The income tax department will carry out additional due diligence on financial transactions that involve entities from countries or jurisdictions that are considered tax havens. The Central Board of Direct Taxes has sent out an advisory with a list of such regimes to field officials, asking them to remain extra watchful about such international transactions.
“The idea is to be vigilant towards such transactions,” said a department official. The department wants deeper enquiries into these transactions to ensure that businesses are not routing their dealings from these regimes to lower their tax outgo here.
Under the Base Erosion and Profit Sharing (BEPS) project at the Organisation for Economic Co-operation and Development, when tax jurisdictions offer a sharply low tax rate or zero tax rate to entities that have no ‘economic substance’ in that jurisdiction, it is considered a harmful tax practice.
A detailed assessment of the practices followed is carried out before classifying any country as having a harmful regime.The status of some regimes is being reviewed, in line with changes committed by them. Jordan has been classified as harmful, while Saint Kitts and Nevis and a host of other tax havens are under review and some have been reclassified.
The tax body’s communication is in line with Action 5 of the BEPS project. This has been a huge concern globally, with countries considering this a major factor behind businesses shifting to such attractive jurisdictions.
“Transactions undertaken through such regimes should be reviewed thoroughly to make sure there is enough economic substance and commercial rationale backed by documentation for using such jurisdictions,” said Amit Maheshwari, tax partner at AKM Global, a consulting firm.
Economic substance means real economic activity. Experts said the CBDT’s move was a follow-up to the OECD project under BEPS Action 5 to check harmful tax practices that are prevalent around the world.
The identified regimes promote and facilitate profit shifting and base erosion from countries where actual economic activity is taking place.
In January 2019, the OECD had released a paper reviewing regimes in 57 countries.
“This directive of the CBDT reemphasises the government’s efforts to tax the profits shifted by MNCs to preferential or harmful tax regimes for tax benefits and without moving any economic activity or substance to such regimes and thus a resulting in a base erosion,” said Rakesh Nangia, chairman of Nangia Andersen Consulting.
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