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Multinational firms look for tax shields in bilateral pacts

Live Mint via MENAFN | 3/18/2013

Multinational firms look for tax shields in bilateral pacts

NEW DELHI, Mar 18, 2013 (Menafn - Mint - McClatchy-Tribune Information Services via COMTEX) — The aggressive push by India’s tax department to increase revenue has prompted several multinational companies (MNCs) to informally seek the views of lawyers and consultants about invoking bilateral investment promotion and protection agreements (BIPAs) to resist the government’s demands for more money.

If the companies, mainly Europe-based multinationals, do ultimately decide to invoke such accords, it could escalate the confrontation between the tax department and companies doing business in India, and put the spotlight on the seeming lack of a stable tax regime in the country.

Under a BIPA, the government guarantees to protect the investments of foreign entities and gains from those investments. India has around 72 BIPAs in force.

Finance minister P. Chidambaram has sought to reassure investors about retrospective changes in tax laws, but the government also needs to boost revenue as it tries to narrow the fiscal deficit amid a slump in economic growth, which is estimated at 5% in the year ending 31 March, the slowest pace in a decade.

"The fact that the finance minister has emphasized the need for a non-adversarial tax regime is comforting. However, the ground reality is very different because of pressure on the fiscal deficit and also due to a trust deficit," said Ketan Dalal, joint leader, tax and regulatory services, PricewaterhouseCoopers.

"Unfortunately, there is also limited understanding about the way global corporations function and that leads to a lot of needless litigation," Dalal said.

Companies are hesitant about invoking the agreements as they want to maintain cordial ties with the authorities.

"Many companies that have had a run-in with the government, be it the tax authorities or any other arm, have been evaluating their options, which included invoking BIPA. Vodafone is a test case," said a New Delhi-based tax expert requesting anonymity.

Last year, Vodafone Group Plc, through its Dutch subsidiary Vodafone International Holdings BV, initiated international arbitration proceedings under the BIPA signed by the Netherlands and India. However, an inter-ministerial panel came to the conclusion that Vodafone’s tax dispute with the government is outside the ambit of the BIPA.

To be sure, Vodafone is currently in negotiations with the Indian government on the tax demand.

International accords have also been cited in a dispute regarding investor rights.

The Children’s Investment Fund Management (UK) Llp (TCI) has filed a notice to the government under treaties India has with the UK and Cyprus for mutual promotion and protection of investors. TCI has also filed a writ petition in the Delhi high court against the coal ministry and state-run Coal India Ltd, in which the investor is a minority shareholder, challenging their moves to keep prices of the commodity artificially low.

"We plan to announce our next steps in the coming weeks," a TCI spokesperson said by email.

Some of the other companies that have served notices under BIPA are Sistema JSFC and Devas Employees Mauritius. Sistema’s case relates to the cancellation of 2G licences by the Supreme Court. Devas Employees is a subsidiary of Devas Multimedia.

Shell India Markets Pvt. Ltd, the local unit of Royal Dutch Shell Plc, plans to challenge an income-tax order that accuses it of under-pricing an intra-group share transfer by Rs.15,220 crore. The company has the option of approaching the dispute resolution panel or the commissioner of income tax (appeals) for contesting the order.

India has seen a sharp increase in disputes relating to transfer pricing, with the tax department adopting an aggressive stand while arriving at a price for the transaction. Transfer pricing refers to the practice of arm’s length pricing for transactions between group companies based in different countries to ensure that a fair price — one that would have been charged to an unrelated party — is levied.

"Companies such as Italy’s Eni SpA had also evaluated the BIPA option," said the New Delhi-based tax expert quoted above.

Mint reported on Eni India’s inability in getting permission to drill from the department of space in the Andaman and Nicobar Islands region, due to the proximity of the block to the rocket-stage impact zone of the Indian Space Research Organisation. Similarly, its Rajasthan block ran into trouble as one-third of it falls under a protected area classified as a "desert forest".

Spokespersons for Shell and Eni didn’t respond to email queries sent on Wednesday about whether they were evaluating the invocation of BIPA.

MNCs are evaluating their options because of unreasonable tax demands, said Mukesh Butani, chairman, BMR Advisors Pvt. Ltd.

"The multinational companies are wondering that is the government meeting fiscal deficit targets by collecting taxes that are not due to it," he said. "When MNCs invest, they look at the size of the market, the stability of the tax system, and the freedom to do business. But some of the recent events do not aid a stable tax system."

In response to a question about tax notices to companies, Arvind Mayaram, secretary, department of economic affairs in the finance ministry, said, "You should ask this question to the department of revenue because I am not aware of the circumstances these notices are being sent in. But certainly every country has a right to receive as taxes (money) which is due to it. There is no reason why anybody should try (to) circumvent that. Anybody who is liable to pay taxes, should pay taxes."

There have been no BIPAs signed in the last two years. Foreign investors can seek legal action at arbitration agencies such as the United Nations Commission on International Trade Law (Uncitral) or at the World Bank-affiliated International Centre for Settlement of Investment Disputes for alleged breaches of treaty obligations.

The Indian government plans to exclude from bilateral trade pacts the clause that permits a foreign investor to sue the host country at an international dispute settlement agency.

In response to a question on reviewing the dispute settlement mechanism clause, Mayaram said, "I am not going to speak about any particular clause as no specific decision has been taken. But we are comprehensively reviewing the existing model text of BIPA to ensure that whatever loopholes exist which create an ambiguity, they are removed."

He added, "There is a whole body of literature which has now emerged ever since countries began to sign BIPAs, based on which there is a lot of learning from across the world and we are trying to assimilate all of it and see if we can make the BIPAs up-to-date."

According to the tax expert cited above, "The only case that was decided under BIPA was White Industries Australia Ltd, which went against India."

That refers to the first time India was sued in an international tribunal, in 2002 in Uncitral. White Industries Australia, a mining firm, cited the bilateral investment treaty signed between the two countries in a dispute with state-owned Coal India. The case is currently in the Supreme Court of India.

 source: Live Mint