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How tax code is executed will make a difference
August, 28th 2009

A proposal in the new direct tax code to treat a foreign firm as a resident Indian entity if part of the management is in India can have a negative impact on foreign investment, says Wilbert H. A. Kannekens, partner and head of the global international tax group at accounting firm KPMG. In an interview last week during a visit to India, he also talked about recent actions taken by the Group of Twenty (G-20) countries on tax havens. Edited excerpts:

How is the new direct tax code perceived by international investors?

Its early to say how it is perceived because it is still brand new. But there is (a) lot of attention from multinational companies because they all have businesses in India or are considering (coming to India). And if I look at the key points from (a) corporate perspective, in the direct tax code it looks like (a) couple of trends that are seen in the international environment, such as reduction of corporate income tax to 25%, thats very much in line with what is happening on the worldwide basis.

At the same time, many exemptions will be abolished. On the one hand, its a good thing because it makes (the tax regime) clearer. On the other hand, its also (a) bad thing because it means an increase in the taxable base on which companies are paying taxes. So that may raise some questions.

Generally, internationally, companies pay tax where they are resident. In the new code there is apparently a section that says that (a) company can be a resident in India if part of the management decisions have been taken here. This can have a negative impact on foreign investments.

Another development in the code is (a) treaty override so it means that in case there is a conflict between Indian domestic law and international law, the domestic law prevails. That will lead to some uncertainty too. I do understand that this is happening in other states too.

In the US, its been there for 30 years, but its not much in line with the international law and standards. Overall, the way it (code) is executedthats going to make (a) difference.

Will reduced tax rates make India a low-tax country for investors?

I think 25% is a very reasonable rate compared with the average world rate. There has been a race to the bottom in terms of (the) corporate tax rate over the last 15 years. I think in (the) European Union the average rate is below 25% now. The United States is higher. There are (a) couple of countries with higher rates such as Japan, the US, and Germany. I think India is on an average now.

What actions have G-20 leaders taken recently on tax havens?

G-20 met last time (a) couple of months ago and have been discussing about tax havens. The main thing they have been discussing was around (the) exchange of information. So which countries do exchange key information and which ones refused to do that. It was around bank secrecy. Now I think what G-20 has achieved is by putting countries on the black list...(A) large number of countries have agreed that they, as of now or in the near future, will adapt to the international standards according to the OECD (Organisation for Economic Co-operation and Development) to exchange information. So I think G-20 has achieved a lot in this respect.

What impact can US President Barack Obamas tax proposals have on outsourcing companies in India?

It wont have a serious impact on outsourcing activities because the key point of Obamas proposal is that profits of multinational companies are going to be taxed in the United States even if profits have been coming from operations outside the US in case they have low tax according to American standards.

Will they take jobs back home?

The way I see is it, (it) is very unlikely. Tax is important but its also important to operate in a country where things are efficient and low-cost. One of the things that could possibly happen (is) that they simply sell those activities to a third party. But they (continue) to use the services. There may be an opportunity even for companies in India to buy those activities.

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