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The Indian government’s clarification that it would honour tax treaties while making a demand of Minimum Alternate Tax (MAT) at the effective rate of 20 per cent came as a relief for favourable treaty nations. But, dilemma still hangs over funds from other nations, whose treaties do not grant an exemption from capital gains.
Business Standard learns that ICI Global, a global organisation with investors managing 19.2 trillion dollars, has written to Union Finance Minister Arun Jaitley, citing Organization of Economic Co-operation and Development (OECD) principles for tax exemption for their funds.
In the letter dated April 13 and 20, the London headquartered organisation whose majority of members are based in the United States, United Kingdom and Hong Kong have highlighted that as per the OECD principles, report of 2010 the income of Collective Investment Vehicle (CIV) is entitled to treaty benefits.
A total of 46 per cent flows come from nations such as USA, UK and Norway as per the data of February 2015.
CIVs are funds that are widely held and hold a diversified portfolio of securities. These funds are subjected to investor protection regulations in the country they are established in. Such funds are typically mutual funds and private equity (PE) funds.
So far, over 50 PEs and mutual funds have received notices from the tax authorities making a tax demand. Even though India adheres to OECD guiding principles, it is not contractually bound to agree to the terms and principles of OECD.
“It would be the prerogative of the tax officer whether they consider OECD principles while making assessment. However, unlike the Double Taxation Avoidance Agreement (DTAA), that grants specific exemption from capital gains; OECD is guiding principle and not binding as per the income tax act,” said an official.
Tax experts also opine that OECD principles might not be of much help.
“The OECD defines a CIV and recommends that CIVs should be eligible for treaty benefits. However, that does not by itself mean that a CIV will not be liable to MAT. Accordingly, CIVs, which are set up in countries such as USA and Luxembourg, could still be exposed to the risk of MAT because India’s treaties with USA and Luxembourg do not exempt them from capital gains tax in India. One could, however, take an argument that the treaty with USA and Luxembourg allows India to tax capital gains and not book profits as defined under MAT provisions. This is an argument, which will need to be tested before courtsý,” said Rajesh Gandhi, partner, Deloitte Haskin and Sells.
According to sources, the tax certainty is essential for these pooling instruments as investor transactions are affected by the Net Asset Value of the fund (NAV). NAV is calculated by determining the assets, liabilities of the fund and tax liability can impact the NAV calculations.
Agreeing with Gandhi, Tejesh Chitlangi, founder, IC Legal says ýOECD norms are not binding.
"OECD norms, or for that purpose, guidance prescribed by similar international organisations may not be treated on a par with DTAA provisions. These are at best of persuasive value unlike the DTAA clauses which have a binding contractual force. Hence, investors from a non-treaty nation or an unfavourable treaty nation may not be benefited," says Chitlangi.
In the letter, the organisation says “anything less than a prompt action from the Indian government would have negative consequences on the Indian capital markets”.
So far organisations like ICI Global and Asian Securities Industry and Financial Markets Association (ASIFMA) have written to the Indian government to resolve the MAT tussle.
Business Standard learns that ICI Global, a global organisation with investors managing 19.2 trillion dollars, has written to Union Finance Minister Arun Jaitley, citing Organization of Economic Co-operation and Development (OECD) principles for tax exemption for their funds.
In the letter dated April 13 and 20, the London headquartered organisation whose majority of members are based in the United States, United Kingdom and Hong Kong have highlighted that as per the OECD principles, report of 2010 the income of Collective Investment Vehicle (CIV) is entitled to treaty benefits.
A total of 46 per cent flows come from nations such as USA, UK and Norway as per the data of February 2015.
CIVs are funds that are widely held and hold a diversified portfolio of securities. These funds are subjected to investor protection regulations in the country they are established in. Such funds are typically mutual funds and private equity (PE) funds.
So far, over 50 PEs and mutual funds have received notices from the tax authorities making a tax demand. Even though India adheres to OECD guiding principles, it is not contractually bound to agree to the terms and principles of OECD.
“It would be the prerogative of the tax officer whether they consider OECD principles while making assessment. However, unlike the Double Taxation Avoidance Agreement (DTAA), that grants specific exemption from capital gains; OECD is guiding principle and not binding as per the income tax act,” said an official.
Tax experts also opine that OECD principles might not be of much help.
“The OECD defines a CIV and recommends that CIVs should be eligible for treaty benefits. However, that does not by itself mean that a CIV will not be liable to MAT. Accordingly, CIVs, which are set up in countries such as USA and Luxembourg, could still be exposed to the risk of MAT because India’s treaties with USA and Luxembourg do not exempt them from capital gains tax in India. One could, however, take an argument that the treaty with USA and Luxembourg allows India to tax capital gains and not book profits as defined under MAT provisions. This is an argument, which will need to be tested before courtsý,” said Rajesh Gandhi, partner, Deloitte Haskin and Sells.
According to sources, the tax certainty is essential for these pooling instruments as investor transactions are affected by the Net Asset Value of the fund (NAV). NAV is calculated by determining the assets, liabilities of the fund and tax liability can impact the NAV calculations.
Agreeing with Gandhi, Tejesh Chitlangi, founder, IC Legal says ýOECD norms are not binding.
"OECD norms, or for that purpose, guidance prescribed by similar international organisations may not be treated on a par with DTAA provisions. These are at best of persuasive value unlike the DTAA clauses which have a binding contractual force. Hence, investors from a non-treaty nation or an unfavourable treaty nation may not be benefited," says Chitlangi.
In the letter, the organisation says “anything less than a prompt action from the Indian government would have negative consequences on the Indian capital markets”.
So far organisations like ICI Global and Asian Securities Industry and Financial Markets Association (ASIFMA) have written to the Indian government to resolve the MAT tussle.
