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Nations may come together to stop abuse of tax pacts
November, 10th 2014

India's attempts to amend tax treaties with countries such as Mauritius may have drawn a blank so far, but its efforts are about to get a huge boost with several nations getting together to ramp up work on a global convention to plug treaty abuse. "Multilateral convention will supplement tax treaties. World is moving towards multilateralism... There would be communiques that would be binding," Akhilesh Ranjan, joint secretary, ministry of finance said at an event organised by industry body CII on Friday.

The convention will have provisions such as limitation of benefit that will prevent abuse of treaty. This will save countries the trouble of having to negotiate such provisions individually with each of their partners. Limitation of benefit clause is usually incorporated in treaties to ensure that only genuine investors avail benefits of a tax pact and include conditions such as a minimum level of investment, listing on the local stock exchange, ceiling on turnover and minimum expenditure, local residents on company board and number of board meetings for carrying out operations in one of the contracting states.

India's tax treaty with Singapore has such provisions and the country has been attempting to incorporate a similar one in its pact with Mauritius. India-Mauritius treaty offers exemption from capital gains tax to investors from the island country, making Mauritius an attractive destination to route investments into the country.

However, Ranjan said the convention is under discussion and it will need to be seen after it is firmed up. Elaborating on the new OECD (Organisation for Economic Cooperation and Development) rules for global base erosion and profit shifting (BEPS), aimed at collecting a fair share of taxes from multinationals operating in different tax jurisdictions and addressing challenges posed by digital world, Ranjan said businesses need to gear up for the new rules.

Multinational companies use a wide range of cross-border tax planning techniques that result in little or no tax liability and such techniques are referred to as BEPS. "Work on BEPS is moving very fast. If things go on track, I think by December 2015 one would end up with set of rules, set of principles which will have acceptance all over the world," The BEPS is being deliberated by the G20 nations and some forward movement is expected at forthcoming summit at Brisbane, he said. "Businesses should gear up, prepare themselves for the changes in the tax legislation, and government is equally open to consider views of the industry," Ranjan added.

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