By Ashwin J Punnen , Mumbai From My Digital

Explore keeping back offices in tax havens

With the government setting a deadline for implementing the general anti avoidance rules (GAAR) from April 1, 2017, overseas investors operating from tax havens have started weighing the option of having more genuine operations on the ground to convince authorities.

Many foreign investors operating from tax havens such as Mauritius and Cayman Islands are now looking at having people in some back office on the ground in order to prove that they have genuine business operations in these countries.

Some are even looking at foregone tax benefits by operating from their country of origin, for example the US or the UK, so that they don’t fall foul of Indian tax authorities. Many overseas funds that were earlier registered in Mauritius have recently started shifting to Singapore whose tax treaty with India has more clarity on limitation of benefit (LoB) clauses.

Foreign funds fear they will come under intense scrutiny of tax authorities once GAAR rules come into force from next year.

“Offshore funds investing from tax-friendly jurisdictions will need to examine their structures to reconfirm that they are compliant with GAAR. Depending on the facts of each case, funds may either need to build commercial substance commensurate with the level of activity or move to other jurisdictions where they have better commercial presence,” says Rajesh H Gandhi, partner, tax, Deloitte Haskins & Sells. GAAR seeks to curb treaty shopping by overseas funds to avoid tax by operating from tax-friendly jurisdictions like Mauritius sans much of commercial substance in that country.

Since GAAR did not clearly define what constitutes “su­b­stance” it had rattled foreign investors when the rule was proposed in 2012. Finance minister Arun Jaitley in his budget made a commitment to implementing GAAR from April 1, 2017.

“The investment sentiment in the country has now turned positive and we need to accelerate this momentum. There are also certain contentious issues relating to GAAR that need to be resolved,” he said in his speech on February 29. GAAR aims to check tax avoidance, empowering the tax department to look into transactions deliberately structured to do this.

“The government should put a special provision un­der the Income Tax Act to notify that all transactions done till April 2017 will be grandfathered, which me­ans that the rule does not apply to investments that are made before the said date and its income cannot come under GAAR,” said Sanjay Sanghvi, tax partner, Khaitan & Co. This is requires bringing more clarity and avoid unnecessary litigation, he added.

The general anti avoidance rules (GAAR) was first introduced by the then finance minister Pranab Mukherjee in 2012 budget to stop companies and investors from routing investments thro­ugh tax havens in order to avoid taxes.

However, it was deferred following widespread protest from overseas investors and domestic companies. Last year, the government had said GAAR would be implemented from April 1 2017.

For more on this story go to: http://www.mydigitalfc.com/stock-market/investors-evaluating-options-beat-gaar-608