Tax transparency in a connected world

India has included many proposals in its tax legislation to bring it to global standards



Transparency is when much is known to many. Embedding transparency into the tax system would mean creating an ecosystem where tax policies and compliances of any organisation contribute a fair share of tax to the government.

Today, tax has become a global reality which requires global action. As the world has become more interconnected it is important to understand who pays tax, and to whom, and how much.

In recent times, there have been reports about the Panama papers or big corporate houses getting into tax troubles due to a fancy or complex structure. These reports have attracted global regulatory scrutiny and media trials.

Information exchange

A range of initiatives have been taken worldwide for tax disclosure and adherence to a high standard of international cooperation.

For instance, The Organisation for Economic Co-operation and Development (OECD) has formed a Global Forum on Tax Transparency and Exchange of Information.

The US introduced the Dodd-Frank Act, which requires a particular class of companies to report all payments made to the US federal and foreign government. It also introduced the Foreign Account Tax Compliance Act (FATCA) in 2010 to tackle tax evasion through obtaining information in respect of offshore financial accounts maintained by US resident and citizen.

In July 2015, US signed an inter-governmental agreement with the US for implementation of FATCA in India.

In July 2013, the OECD released an Action Plan on Base Erosion and Profit Shifting (BEPS). BEPS refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations. The purpose of the Action Plan was to prevent double taxation as well as cases of no or low taxation associated with practices that artificially segregate taxable income from activities that generate it.

Today, India has already included many proposals in its tax legislation to adopt BEPS recommendation. Perhaps the most important one is incorporation of country-by-country (CBC) reporting in the Indian transfer pricing regulation.

CBC reporting is an attempt to enforce the principle that the risk, rewards and value drivers of business operations should be closely associated with the strategic functions and the substance. It entails three tiers of documentation, namely the master file, the local file and CBC report.

For tax administrators, CBC report would highlight any possible mismatch between the level of profits or revenues residing in, or intangibles owned by, a group entity, along with the functions carried out by, or capital infused in, that entity.

The MLI master stroke

Another master stroke adoption was the signing of the Multilateral Instrument (MLI). In June 2017, more than 65 countries backed the initiative which will amend over 1,500 bilateral tax treaties.

MLI will allow countries to transpose treaty-related BEPS recommendations into their existing tax treaties without going through multiple bilateral negotiations and re-negotiations to implement changes.

By signing MLI, India has proposed to notify all its 93 treaties as ‘Covered Tax Agreements’ to the extent its reciprocated by other countries.

However, it is important to mention here that bilateral treaties with India will stand modified only when both the countries have exercised the same option.

If either of the two countries chooses to not opt for MLI provisions, then the existing treaty will continue to remain as it is. No doubt, BEPS has set a new benchmark for international tax policy and administration across the world.

India is playing an active role on tax transparency taking several measures including the implementation of the Goods and Services Tax (GST), amendment of tax treaties with tax haven countries.

India has also signed multilateral pacts for information exchange on multinational companies.

Our tax administration is also moving from discretionary to transparency-based systems. Hopefully, tax disclosure requirements will eventually become consistent, globally.

Rakesh Nangia, Managing Partner and Neetu Singh, Director- Direct Taxation, Nangia & Co LLP

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