The General Anti Avoidance Rule

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The General Anti-Avoidance Rules

Direct Taxes Code Bill, 2009

Background
Avoidance – An attempt to reduce tax liability through legal means, i.e. to regulate your affairs in such a way that you pay the minimum tax imposed by the Act as opposed to the maximum Example – Mr. A forms a company to sell his products. The company pays 25% tax, but if he himself sold the products he would pay 30%

Evasion – Use of illegal means to reduce tax liabilities, i.e. falsification of books, suppression of income, overstatement of deductions, etc. Example – Mr. B sells his products for cash and does not bank the cash.

“Every man is entitled to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be” – Lord Tomlin (IRC v. Duke of Westminster)

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Direct Taxes Code Bill, 2009

©2009 Deloitte Haskins & Sells. All rights reserved.

Anti-avoidance
Anti Avoidance rules can be classified into following: ‒ Measures based on general principles in the law • This refers to principles which are not codified in the legislation (non-statutory) • They include a range of philosophies and approaches including “substance over form” “abuse of law”

‒ General Anti Avoidance rules
• It has same meaning as “anti avoidance rules based on general principles in law” except that it is codified and included in the legislation

‒ Specific Anti Avoidance rules
• These are the specific anti-avoidance rules which applies to the specific situations- CFC, Thin Capitalization rules, Exit Tax etc.

India moved from the first stage to the second stage by introducing GAAR under Domestic Tax Laws.

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Direct Taxes Code Bill, 2009

©2009 Deloitte Haskins & Sells. All rights reserved.

General anti-avoidance provisions introduced
The Commissioner empowered to declare an arrangement as an impermissible avoidance arrangement (IAA) if: • The whole, a step or a part of the arrangement has been entered with the objective of obtaining tax benefit, and • The arrangement: ‒ Creates rights and obligations not normally created in arm’s length transactions, or ‒ Results in direct or indirect misuse or abuse of the provisions of the code, or ‒ Lacks commercial substance in whole or part, or ‒ Is not bonafide

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Direct Taxes Code Bill, 2009

©2009 Deloitte Haskins & Sells. All rights reserved.

Impact of IAA
Once treated as an IAA, look through permitted by: • Disregarding the whole or part of the impermissible avoidance arrangement • Treating related or accommodating or connected parties as one and the same person • Reallocating amongst parties or re-characterizing any accrual, receipt, expense, deduction, rebate, etc. whether revenue or capital • Re-characterizing debt to equity or vice versa Domestic transfer pricing rule ? Thin – capitalization ? Impact of currency law ? Do we needs FAQ’s, safe harbors ?

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Direct Taxes Code Bill, 2009

©2009 Deloitte Haskins & Sells. All rights reserved.

Lacking commercial substance
Lacking commercial substance defined to include situations where there is a: • Significant tax benefits without a significant effect upon business risk or net cash flows • Legal substance or effect differs from legal form • It involves or includes: ‒ Round trip financing ‒ An accommodating or tax indifferent party ‒ Any element that has the effect of offsetting or cancelling each other – A transaction which is conducted through one or more persons and disguises the nature, location, source, ownership or control of funds

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Direct Taxes Code Bill, 2009

©2009 Deloitte Haskins & Sells. All rights reserved.

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 • Reserve Bank of India averse to any such proposals • FIPB refers these arrangements to tax authorities A

B

Mauritius India...
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