International Taxation Law deals basically with taxing activities which happen over various numbers of transactions between two or more countries. The objective of International Taxation Law is to govern and properly manage the cross country tax systems when any international transactions take place. The law helps in preventing tax avoidance, facilitating improved international trade and finance, preventing double taxation and to maintain the position of tax jurisdiction of a country. There are various concepts under the subject that become extremely crucial to understand, one such important matter is the General Anti-Avoidance Rule. General Anti-Avoidance Rule is a concept which helps in empowering the Revenue Department of a particular country to disallow or to deny any tax benefit on a transaction or specific agreement which does not hold any substance. It means that these agreements or transactions are basically done to get the tax benefit solely. This rule thereby helps in preventing any potential tax avoidance. In India, the General Anti-Avoidance Rule was introduced for the very same reason which was to curb evasion of tax. The need of introducing the same was felt after the Vodafone International case. In the current paper, the author aims to understand the relevance of the General Anti-Avoidance Rule in International Taxation, specifically its implication in India.
The author has opted for the Doctrinal Approach Research Design for conducting the research on the topic- “Understanding Relevance Of General Anti-Avoidance Rule In International Taxation”. Doctrinal Approach as known as Doctrinal Methodology is conducted by using legal research resources and databases. These include case laws, statutes and e-databases. For the same, the author has conducted research using the Official Website of United Nations, Research Articles available on online-databases such as SCC Online, Manupatra, HeinOnline, etc. The author has made the analysis of this paper and tried to answer the research papers using the above method and resources available. Hence the paper is based on secondary data sources.
Introduction-
Tax Planning is considered as a formal method used to analyse a particular financial situation while conducting a business transaction or after conduction of a business transaction which ultimately helps in payment of lowest taxes as possible. This method is absolutely legal and helps in reducing taxes efficiently through rigorous planning. The liability of paying taxes is also reduced by optimally utilizing tax exemptions, tax rebates and several other benefits. As taxes get reduced, savings get increased, thereby seemingly being more beneficial.
Tax Evasion on the other hand is considered as an illegal way through which tax liability is reduced. This is done through using fraudulent techniques or illegal methods that aim at reducing tax burden. One most frequently adopted move is reflecting fewer profits in the financial statements of the company. Lesser the profits reflected in the credit side of the financial statement, lesser the liability to pay the taxes to the government. Here, tax is deliberately avoided where true tax liability lies.
Between these two concepts of Tax Planning and Tax Evasion is Tax Avoidance. Tax Avoidance is considered as a legal method of abusive tax planning. One such method frequently used is getting into transactions which are conducted not for any business consideration or transaction, rather for the purpose of claiming tax benefits or for avoiding tax liability.[1] In case of International Taxation, this method is used to avail the benefits of double taxation avoidance agreements. Here, the role of the General Anti-Avoidance Rule comes into play. The General Anti-Avoidance Rules (GAAR) seeks to prevent the companies from routing transactions through other countries to avoid taxes. Thereby, if the taxation officials of the country feel that a transaction has been conducted only to avoid taxation and not for a real business deal, then the benefits can be denied by them.[2] At various occasions, International Treaties such as Double Taxation Avoidance Agreements are misused by the companies in order to avoid taxation liabilities which are to be paid to the government of the countries. This too is prevented by the General Anti-Avoidance Rules in order to stop the misuse of any sorts.
Taxation is the most important revenue source for any country, when practices such as Tax Avoidance, Tax Evasion are done by companies and other parties, the country faces severe losses and their expected revenue decreases by a significant percentage margin. This revenue is further used by the government in paying its employees, carrying welfare projects for the citizens and the country, and conducting transactions which are mutually beneficial. This is why the importance of General Anti-Avoidance Rules increased exponentially. Thereby including these rules in the domestic laws would help the authorities in carrying out investigations and questioning the corporations that are trying to avoid taxes.[3]
General Anti-Avoidance Rules in India-
The General Anti-Avoidance Rules were adopted in India and came into operation from 1st April 2017 to curb taxation leakage issues and were codified in Indian laws in Chapter X-A, Income Tax Act, 1961[4]. The rules became applicable in India from the assessment year 2018-19. The Indian adoption of the General Anti-Avoidance Rule is based on the ‘Substance Over Form’ Doctrine. This doctrine basically gives the permission to the government revenue department of taxation to ignore and not solely focus on the legal form of the arrangement that is made and entered by the companies but to actually check the substance of the arrangement.[5] Which in simpler words means that the authorities will carry out an in-depth check on the arrangement or the agreement that is made and see the purposes behind such formation. They shall also look at whether the same is done for tax avoidance purposes or actually for conducting businesses. If it is noticed by the revenue department of the government that the purpose behind such formation was tax avoidance, then the department can declare the same as IAA- Impermissible Avoidance Arrangement.
Impermissible Avoidance Arrangement is a tax avoidance arrangement/agreement on which the General Anti-Avoidance Rules can be applied by the government. This is done when the government or the revenue department believes that the entire arrangement is made in order to avoid taxes or solely for gaining tax benefits and not for any commercial profit purposes. Once the government or the revenue department holds an arrangement/agreement as Impermissible Avoidance Arrangement, then the tax benefits can be denied to them.
For determining a company or formation as Impermissible Avoidance Arrangement, the following purposes or at least one purpose should be alleged-
1. The agreement/arrangement creates rights & obligations that are not at arm’s length.
2. There is clear abuse and misuse of taxation law provisions.
3. The business/commercial purpose is either missing or lacking.
4. The entire agreement/arrangement is not carried in a bona fide manner.
The introduction of the General Anti-Avoidance Rule along with improvements, and other advancement in the Indian Taxation laws was a consequence of the Supreme Court judgement in the case of Vodafone International Holdings v. Union of India & Anr.[6], 20th January 2012. Vodafone International Holdings was a resident company of the Netherlands and had acquired complete shares in CGP Investment Holdings. CGP Investment Holdings was a resident company of Cayman Islands. CGP Investment Holdings further had 67% of controlling holdings in HEL which was a resident company of India. This company was formed when a joint venture agreement was executed between Hutchison Telecommunications International Limited and Essar. Thereby eventually, Vodafone International Holdings got control of both CGP Investment Holdings and HEL.
While conducting the entire transaction wherein Vodafone made payments to Hutchison Telecommunication International should have deducted taxes at source and the same should have been retained to the government. Thereby, a Show Cause Notice was sent to Vodafone International Holdings by the revenue department of the government since there was a transfer of indirect assets of the companies in the instant matter. When the case went to the Bombay High Court, it ruled in favour of the income tax department and then they subsequently filed a Special Leave Petition under Article 136 of the Indian Constitution in the Supreme Court of India. The Apex Court then ruled in favour of the Vodafone International Holdings and held that they were not bound to pay taxes to the Indian Government for the transactions that were made with respect to share assets of the companies. The Indian Government accordingly claimed that they faced US$2 billion which were to be paid as taxes. This case highlighted several extremely important subject matter of understanding was to determine the difference between Tax Avoidance and Tax Evasion. The Supreme Court also made an observation that the revenue department tried to retrospectively introduce laws on indirect transfer of assets via the Income Tax Act, 1961. Retrospectively laws can only be applied in extremely rare cases that too either to correct mistakes made in the laws, to remove defects in the procedural laws or to protect the tax revenue of the country from any extremely high abusive tax planning.[7]
General Anti-Avoidance Rules in International Taxation-
The United Nations formed a data report on the Role of a General Anti-Avoidance Rule in Protecting the Tax Base of Developing Countries. The report provides distinction between Tax Avoidance and Tax Evasion. Tax Evasion defined as intentional non-payment of tax either fraud, non-disclosure or misinterpretation. It is a criminal offence for which one can be punished either by paying fines or imprisonment or both. Tax Avoidance is on the other hand defined as reduction of tax, which is done through absolute legal means. In order to discourage and prevent Tax Avoidance practices, General Anti-Avoidance Rules were introduced which are applicable on the types of transactions and arrangements/agreements. GAAR can be introduced either through legislation or through formation of a statutory body. These General Anti-Avoidance Rules are incorporated in various countries including Canada, South Africa, United Kingdom, Kenya, Australia, amongst others. Other than GAAR, SAAR- Specific Anti-Avoidance Rules also exist. These as the name suggests are specific and are targeted only on ‘known’ arrangements/agreements which are made with the intention of avoiding taxes.
Germany has also adopted General Anti-Avoidance Rules in its Tax Code which is applied when an inappropriate tax planning done by companies who are either unrelated or reasonable parties would not have formed a legal structure/agreement to achieve a specific commercial or business goal. In Canada, General Anti-Avoidance Rules are applicable in case of a tax avoidance transaction and once applied, then the tax benefits can be denied. Similarly in South Africa if found to be a tax avoidance transaction which was not conducted in bona fide manner and lacks commercial substance. In China, General Anti-Avoidance Rules came into effect back in the year 2008 for denying benefits to legal arrangements/agreements that are made without any commercial or business purposes but only to avoid taxes that ultimately lead to eliminating, reducing or deferring taxable income.[8]
Conclusion-
The objective of International Taxation Law is to govern and properly manage the cross country tax systems when any international transactions take place. The law helps in preventing tax avoidance, facilitating improved international trade and finance, preventing double taxation and to maintain the position of tax jurisdiction of a country. General Anti-Avoidance Rule (GAAR) as well as Specific Anti-Avoidance Rule (SAAR) were introduced for the very same reason which was to curb evasion of tax. These General Anti-Avoidance Rules were incorporated in Indian Legislation which is the Income Tax Act, 1961 in its Chapter X-A and became effective in the year 2017. With the introduction of the same, the revenue department of the government can hold an arrangement as Impermissible Avoidance Arrangement and deny tax benefits once specified conditions are met with.
[1] On India’s Capacity in GAAR, Vivek Mallya, Economic and Political Weekly, 2012.
[2] The General Anti-Avoidance Rule, Mary Cowx & Jon N. Kerr, The Ohio State University, November 2020
[3]Addressing Tax Avoidance: Cross Country Experience and an Indian Case Study, Parthasarathi Shome, London School of Economics and Political Science, 2019.
[4] Income Tax Act, 1961.
[5] Lightening the Burden of GAAR, Sukumar Mukhopadhyay, Economic and Political Weekly, 2012.
[6] [2012] 1 S.C.R. 573
[7]Changing Tax Reforms in India- What Next?, Anil Talreja, National Law School of India Review, 2013.
[8]Factors that limit the efficacy of general anti-avoidance rules in income tax legislation: lessons from South Africa, Australia, and Canada, Benjamin T Kujinga, The Comparative and International Law Journal of Southern Africa, 2014.
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