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Thursday, Jun 08, 2006

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Transcending borders

Nothing to kill or die for, and no religion too, and where all people live life in peace. What a dream, but that's the world John Lennon paints in `Imagine.' "Imagine all the people sharing all the world... and the world will live as one."

Citing the lyrics right at the start, here comes a recent publication of the Institute of Chartered Accountants of India (, Aspects of International Taxation: A Study. Peace and tax may seem a strange pair, even in imaginations, but the book points out how the cherished dream of world leaders is the unification of trade practices, with agreements to take care of irritants in taxation.

Such agreements are, usually, the DTAAs or double-taxation avoidance agreements. Hard bargaining goes into the making of these treaties. "The earlier guiding principle in determining the source of income and the location of the gross profit was to ask the question `what has been done to earn the profit?' Now the more appropriate question would be `what and where has the profit earning activity been carried out?'"

For instance, in the recent case of Morgan Stanley, one of the questions before the Authority for Advance Rulings was whether the company could be deemed to have a PE (permanent establishment) in India as a result of sending employees to India or due to deputation of employees to MSAS (Morgan Stanley Advantage Services). Another issue was whether remuneration based on a margin on total operating cost of the PE is the appropriate profit attributable to such a PE.

"The essence of the PE is the right to use with some sort of permanence attached to it. However, permanent need not mean everlasting but it should be something more than temporary," reads an explanation in the book. PE, as a topic, has been home to everlasting controversies.

ICAI has devoted separate chapters to transfer pricing and advance rulings too. The final chapter titled `contentious issues' discusses the treatment of e-commerce transactions, standalone server and so on. Don't miss the section on Mauritius treaty — something so hot in the news that the Finance Minister had to recently assure the worried that there would be no review of the treaty.

As per Article 13 of the treaty between India and Mauritius, "income from capital gains of a resident of Mauritius on the transfer of shares in an Indian company is taxable only in Mauritius. Coupled with this, currently, Mauritius does not tax capital gains of offshore entities under its domestic tax laws." A case of eating the cake and having it too!

"This makes the use of Mauritius ideal for providing for tax-free exits in any investment structure for India. Further, for FIIs (foreign institutional investors) intending to trade in Indian equities, Mauritius provides a significantly lower cost alternative, compared to other jurisdictions." The landmark decision of the apex court in the Azadi Bachao Andolan case is extensively discussed.

"As far as the India-Mauritius treaty is concerned, the subject has been debated threadbare. Having regard to larger economic, political and diplomatic considerations, we are not proposing any unilateral revision of that treaty," the Finance Minister had said on May 20, apparently in a move bolster the sagging index; but two days later, Sensex suffered its most serious jolt of falling 1,111 points.

Useful reference for professionals.

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