be fulfilled:

i.         Such company is required to be registered in a country with low tax jurisdiction and the shares of the company are not listed in that country.

ii.        An Indian resident must be exercising control over the company.

iii.       It is also required that the company’s income must be above 25 lakhs. This process is known as the De Minus test.

iv.       The company must not be involved in active trade or business.

v.        The tax that is paid in the foreign country must be less than one half of the tax that is payable under the DTC.

The Government has justified the inclusion of this concept in the DTC on the basis that our country has seen a trend of increase in outward investment44 resulting in a major loss of revenue for the government. The revised discussion paper on the DTC has laid down that the passive income45 earned by a foreign corporation, controlled either directly or indirectly by a resident of India, but not distributed among the shareholders for the purpose of avoiding tax will be considered as distributed if it is established that the transaction has been entered into with the purpose of avoiding tax. This income would then be liable for tax once the dividend has been received by the shareholders.

A major change which has been introduced with regards to Controlled Foreign Corporation in the revised discussion paper on DTC is widening the ambit of the term “Place” which has now been defined as the place where “key management and commercial decisions” are routinely taken. Prior to this, section 9 of the Income-tax Act limited the definition of the term “Place” to the extent that that a Foreign Corporation was liable to be taxed only if the management and control are wholly owned in India.

The DTC lays down a twofold test for determining the “place of effective management”-

i.         The place where the decisions are made by the board of directors or the executive directors of the company.

ii.        The place where the board of directors routinely approve the commercial and strategic decision which are made by the executive directors or the officers of the company.

VII.1   Criticism against Controlled Foreign Corporation

a.        The term “routinely” has been included while defining “Place for effective management”. However, no proper meaning has been given to this term. Thus, it is required that a proper interpretation must be given to it so as to reduce any possibility of an increase in litigation.

b.       It is required that the Controlled Foreign Corporation Rules be accompanied with Safe Harbour Rules which will exclude the operation of these rules for certain tax payers like a listed company or a company whose certain percentage of income is distributed every year.

c.        The term direct and indirect holding has not been defined under the code which leads to uncertainty as to whether all the foreign companies will be included under this or whether this chain will be broken if one of the entities is not a company.

Though these regulations were not present in the original draft of the DTC however they were included in the revised discussion paper since the Government considered this to be a method for avoiding tax. However it is required that a proper analyses of such provisions be done since a proper framework has still not been laid down for such provisions.

VIII.    CONCLUSION

The intent of the tax authorities and the Government to introduce provisions for curbing tax avoidances is progressive as far as tax policy is concerned. The revenues collected from this will prove to be a major boost for the economy and the country as a whole. The introduction of these provisions will also put to rest once and for all the controversy as to whether tax avoidance is legal or not. However, there are still some aspects of the proposed DTC that the Government must reexamine and clarify. The proposed DTC still leaves a lot open for interpretation and efforts must be made to minimize this in order to achieve the objective of fewer lawsuits as far as tax avoidance is concerned.

1.           The Direct Tax Code seeks to consolidate and amend the law relating to all direct taxes, namely, income-tax, dividend distribution tax, fringe benefit tax and wealth-tax so as to establish an economically efficient, effective and equitable direct tax system which will facilitate voluntary compliance and help increase the tax-GDP ratio

2.           These legislative amendments also resulted in making the Act more complex thereby resulting in an increase in tax suits.

3.           Under these rules the concerned can invalidate a transaction which is aimed solely with the purpose of avoiding tax if the object and purpose of applicable tax laws would be violated

4.          Tax benefit may be explained as something which results in avoiding or deferral of tax, increase in refund of tax and increase in refund of tax because of DTC.

5.           Sometimes the companies deliberately follow this method of raising capital since there is no deduction of tax on the interest that is paid on the debt whereas in equity certain amount of income tax is deducted on the dividend that is paid.

6.          Transfer Pricing refers to the price at which physical goods and intangible property is transferred between related business entities

7.           According to the statistics provided by Global Financial study, India from a period of 1948-08 has lost $ 462 billion as a result of corruption and tax avoidance.

8.          [1935] All ER 259 (H.L.)

9.          [1982] AC 300 (HL)

10.        [1982] S.T.C. 30, H.L.(SC.)

11.         [1968] 67 ITR 11 (SC)

12.         (2006) 200 CTR Bom 225

13.         Colourable devices is the use of unfair methods which are used for avoiding or reducing tax. Though these methods were declared legal by the courts but the DTC will declare such methods as illegal.

14.        (2003) 263 ITR 706 (SC)

15.         https://cvc.nic.in/vscvc/taxcorrup.pdf

16.        Section 90 of the Income Tax explains that the Indian government may enter into a treat with a foreign counter part in order to avoid the issue of double tax for the tax payer.

17.         Section 91 explains that where a resident proves that he has paid tax in a foreign country with which India does not have an agreement, in such a case the concerned person is eligible for deduction from Income Tax payable by him.

18.        Sub Section (2) of Section 90 of the Income Tax Act, 1961 lays down where the Central Government has entered into an agreement with the Government of any country outside India under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.

19.        Arms’ length may be defined as a deal between two interrelated or enterprise associates parties. That is behaviour as if they were not related, so that there is no query of a disagreement of attention. In simple way we can describe this as “a deal between two unconnected or associate parties

20.        The criticism regarding not being exhaustive enough arose since it was believed that there was still a lot of room for interpretation thereby allowing the tax payers to find loopholes and avoid tax.

21.         https://finmin.nic.in/Dtcode/RevisedDiscussionPaper.pdf

22.        The Dispute Panel Resolution shall consist of Commissioners who are the revenue officers. The panel is required to make necessary inquiries and issue direction to the tax officer within nine months.

23.        The court held that even if a transaction has been entered into with the primary motive of avoiding tax, such transaction would not become a colourable devise and thus not result in disqualification.

24.        Double Taxation Avoidance Agreement are those agreements which two countries enter into. The purpose of these is to avoid the double taxation of a tax payer since in some cases country of residence is different from the country where the income was generated which eventually will result in double taxation.

25.        Foreign Direct Investment is essential for the development of a country. India has become one of the most favoured destinations for FDI and as per the statistics of United Nation Conference on Trade and Development, India was the 2nd most preferred destination for FDI.

26.        The Law Committee in its report laid down that Specific Anti Avoidance will help the judges to look at the underlying purpose of the legislation and publication of memoranda explaining the purpose of legislation thereby making it easier for them to target specific provision more accurately.

27.        The Australian Income Tax Act consists of special types of SAAR which have been designed in such a way so as to tackle specific behavior and transactions. They help in preventing tax payers from getting unnecessary tax benefits. Some of the examples of SAAR in Australia are “determine which party is, or parties are, liable to tax”, assist with the identification of, and address, artificial transactions and behaviours https://www.treasury.gov.au/documents/1901/PDF/dp_anti_avoidance_provisions.pdf

28.        For the Economic Substance Doctrine to be levied by the courts it is required that the courts be satisfied that the tax payers main motive was to obtain tax benefit and the transaction does not have any economic substance.

29.        If it is proved that the transaction has been entered into with the purpose of obtaining tax benefit, in such a case either the transaction is disregarded or is requalified.

30.        The first two conditions that have been mentioned, in those cases the onus is basically in the tax payer to prove them wrong while the onus of the third condition is on the Canadian Revenue Agency.

31.         Recently a committee was setup by the Exchequer Secretary consisting of six members has been set up to look into the proposal of introducing GAAR into UK. A deadline of 31st October has been set after which a report will be submitted to the treasury minister.

32.        Though the basic provisions regarding GAAR is contained in Enterprise Income Tax Laws however some other provisions regarding this are also contained in the EITL Implementing Regulations and Notice of the State Administration of Taxation on Issuing the Measures for the Implementation of Special Tax Adjustments.

33.        Article 47 of the Enterprise Income Tax Law empowers the tax authority to make a tax adjustment where a transaction has been entered into without a reasonable business purpose and has resulted in a reduction in taxable revenue or profit.

34.         The principle of substance over form has been mentioned in Article 93 of the Enterprise Income Tax laws. The article further goes on to explain the situation under which a transaction may be considered as substance over form.

35.        https://www.wilmerhale.com/publications/whPubsDetail.aspx?publication=9624

36.        When a firm raises money for working capital or capital expenditures by selling bonds, bills, or notes to individual and/or institutional investors. In return for lending the money, the individuals or institutions become creditors and receive a promise that the principal and interest on the debt will be repaid.

37.        The act of raising money for company activities by selling common or preferred stock to individual or institutional investors. In return for the money paid, shareholders receive ownership interests in the corporation.

38.        The Foreign Investment Promotion Board (FIPB) is a government body that offers a single window clearance for proposals on Foreign Direct Investment (FDI) in India that are not allowed access through the automatic route. IPB comprises of Secretaries drawn from different ministries with Secretary, Department of Economic Affairs, MoF in the chair. This inter-ministerial body examines and discusses proposals for foreign investments in the country for sectors with caps, sources and instruments that require approval under the extant FDI Policy

39.        The lack of commercial substance, in the context of an arrangement, shall be determined, but not limited to, by the following indicators:

               (i) The arrangement results in a significant tax benefit for a party but does not have a significant effect upon either the business risks or the net cash flows of that party other than the effect attributable to the tax benefit.

               (ii) The substance or effect of the arrangement as a whole differs from the legal form of its individual steps

40.       This case laid down that In absence of “thin rules”, interest paid to shareholders for loans cannot be disallowed despite capital-structure tax-planning

41.        An Associate Enterprise is the one where one enterprise is controlled by the other, or both enterprises are controlled by a common third person.

42.        The Central Board of Direct Taxes is a part of Department of Revenue in the Ministry of Finance. On one hand, CBDT provides essential inputs for policy and planning of direct taxes in India,at the same time it is also responsible for administration of direct tax laws through the Income Tax Department.

43.        Tax Haven is an area where the taxation structure has loop holes which allows individuals and companies to take advantage of significantly lower taxes while engaging in domestic or international trade. A typical haven for certain institutional investors in India is Mauritius

44.       A business strategy where a domestic firm expands its operations to a foreign country either via a Green field investment, merger/acquisition and/or expansion of an existing foreign facility. Employing outward direct investment is a natural progression for firms as better business opportunities will be available in foreign countries when domestic markets become too saturated.

45.        Income derived from business investments in which the individual is not actively involved, such as a real estate limited partnership.
  
Reproduced with permission from AIFTP Journal July 2011