By Dilip J. Thakkar
Chartered Accountant
When I qualified as a Chartered Accountant way back in 1961, the words
‘International Taxation’ were not known to Chartered Accountants. The reason is
not difficult to find.
Our country had an acute shortage of foreign exchange. Hence the British
Government, who ruled our country before 1947, imposed exchange control
regulations as a temporary measure at the time of the Second World War through
the Defence of India Rules in 1939. Though it was meant to be a temporary
measure to fight the War, its continued need was felt and hence it was made
permanent by legislating the Foreign Exchange Regulation Act, 1947. It was a
very loose piece of legislation, not precise, leaving a lot to interpretations.
After the experience gained over 26 years, the 1947 Act was replaced by
the Foreign Exchange Regulation Act, 1973 (FERA) which came into force from 1st
January, 1974.
Because of acute foreign exchange resources of the country, there were
very few inward foreign investments and hardly any outbound foreign investments
and that too, confined to a few high and mighty, the rich and the famous.
When I passed my final CA examination of November, 1960, the subject of
foreign exchange and/or international taxation was not on the CA curriculum.
Hence, there were hardly any tax professionals, aware of and practising
international taxation and foreign exchange regulations.
FERA, 1973 was a draconian, criminal law in which mens rea,
meaning guilty mind, was presumed. One was presumed to be guilty until one
proved oneself to be innocent – completely contrary to the established
principles of jurisprudence. For every need of foreign exchange, including for
legitimate foreign travel, one had to approach the Reserve Bank of India (RBI)
for release of foreign exchange. If one asked for release of foreign exchange
for five days, RBI would give sanction for three days. There were instances
when during a week of foreign travel, there was Saturday and Sunday in between;
in such cases RBI would rather want one to come back on Saturday morning and go
back on Monday morning and sanction foreign exchange accordingly! Coupled with
shortage of foreign exchange, there was what was known as requirement of ‘P’
form; meaning to get approval for booking your passage or ticket for going
abroad; and chances of getting that were better if one preferred to fly Air
India. Later, the foreign exchange quota was relaxed by allowing first a lump
sum of USD 100, later increased to USD 500 for a foreign trip, irrespective of
its duration. People used to book an excursion ticket by Air India, which was
valid for four months, avail of the sumptuous allowance of USD 500 and go
abroad. This was nothing but official invitation to contravene FERA as such
people used to make other arrangements for their requirement of foreign
exchange. The law was so impractical that the then Prime Minister had gone on
public record saying that offering a cup
of tea to a Non-Resident by a Resident would amount to contravention of FERA. Since then, we have come a long way.
Now, not only a cup of tea but complete hospitality to a non-resident is
permitted.
The real breakthrough came in July of 1991 when our foreign exchange
reserves were as low as approximately USD 1.1 million, hardly enough for
fifteen days’ imports. The country would have literally gone bankrupt but for
the timely action by the then Finance Minister, Dr. Manmohan Singh, who pledged
the country’s gold with IMF, announced sweeping reforms and saved the country
from international shame.
As a result of such reforms, foreign exchange reserves gradually
increased and both inbound and outbound foreign investments increased
gradually. This started the awareness about foreign exchange regulations,
double taxation avoidance agreements and international taxation amongst the tax
professionals. One saw a gradual increase in seminars and conferences with FERA
and International Taxation as subjects for discussions.
As per the experience gained over another 26 years, the Foreign Exchange
Regulations Act, 1973 (FERA) was completely replaced by the Foreign Exchange
Management Act, 1999 (FEMA) which came into force on 1st June, 2000.
FEMA has been a civil law, which is more precise and comparatively easy to
understand and implement. Under FERA, all transactions in foreign exchange and
dealings with Non-Residents were prohibited unless permitted by RBI. Under
FEMA, all Current Account transactions are freely permitted under the automatic
route except for a very few requiring RBI permission but all Capital Account
transactions are prohibited unless permitted by RBI.
This opened up the floodgates of professional opportunities for tax
professionals and Foreign Direct Investments into India and India’s investments
overseas have considerably
increased, resulting in the present foreign exchange reserves of the
country in excess of USD 390 billion. Now the tax professionals have understood
the importance of International Taxation
and its potential for professional practice. The need is further strengthened
with the introduction of Transfer Pricing Regulations in our tax laws from
2001.
Since June, 2000, the law in force is Foreign Exchange Management Act,
1999 (FEMA). Hence the emphasis is more on management of foreign exchange
rather than regulation of foreign exchange. Hence, RBI has, since February,
2004, introduced the Liberalised Remittance Scheme (LRS) permitting residents
to access a certain amount of foreign exchange for their personal needs like
foreign travel, education, medical expenses, etc. The LRS scheme started with a
small quota of USD 25,000 to each resident to invest abroad, open a bank
account overseas etc. which gradually increased to USD 50,000, USD 100,000, USD
1,25,000 reduced to USD 75,000 for a short period and increased to USD 2,50,000 at which it has now
stabilised. Of course, the LRS scheme has brought in its wake new problems but
it is more or less successful.
Now the tax professionals have come to know the role of OECD in the realm
of International Taxation and
now we find
many such professionals
practising International Taxation and FEMA and also sharing their
knowledge at conferences and seminars. Study of international taxation, FEMA
and DTAA have opened up certain limited opportunities for international tax
planning but one has to do so very cautiously due to concepts and regulations
like GAAR, POEM, BEPS, MLI, TP, Permanent Establishment, etc. The matter has
become more complicated with the coming into play of FATCA and CRS which have
set into action, automatic exchange of information globally.
Over and above the Article for Exchange of Information contained in the
Double Taxation Avoidance Agreements (DTAA) that our country has entered into
with several countries, since many so-called tax haven countries were excluded
or were not inclined to enter into such agreements, now our Government has
proactively entered into Tax Information Exchange Agreements (TIEA) and also Multilateral
Convention on Mutual Administrative
Assistance in the matter of Taxation with many other countries.
These have resulted in our country being able to obtain tax information
from all these countries. Moreover, because of the Foreign Account Tax
Compliance Act (FATCA) of USA and the Common Reporting Standard (CRS) adopted
by many other countries resulting in automatic exchange of information, a lot
of information relating to beneficial owners of overseas assets and income has
started flowing in, resulting in Tax Department and Enforcement Directorate
initiating investigation against persons concerned. As a result of all these
steps, more and more persons have been adversely affected by the crackdown on
offshore tax havens.
All these, coupled with Black Money (Undisclosed Foreign Income and
Assets) And Imposition of Tax Act, 2015 (BMA), have opened up immense professional
opportunities and challenges for tax professionals provided
they have sharpened their skills in the fields
of international taxation and exchange control regulations. This may
also have implications of taxation in multiple countries requiring filing of
tax returns in other countries and paying taxes there. This will necessitate
the need to claim foreign tax credit in the country of residence in respect of
taxes paid in the source country. Many tax professionals must have already
experienced the impact of automatic exchange of information in respect of their
clients.
One important facility in International Taxation is the permission to
Chartered Accountants by CBDT and RBI to issue withholding tax certificate in
Form 15CB for making overseas remittances. This is very much appreciated by all
concerned as it, being prompt and
professional, saves time in making remittances.
However, one negative in the matter of International Taxation is the
attitude of Authorised Dealer Banks. RBI has delegated many powers to banks and
everything has to be routed through banks only. But their lack of knowledge hampers
and delays the process. Today, a professional who is able to advise clients in
the matter of International Taxation is much more respected than one who
confines to auditing and domestic taxation because of the opportunities thrown
open to corporates and entrepreneurs. Now it is no more confined to the high
and mighty, the rich and famous. The tax professionals are experiencing many
inquiries from common businessmen for advice on overseas structures and
regulations concerning the same.
The term, Base Erosion and Profit Shifting (BEPS) has now become an
important topic for discussions and consideration amongst tax professionals
globally and has made inroads into India also. The general tendency amongst
businessmen and industrialists is to look for low tax or no tax countries to
shift their activities. Hence, the existence of tax havens became very relevant
in the last few decades. The profits are artificially shifted to such low-tax
or no-tax jurisdictions. This brings out the issue of form over substance as
such activities do not have much substance. This, in short, is known as BEPS.
In recent times the world has become
more transparent in terms of commercial and economic activities. The tax havens
which had no Double Taxation Avoidance Agreement with any country have now
given up because of the fear of extinction and have signed tax information
treaties with all major countries. Frankly, tax haven has now become a dirty
word, as it immediately smells of tax evasion. Treaty abuse had become rampant
and to control the same, OECD formulated Multilateral Instruments (MLI) with a
view to modify bilateral tax treaties and arrest
treaty abuse.
Another avenue of international tax planning which had become very
popular was cross-border offshore Trusts for tax saving and estate planning. It
is always a fact that businessmen and entrepreneurs are very quick in
understanding and implementing such measures while the laws and tax authorities
are very slow in understanding such loopholes and catching up with legislation
to counter them. This leads to changes in domestic laws to make such
tax-planning measures very expensive and even useless. There was a time when
offshore Discretionary Trusts settled by Non-Resident relatives for the benefit
of their Resident relatives in India were very popular because any capital
distribution by such Trusts was exempt in the hands of such beneficiaries.
Moreover, the banking secrecy laws of jurisdictions like Switzerland, the
Channel Islands etc., helped proliferation of such Trusts. But now, with global
awareness about their abuse for tax planning, coupled with the KYC requirement
regarding the ultimate beneficial owner (UBO), has led to amendments in
domestic laws making such Trusts almost redundant.
Now that we Indians are allowed to own assets worldwide, the importance
of International Taxation has gained considerable importance. The issue of
Cross-Border Wills or Wills for overseas assets also opens up avenues for
international tax practice. One lesser known area is the GST impact on
cross-border transactions. Its impact on import and export of goods and
services, stock transfers, international trading, projects outside India etc.,
needs careful consideration as a part of International Taxation.
One important issue that seems to have escaped attention of the tax
professionals and the authorities concerned needs to be resolved. It is about the fact that when the
Enforcement Directorate (ED) concludes an investigation, even after
adjudicating process, no order is issued when it is in favour of the person
concerned but invariably an order is issued when the same is against the person
and a penalty is levied. It is well-known that under FEMA, there is no
limitation period prescribed but even then, there should be a regulation to
provide for a discipline of time limit within which an order, whether adverse
or favourable, must be issued by ED after completion of the hearing. We find this very common under all other laws
that an order is invariably issued, whether in favour or against, within a
reasonable time after the hearing is over. Even taking an example under FEMA,
the law provides that the hearing of a compounding application must be
completed within 180 days and thereafter an order is invariably issued within a
maximum of one month. Why shouldn’t the same be made applicable to the ED?
All these developments in the arena of International Taxation and FEMA
would mean that specialisation is the only way for tax professionals to
survive, succeed and prosper. The days
of Jack of All and Master of None are now over.
Now we have not only to look to the present but to think of the future
and equip ourselves to understand events happening globally in the fields of
economic activities, reforms and international taxation. However, the future
lies in complete removal of exchange control regulations. We have the examples
of England and Singapore and how they have progressed and flourished as
financial centres after abolishing exchange control regulations.
