Description
The PPT explaining about Tax Avoidance and Tax Evasion:
Tax Avoidance vs. Tax Evasion
It was a scene straight out of the movies — except that it happened in Chowringhee, Kolkata’s office complex. On a mild February afternoon, passers-by were shocked by the sight of currency notes floating down towards the ground from the 15th floor of the Everest building. A couple of beggars were grabbing fistfuls of money before white-coated policemen could cordon off the area. It was the desperate move by executives of an engineering company to get rid of unaccounted-for money moments before an income tax raid.
Tax evasion is deliberate attempt to subvert the law
or manipulation of records to obtain relief. whereas
Tax avoidance involves arranging transactions within
the permissible limits of law to secure tax advantage and it is generally accepted as legal.
Methods of Tax Evasion
• Fudging rentals – both commercial and domestic – by taking part of the rent in cash and the rest in cheques • Fudging accounts to show increased losses and expenses in the balance sheet to seek tax exemptions. • Reducing collection figures. • Sometimes to make a capital expenditure, especially in real estate, and show it in accounts as repairs (which are not taxed). • Misrepresenting data in both import and export businesses to seek exemptions under various categories (For individuals)Breaking salaries into multiple parts and taking allowances by listing items like toothpaste etc. as medicines.
Round Trip Financing
• The ordinary meaning of the word 'round-tripping' is 'a journey to a place and back again’ • Differential rates of tax for foreign and Indian investors have been the primary driver for this route
Transfer Payment Manipulation
• TPM is fixing transfer price on non-market basis which generally results in saving the total quantum of organization’s tax by shifting accounting profits from high tax to low tax jurisdictions. The implication is moving of one nation’s tax revenue to another.
Motivation
• Corporate Tax Differential • High Customs Duty – leading to under-invoicing of goods. • Restriction on Profit Repatriation – leading to over-invoicing of raw materials, etc transferred from parent country, hence compensating for locked forex.
• India’s Income Tax athourity had slapped a $2 billion tax bill on Vodafone International Holdings BV related to its 2007 acquisition of a 67% stake in Hutch Essar Ltd. from CPG Ltd., owned by Hutchinson Telecommunications International Ltd. But Netherlands-registered Vodafone International has been arguing that the deal with CPG, which is registered in the Cayman Islands, isn't liable to be taxed in India as it took place elsewhere. - October 30, 2009, The Wall Street journal
Treaty Shopping
• Used for investments routed by companies through countries with which India has a double taxation avoidance treaty. Example: Mauritius which accounts for more than 40 per cent of India’s FDI since 2000. • In August FIPB rejected a proposal by Goldman Sachs, Mauritius seeking a composite approval for any new investment in India for non-banking financial company services • Revenue department advised the FIPB to reject a proposal by Japan Tobacco International (JTIL) Mauritius Pvt Ltd to raise its stake in its Indian venture from 50 to 74 per cent by infusing $100 million on the same grounds.
Methods of Tax Avoidance
• Legal Entities– Create a legal separate entity like a Foundation or trust to which they donate their property. – Therefore income that is earned belongs to this entity and not by the owner. – Charitable organisations enjoy maximum exemption under the existing IT Act and Non-Profit Organisations.
• Country of residence –
– Changes the tax residence to a place that is a tax haven or become a regular traveller – Residence for 182 days in a year or 60days in the reference year and 365days in preceding 4 years
• Double taxation
– So that entities do not have to pay double taxes, once in the country where the income earned and then resident country, countries have bilateral treaties of double taxation. – E.g. India and Mauritius have double taxation avoidance treaties under which, capital gains made in Mauritius are not taxable in India.
History
• In 1936 , House of Lords in England suggested that a citizen has legal right to dispose off his income so as to attract upon himself least amount of tax. • If a document of transaction is genuine the court cannot go behind it to some supposed underlying substance. • Later the same House of Lords considered a series of transaction as a whole instead of individually ascertaining the genuineness of each transaction. This resulted in significant change in approach towards tax avoidance schemes.
SUPREME COURT RULINGS
• McDowell & Co Ltd vs. CTO (1985 154 ITR 148 SC):
– – – – – depart from the old thinking. Tax avoidance is bad and deserves condemnation. Tax planning might be legitimate provided it is lawful Colourable devices cannot be part of tax planning And wrong to encourage to avoid the payment of tax by resorting to dubious methods.
• Azadi Bachao Andolan's : case has laid down the clear law that where a Mauritian entity has been issued "tax residency certificate" by Mauritian tax authorities, benefits of IndoMauritian tax treaty would be available.
• Later after examining quite a number of cases apex court- Supreme Court of India observed that– Tax planning is legitimate within framework of law , colorable devices cannot be a part of law. – It is wrong to encourage the belief that it is honorable to avoid the payment of tax by resorting to dubious methods. – It permitted the scheme if there was strong commercial motivation behind it and tax benefit was only incidental.
Despite of above mentioned observations there remained an uncertainty between what is unacceptable tax evasion and acceptable tax avoidance . Aggressive tax avoidance disrupts the intergrity and equity of the system so in DTC i.e. Direct Tax Code , General Anti Avoidance Rule (GAAR) has been inserted.
GAAR
• It applies to any ?Arrangement? entered into by a person if the same can be regarded as ?Impermissible Avoidance Arrangement?. • ?Impermissible Avoidance Arrangement? under Sec 113 of DTC means , an arrangement (partly or whole) whose main purpose is to obtain tax benefit and it– Creates rights, or obligations, which would not normally be created between persons dealing at arm’s length. – Results directly , or indirectly in the misuse, or abuse , of the provisions of DTC – Lacks commercial substance, in whole or in part; or, – is entered into or carried out, by means, or in manner, which would not normally be employed for bonafide purposes.
Other Features
• Burden of proof is on taxpayer, who has to establish that obtaining a tax benefit was not the main purpose of the arrangement. • DTC proposes to prescribe penalties and prosecution for noncompliance with tax laws. Several provisions are there in DTC which bestow tremendous powers on revenue authorities. • On invoking GAAR, the commissioner may determine tax consequences by revising the arrangement. • The GAAR would override the underlying tax treaty and the decisions of the commissioner would be binding on assessing officer.
Key Operational Concerns
• GAAR would apply to certain transactions which commissioner presumes to be motivated by tax avoidance. • The burden of explaining the purpose of transaction lies on the taxpayer. • When commissioner will revise the purpose of transaction it would impart more uncertainty in the tax system as this will lead to further litigation. • In India , since the introduction of GAAR is new commissioners should be trained and have exposure to such prevailing practices in other jurisdictions.
• Power to invoke GAAR need to be moderated with suitable checks and balances to avoid misuse and abuse. They can cause tremendous inconvenience and hardship to genuine and bona-fide tax payers. • The consequences of invocation of GAAR may restrict freedom of parties to enter into transactions into tax efficient manner. • For businesses beforehand it is impossible to know what their tax liability is and which transactions are impermissible till the time due diligence exercise is conducted by revenue authorities.
• The Phraseology of GAAR has an element of subjectivity. Various stakeholders can interpret it in different manners. • Constituting separate authority to see into the matter will help in avoiding long litigation. On the other hand this may result in the fructification of commercial transactions.
International Scenario
• Countries that have introduced GAAR
– Australia, Canada, China, France, Germany, New Zealand, South Africa
• UK and US
– Reliance on judicial decisions on anti abuse principals – Legislative provisions to deal with specific situations
GAAR Experience
• South Africa:
– Primarily to prevent misuse or abuse of domestic arrangements. – Compensatory adjustments when debt is re-characterised as Equity and vice-versa is available. – Indian GAAR is believed to be inspired by South African GAAR
• China: GAAR provision that provides that where an enterprise enters into arrangements without a reasonable commercial purpose and which result in a reduction of taxable gross income or taxable income, the tax authorities can make an adjustment using appropriate methods. The authorities have also issued the implementation measures on the administration of the GAAR.
• The Spanish legislation containing a GAAR provides that tax can be levied by reference to the tax substance irrespective of the legal form of a transaction. • When there is an arrangement whose main purpose is to obtain a tax benefit, avoid tax event achievement or reduce the tax base and either • (a) the arrangements that, individually or jointly considered, are not appropriate to achieve the obtained result or • (b) arrangements that do not result in relevant legal or economic effects, then the Spanish tax authorities can apply the domestic GAAR to challenge the treaty shopping, in the absence of any specific Limitation on Benefits(LOB) provision in the relevant treaty.
• Netherlands and Canada –Burden of proof on the tax authorities • Australia –Application determined on the basis of 8 test or factors • The Indian GAAR, which is a 'catch all rule', could have far-reaching implications for the arrangement of the affairs of domestic and international businesses. As the new Code contains provisions that remove exemptions and deductions, rationalise tax rates, tax capital gains as business income and various other amendments, will make the GAAR practically unapplicable in domestic transactions. • The intention of the government is clearly to apply the GAAR to any international arrangement resulting in a tax benefit and which lacks commercial substance or bona fide purpose.
Suggested measures to control Tax Evasion and Avoidance
• Enacting a separate appeal mechanism wherein tax payer who is served notice about invocation of GAAR may appeal against such decision within specified time of getting notice. • A separate authority can be constituted which can be approached by tax payer for obtaining pre clearance for the transactions which are ambiguous in terms of interpretation. (this will be time consuming though) • Control measures on tax officer : e.g. Accountability • Tight administration of invoices • Information system for tax administration: tax collection, tax audits and investigation, tax legislation and enforcement. This will improve accuracy and speed up the whole process.
References
•
•
• •
• •
Goradia, S., & Seshadri, S. (2009, August 19). Differentiating tax avoidance and evasion. Economic Times . Deloitte Haskins & Sells. (2009). The General Anti Avoidance rule. Mumbai: Deloitte Haskins & Sells. Ernst&Young. (2009). Deciphering The Direct Tax Code. Mumbai: August- September 2009 Euromoney Institutional Investor PLC. . (2009, OCtober). Draft moves India towards international practice. Retrieved November 17, 2009, from International Tax Review: http://www.internationaltaxreview.com/includes/magazine/PRINT.asp?SID=72 2809&ISS=25495&PUBID=35 Kundra, P. (2009, October 19). Paradigm shift in tax avoidance. The Hindu Business Line . Money Blue Book. (2008, March 20). The Difference Between Legal Tax Avoidance and Illegal Tax Evasion. Retrieved November 4, 2009, from Money Blue Book: http://www.moneybluebook.com/the-difference-between-legal-tax-avoidance-and-illegal-taxevasion/
THANK YOU !!!
doc_556689922.pptx
The PPT explaining about Tax Avoidance and Tax Evasion:
Tax Avoidance vs. Tax Evasion
It was a scene straight out of the movies — except that it happened in Chowringhee, Kolkata’s office complex. On a mild February afternoon, passers-by were shocked by the sight of currency notes floating down towards the ground from the 15th floor of the Everest building. A couple of beggars were grabbing fistfuls of money before white-coated policemen could cordon off the area. It was the desperate move by executives of an engineering company to get rid of unaccounted-for money moments before an income tax raid.
Tax evasion is deliberate attempt to subvert the law
or manipulation of records to obtain relief. whereas
Tax avoidance involves arranging transactions within
the permissible limits of law to secure tax advantage and it is generally accepted as legal.
Methods of Tax Evasion
• Fudging rentals – both commercial and domestic – by taking part of the rent in cash and the rest in cheques • Fudging accounts to show increased losses and expenses in the balance sheet to seek tax exemptions. • Reducing collection figures. • Sometimes to make a capital expenditure, especially in real estate, and show it in accounts as repairs (which are not taxed). • Misrepresenting data in both import and export businesses to seek exemptions under various categories (For individuals)Breaking salaries into multiple parts and taking allowances by listing items like toothpaste etc. as medicines.
Round Trip Financing
• The ordinary meaning of the word 'round-tripping' is 'a journey to a place and back again’ • Differential rates of tax for foreign and Indian investors have been the primary driver for this route
Transfer Payment Manipulation
• TPM is fixing transfer price on non-market basis which generally results in saving the total quantum of organization’s tax by shifting accounting profits from high tax to low tax jurisdictions. The implication is moving of one nation’s tax revenue to another.
Motivation
• Corporate Tax Differential • High Customs Duty – leading to under-invoicing of goods. • Restriction on Profit Repatriation – leading to over-invoicing of raw materials, etc transferred from parent country, hence compensating for locked forex.
• India’s Income Tax athourity had slapped a $2 billion tax bill on Vodafone International Holdings BV related to its 2007 acquisition of a 67% stake in Hutch Essar Ltd. from CPG Ltd., owned by Hutchinson Telecommunications International Ltd. But Netherlands-registered Vodafone International has been arguing that the deal with CPG, which is registered in the Cayman Islands, isn't liable to be taxed in India as it took place elsewhere. - October 30, 2009, The Wall Street journal
Treaty Shopping
• Used for investments routed by companies through countries with which India has a double taxation avoidance treaty. Example: Mauritius which accounts for more than 40 per cent of India’s FDI since 2000. • In August FIPB rejected a proposal by Goldman Sachs, Mauritius seeking a composite approval for any new investment in India for non-banking financial company services • Revenue department advised the FIPB to reject a proposal by Japan Tobacco International (JTIL) Mauritius Pvt Ltd to raise its stake in its Indian venture from 50 to 74 per cent by infusing $100 million on the same grounds.
Methods of Tax Avoidance
• Legal Entities– Create a legal separate entity like a Foundation or trust to which they donate their property. – Therefore income that is earned belongs to this entity and not by the owner. – Charitable organisations enjoy maximum exemption under the existing IT Act and Non-Profit Organisations.
• Country of residence –
– Changes the tax residence to a place that is a tax haven or become a regular traveller – Residence for 182 days in a year or 60days in the reference year and 365days in preceding 4 years
• Double taxation
– So that entities do not have to pay double taxes, once in the country where the income earned and then resident country, countries have bilateral treaties of double taxation. – E.g. India and Mauritius have double taxation avoidance treaties under which, capital gains made in Mauritius are not taxable in India.
History
• In 1936 , House of Lords in England suggested that a citizen has legal right to dispose off his income so as to attract upon himself least amount of tax. • If a document of transaction is genuine the court cannot go behind it to some supposed underlying substance. • Later the same House of Lords considered a series of transaction as a whole instead of individually ascertaining the genuineness of each transaction. This resulted in significant change in approach towards tax avoidance schemes.
SUPREME COURT RULINGS
• McDowell & Co Ltd vs. CTO (1985 154 ITR 148 SC):
– – – – – depart from the old thinking. Tax avoidance is bad and deserves condemnation. Tax planning might be legitimate provided it is lawful Colourable devices cannot be part of tax planning And wrong to encourage to avoid the payment of tax by resorting to dubious methods.
• Azadi Bachao Andolan's : case has laid down the clear law that where a Mauritian entity has been issued "tax residency certificate" by Mauritian tax authorities, benefits of IndoMauritian tax treaty would be available.
• Later after examining quite a number of cases apex court- Supreme Court of India observed that– Tax planning is legitimate within framework of law , colorable devices cannot be a part of law. – It is wrong to encourage the belief that it is honorable to avoid the payment of tax by resorting to dubious methods. – It permitted the scheme if there was strong commercial motivation behind it and tax benefit was only incidental.
Despite of above mentioned observations there remained an uncertainty between what is unacceptable tax evasion and acceptable tax avoidance . Aggressive tax avoidance disrupts the intergrity and equity of the system so in DTC i.e. Direct Tax Code , General Anti Avoidance Rule (GAAR) has been inserted.
GAAR
• It applies to any ?Arrangement? entered into by a person if the same can be regarded as ?Impermissible Avoidance Arrangement?. • ?Impermissible Avoidance Arrangement? under Sec 113 of DTC means , an arrangement (partly or whole) whose main purpose is to obtain tax benefit and it– Creates rights, or obligations, which would not normally be created between persons dealing at arm’s length. – Results directly , or indirectly in the misuse, or abuse , of the provisions of DTC – Lacks commercial substance, in whole or in part; or, – is entered into or carried out, by means, or in manner, which would not normally be employed for bonafide purposes.
Other Features
• Burden of proof is on taxpayer, who has to establish that obtaining a tax benefit was not the main purpose of the arrangement. • DTC proposes to prescribe penalties and prosecution for noncompliance with tax laws. Several provisions are there in DTC which bestow tremendous powers on revenue authorities. • On invoking GAAR, the commissioner may determine tax consequences by revising the arrangement. • The GAAR would override the underlying tax treaty and the decisions of the commissioner would be binding on assessing officer.
Key Operational Concerns
• GAAR would apply to certain transactions which commissioner presumes to be motivated by tax avoidance. • The burden of explaining the purpose of transaction lies on the taxpayer. • When commissioner will revise the purpose of transaction it would impart more uncertainty in the tax system as this will lead to further litigation. • In India , since the introduction of GAAR is new commissioners should be trained and have exposure to such prevailing practices in other jurisdictions.
• Power to invoke GAAR need to be moderated with suitable checks and balances to avoid misuse and abuse. They can cause tremendous inconvenience and hardship to genuine and bona-fide tax payers. • The consequences of invocation of GAAR may restrict freedom of parties to enter into transactions into tax efficient manner. • For businesses beforehand it is impossible to know what their tax liability is and which transactions are impermissible till the time due diligence exercise is conducted by revenue authorities.
• The Phraseology of GAAR has an element of subjectivity. Various stakeholders can interpret it in different manners. • Constituting separate authority to see into the matter will help in avoiding long litigation. On the other hand this may result in the fructification of commercial transactions.
International Scenario
• Countries that have introduced GAAR
– Australia, Canada, China, France, Germany, New Zealand, South Africa
• UK and US
– Reliance on judicial decisions on anti abuse principals – Legislative provisions to deal with specific situations
GAAR Experience
• South Africa:
– Primarily to prevent misuse or abuse of domestic arrangements. – Compensatory adjustments when debt is re-characterised as Equity and vice-versa is available. – Indian GAAR is believed to be inspired by South African GAAR
• China: GAAR provision that provides that where an enterprise enters into arrangements without a reasonable commercial purpose and which result in a reduction of taxable gross income or taxable income, the tax authorities can make an adjustment using appropriate methods. The authorities have also issued the implementation measures on the administration of the GAAR.
• The Spanish legislation containing a GAAR provides that tax can be levied by reference to the tax substance irrespective of the legal form of a transaction. • When there is an arrangement whose main purpose is to obtain a tax benefit, avoid tax event achievement or reduce the tax base and either • (a) the arrangements that, individually or jointly considered, are not appropriate to achieve the obtained result or • (b) arrangements that do not result in relevant legal or economic effects, then the Spanish tax authorities can apply the domestic GAAR to challenge the treaty shopping, in the absence of any specific Limitation on Benefits(LOB) provision in the relevant treaty.
• Netherlands and Canada –Burden of proof on the tax authorities • Australia –Application determined on the basis of 8 test or factors • The Indian GAAR, which is a 'catch all rule', could have far-reaching implications for the arrangement of the affairs of domestic and international businesses. As the new Code contains provisions that remove exemptions and deductions, rationalise tax rates, tax capital gains as business income and various other amendments, will make the GAAR practically unapplicable in domestic transactions. • The intention of the government is clearly to apply the GAAR to any international arrangement resulting in a tax benefit and which lacks commercial substance or bona fide purpose.
Suggested measures to control Tax Evasion and Avoidance
• Enacting a separate appeal mechanism wherein tax payer who is served notice about invocation of GAAR may appeal against such decision within specified time of getting notice. • A separate authority can be constituted which can be approached by tax payer for obtaining pre clearance for the transactions which are ambiguous in terms of interpretation. (this will be time consuming though) • Control measures on tax officer : e.g. Accountability • Tight administration of invoices • Information system for tax administration: tax collection, tax audits and investigation, tax legislation and enforcement. This will improve accuracy and speed up the whole process.
References
•
•
• •
• •
Goradia, S., & Seshadri, S. (2009, August 19). Differentiating tax avoidance and evasion. Economic Times . Deloitte Haskins & Sells. (2009). The General Anti Avoidance rule. Mumbai: Deloitte Haskins & Sells. Ernst&Young. (2009). Deciphering The Direct Tax Code. Mumbai: August- September 2009 Euromoney Institutional Investor PLC. . (2009, OCtober). Draft moves India towards international practice. Retrieved November 17, 2009, from International Tax Review: http://www.internationaltaxreview.com/includes/magazine/PRINT.asp?SID=72 2809&ISS=25495&PUBID=35 Kundra, P. (2009, October 19). Paradigm shift in tax avoidance. The Hindu Business Line . Money Blue Book. (2008, March 20). The Difference Between Legal Tax Avoidance and Illegal Tax Evasion. Retrieved November 4, 2009, from Money Blue Book: http://www.moneybluebook.com/the-difference-between-legal-tax-avoidance-and-illegal-taxevasion/
THANK YOU !!!
doc_556689922.pptx