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Changing face of Indian taxation: Mark Weinberger
December, 05th 2009

The Finance Minister had last month announced the revenue department would reopen negotiations of all 77 Double Taxation Avoidance Agreement with all countries. E&Ys global vice-Chairman, Mark Weinberger discusses the implications of the announcement and more in an exclusive interview with CNBC-TV18.

Here is a transcript:

Q: Let me start with the bad news, what do you make of the Indian governments decision to reopen negotiations on all 77 international tax treaties?

A: International treaties are very important because they provide certainty about how businesses operate cross broader, and they are usually negotiated over a longer period of time and in a painstakingly detailed way, so its on circumstance that you get to override or unilaterally change a treaty and that being said, sovereign countries do have the ability to do that, so you would take that process that is under unique circumstances where perhaps treaties can be renegotiated, re-opened up or over done by a law of a particular country but doing it on a wholesale basis will cause a lot of uncertainty for the business community in India when they operate out side of India and similarly when there is foreign direct investment coming in into India. This also raises reciprocal issues where you would want necessarily other countries to have to re-negotiate treaties so I think there is a time and appropriate to do it but I think that has to be done in very rare circumstances and in a very specific way when you are specifically overriding or particularly changing a treaty.

Q: This re-negotiation is to be able to ask for a better exchange of information, if the renegotiation is limited to enable better information exchange is that all right or are you worried that the renegotiation might spill into other areas as well considering the kind of aggression that we have seen in the Indian tax department in the recent past.

A: Its a pretty big task, you have to come in and say you are going to renegotiate the treaty, once you open up a treaty from an India perspective; you are also opening it up the opportunity for countries to come in and ask for things that they would like to change in the treaty and then it becomes the more difficult process, so if thats the process if that the Indian government is undertaking it could be a very long time for treaties to even get renegotiated. So again I think there is a time when treaties do come up for negotiation but to do a wholesale renegotiation of multilateral treaties at one time I think would be a very difficult process.

Q: You are visiting India at a time when the tax fraternity is grappling with two very big changes, the Implementation of GST and the indirect tax space and the implementation of the whole new tax code in the direct tax space, what you make of both of them. What are you picking up from the tax fraternity out side of India on how these are being received?

A: There are a lot of changes going on in India but there are lots of changes going on in the world on tax. In the last 12 months some of the prolific tax legislation in the decades and thats through the stimulus that we saw enacted across the world and now we are starting to come to a tipping point where those stimulus bills that were enacted to help companies and help governments keep the economy strong have resulted in some cases significant holes in the finances and so we are starting to see tax increases to be put back on the table in many parts of the world as well, so India appropriately is looking at forming and maybe in some cases changing the taxation in certain items. With respect to the GST in particular it is a trend we are seeing worldwide and most the tax changes we are seeing are through movements of the rates of indirect taxes such as value added taxes, the goods and services taxes, but here in India they are talking about more comprehensive reforms, putting in a dual tax that would be administered both at the state and at the center levels and that would replace some existing taxes, so the theory is good there that if you could take a bunch of taxes and replace it with the completely uniform dual tax then thats good for tax efficiency purposes, the devil will certainly be in the detail and in that meaning it really would have to be a uniform treatment between the state and the center and otherwise it can be difficult administratively and similarly you want to have a tax that follows some of the other regional taxes that you have such as in New Zealand, Japan and Singapore which are broad based and low rates and more easy to administer and dont have lot of exemptions and zero ratings like some of the European value added tax system that have provided a lot of difficulty in applying and so thats something as you say early on in the process, we will have to see how it develops and the theory is good and with regards to the DCC, the direct tax changes that India have put on the table, there too its early but that is also following a global trend, we are seeing around the world corporate taxes being reduced about 90% in the OECD countries in the last ten years have reduced the top corporate tax rate and in many cases they have broadened out tax base as a result of that in order to keep the revenue base the same but it is done to attract businesses into the country.

So here on the table as I understand is that proposing to go from a 34 to 25% top corporate tax rate and broadening the base which is again consistent with what we are seeing globally but as part of that package which you indicated there are a lot of other things in it, there are some other types of new taxes that arent necessarily the ones that you see around the world and one those you have to understand if there is going to be unattended consequences with any of those. Such as when you have the growth asset tax the MAT, minimum asset tax that is not something that we have seen a lot around the world and that could have unintended consequences as a result of creating double taxation, so that is something that is really need to have to looked at and worked on. So the bottom-line is, taxes are changing around the world and so India needs to do that but we will have to see how they play through the process.

Q: How does all this fit into the fact that we are seeing increased aggression by revenue across the worlds as governments scramble to be able to top up their tax revenue to meet their expanding deficit and revenue across the world is becoming more and more aggressive when it comes to be able to claim their share of the pie what do you make of some of these developments why just in India but everywhere in the world?

A: There are a lot of levels of answers to your question; the first one is yes that we are seeing as a result of significant financial strains on countries that they are trying to increase their revenues through enhanced enforcement and closing tax gaps and the like, they are doing it through increased exchanging of information, in some cases trying to go after more types of revenue by expanding and coping with establishment issues being worked in the auditing and transfer pricing type issues so we are seeing enhanced enforcement as means to gain revenue.

The President Obama proposals are a different type of proposals but we are also seeing much changes in that area as well when the president did talk about close down tax provisions in the US code that forced workers overseas as to how it was described, but the proposals that the president actually put in place, the four major proposals dealing with restricting the deferral of overseas taxes and income form taxation going ahead and changing what they refer to as check the box rules and recalculate the foreign tax credit by changing the pooling, those are all fundamental policy changes and those are the most fundamental changes in the US in decades and really go back the policies created in 1960s when the US tax systems were established, so in that situation the US is actually going in a different direction than the rest of the world because virtually all countries have as to what we refer to as territorial tax system where companies are taxed under active business income in their host country but not under earnings overseas and infact at the beginning of this year the three principal countries that didnt do that, they didnt have as what were to referred to as worldwide taxation, the UK, Japan and the US were the three and at the beginning of this year the UK and Japan joined with the rest of the world and has moved towards the dividend of exemption system which is more referred to as territorial system by restricting the taxation of host companies that operate overseas, so the US is really going alone and proposing expansion of worldwide taxation when most other countries are not.

Q: You interact with CEOs across the world what are the 3-4 things that CEO offices need to be aware of or be alert to or prioritize to be able to deal with the changing tax environment?

A: The Tax directors in boardrooms are going to have pay a lot more attention to tax issues. One because as I suggested, tax rates are going up whether they be indirect taxes or eventually income taxes we are going to see tax rates go up around the world because countries will have to dig out of the hole that they are in, the opportunity cost of not doing appropriate planning or the opportunity cost of not assessing the right amount of tax to the governments will go up. As governments are pushing more and more to get more revenues, they are going to see more and more controversies, so we are seeing more cross border controversy than we ever have, so what do businesses need to do to deal with that, first of all they have to be aware of the law changes and the enforcement changes that are going on and they have to work with governments. We are seeing more and more governments willing to work with taxpayers and their businesses to help put in place an efficient tax system in giving the taxpayers more certainty and more certainty to the government. So they are clearly going to have to pay more attention to the changes in tax laws and the changes in enforcement going out around the world and they have to elevate the risk issues untaxed to the boardroom because the types of taxes that are being assessed around the world today are large dollar amounts and they will affect the companys reputation, the companys financial disclosure and they cant afford not to be able to anticipate and deal with those issues on the front end.

So I think you are going to see a lot more attention to businesses that are going to have to pay to dealing with such cross border controversies.

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