From the adoption of the OECD framework to the end of retrospective taxation, 2021 has seen big changes
By Naveen Aggarwal
A central theme of the tax policies of the current exemption is to resolve ambiguities in income tax (IT) laws that have led to tax disputes. To this end, two amendments in 2021 are important. Administratively, the government has completely overhauled the procedure and conditions for reassessing a taxpayer’s income. The timelines for opening the reassessment have also been changed, with a longer period of 10 years only available in limited circumstances. Hopefully this will help increase certainty for the taxpayer community.
Second, India has buried the ghost of the indirect share transfer retrospective amendment that was introduced to circumvent the Supreme Court ruling in a landmark case. In August, the government passed a law exempting from tax indirect transfers of shares in transactions carried out before May 28, 2012. Although it can be argued that India could have avoided the wave of litigation in Indian and international forums by making such a change much earlier, this decision was a broader policy statement that India is not in favor of retrospective changes to its IT laws.
With any change in law, especially tax laws, differences in interpretation are common. With India gradually changing tax laws, the judiciary has had to intervene on several occasions to deal with these aspects. For example, while the reassessment process has changed since April 1, 2021, Revenue has issued notices for previous years without following the established process. Taxpayers have entered the Hautes Cours, with mixed results. Likewise, as faceless valuation took hold, taxpayers had to go to court, on natural justice grounds due to the lack of an opportunity to be heard. The tax on the distribution of dividends, abolished in 2020 and replaced by withholding at source, has brought a new nuance to the courts as disputes have arisen between the tax administration and taxpayers over the applicability of the clause most favored nation in certain tax treaties.
The past year has also seen a Supreme Court ruling resolving the ten-year dispute over the taxation of cross-border supply of software. The heyday curt was faced with solving a technology-related problem: the delivery of software, first via floppy disks, then CDs until now hosted and digitally accessible. The Supreme Court evaluated four different business models and delved into India’s copyright laws, tax changes and tax treaty provisions, and then delivered a clear verdict. This has had an impact on many taxpayers and, in addition to addressing the problem of characterization of software payments, it will also serve to reiterate the principle that the provisions of tax treaties trump unilateral national changes that have a impact on non-residents.
Non-residents continue to face various interpretation issues due to India’s unilateral measure to tax the digital economy, via the Equalization Levy (EL). There had been a general proliferation of similar unilateral measures by countries. However, the EL provisions, although clarified to some extent in the 2021 budget, are broader in scope and continue to pose challenges in terms of coverage of routine cross-border transactions.
However, in October, after several rounds of pledges, 136 countries, representing more than 90% of global GDP, joined the OECD framework that will revolutionize the way cross-border income of multinational companies is to be taxed. The two-pillar approach aims to ensure that the world gradually moves away from taxation based on physical presence, MNEs do not use jurisdictions only for tax arbitration and countries are deterred from the race to the bottom by offering low tax rates to attract investment. With an overall minimum tax of 15% under the second pillar and the right of market courts to receive a proportional share of the profits, regardless of their physical presence, under the first pillar, a clearly defined path for the implementation of the two-pillar approach in the coming years has been laid down, with a commitment to withdraw from unilateral measures like the LE.
If 2021 were a trailer, 2022 will likely be the blockbuster as countries negotiate and implement changes to bring new international tax rules to life. Although EL withdrawal is not likely next year, with India reaching an interim compromise with the United States for an EL credit mechanism against the OECD Pillar 1 liability of entities whose Headquarters is in the United States, it is hoped that the government will consider the concerns raised by the industry and issue the necessary guidance. In addition, developments in international taxation would require a recalibration of Indian tax laws to give effect to the OECD framework. As the government plans to introduce laws to regulate cryptocurrencies, the taxation of cryptocurrencies and other digital assets will take center stage. In the midst of all this, against the backdrop of the success of ad hoc dispute resolution systems such as “Vivad Se Vishwas” and the government’s goal of reducing tax disputes, the coming year could be a good time for the government. government to consider a permanent mechanism to resolve tax disputes that complement changes in the tax system.
The author is Partner (Tax) KPMG in India
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