International business council says GAAR proposals too vague

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A group of leading US-based MNCs have expressed their concern over the draft GAAR taxation proposals, saying that the proposed regulations are 'too vague' to comfort the business investors.

Besides, there is a risk that the panel proposed for reviewing the cases of GAAR applications could become a 'rubber-stamp' approval entity for the position of tax administrators, the US Council For International Business (USCIB) has written to the Finance Ministry.

USCIB is a leading industry group and has more than 300 top US-based global companies as members which include American Express, Apple, BP, Citigroup, Coca-Cola, Dow Chemical, Google, IBM, Intel, Microsoft and PepsiCo.

Providing its comments on the recently proposed draft guidelines regarding implementation of General Anti-Avoidance Rules (GAAR), USCIB has said that the 'proposed guidelines are too vague to provide certainty to business investors'.

"For example, an important part of certainty is respecting the obligations imposed by double taxation agreements between treaty partners. Treaty obligations should generally not be overridden by GAAR provisions," the letter noted.

"We believe that the application of the GAAR rules in this manner would constitute an impermissible unilateral amendment of the United States-Indian Treaty," it added.

The USCIB also said that the guidelines do not clarify the role of a three-member panel, whose approval is necessary for the tax administration to proceed with a GAAR case.

"That the taxpayer would still have access to competent authority procedures and Indian courts should be made clear.''

''In addition, it would seem unlikely that all of the potential applications of the GAAR could be reviewed by a single three member panel, particularly given the fact that senior officials are required to participate on the panel and the short time frames associated with the process.''

"We applaud the recognition that these issues need to be resolved quickly, but are concerned that this will lead to 'rubber stamp' approvals of the tax administration's position.''

"This may be the case even if multiple panels are set up, as the guidelines permit. Thus the role and structure of the three-member panel should be more clearly defined," it said.

Introduction of GAAR, which was proposed by then Finance Minister Pranab Mukherjee in March to check tax evasion, had triggered strong opposition by foreign investors following which its implementation was postponed till April, 2013.

The Finance Ministry came out with draft guidelines on GAAR in June wherein it invited comments from the stakeholders.

Prime Minister Manmohan Singh also set up a committee earlier this month for holding consultations to bring in greater clarity and prepare a roadmap by September 30 for implementation of GAAR.

In its comments, USCIB said the examples given in the draft proposals 'are very general and simple'.

Noting that the real cases will be more complex, USCIB said "this lack of clarity will create the opportunity for subjective interpretations by the tax authorities that may result in numerous disputes."

USCIB said the guidelines may be intended to provide clarity to taxpayers, but 'the current guidance in the examples leaves significant uncertainty'.

USCIB also supported the comments submitted earlier this month by the Asia Securities Industry and Financial Markets Association and the Capital Markets Tax Committee of Asia, concerning the application of the GAAR rules to the financial markets.

"Capital markets need a safe harbour that does not require them to disavow treaty benefits to which they may be entitled," it added.

Earlier, a number of US industry associations had written to the US government's Treasury Secretary Timothy Geithner, expressing their concern over the proposed GAAR regulations.

These industry bodies included the Financial Executives International, Financial Services Forum, Information Technology Industry Council, Investment Company Institute, Managed Funds Association, National Foreign Trade Council, Securities Industry and Financial Markets Association, Software Finance and Tax Executives Council, TechAmerica, US Chamber of Commerce, US-India Business Council, as also USCIB.

They requested Geithner to address these concerns with representatives of the Indian government.

The industry bodies had said that 'if enacted, the proposals will have a significant negative effect on member companies operating in India, their customers and shareholders, and investment in India'.