Retro tax still a concern for foreign investors: John Hobster

Foreign investors are still concerned about the retrospective taxation in India, but the concerns have alleviated a little due to assurances by the government, says John Hobster, global head (transfer pricing), EY. He tells Dilasha Seth that in terms of transfer pricing, things are changing in India not only at legislative level but also in practice, which is a big positive. According to him, the issue of treaty abuse involving countries such as Mauritius will be dealt with under the Organisation for Economic Cooperation and Development’s base erosion and profit shifting (BEPS) provisions coming into play next year. Edited excerpts:

India is working to align its transfer pricing regime with global best practices. How far has it come?

In terms of simplification of transfer pricing rules, India is doing a pretty good job. In 2001, when India’s transfer pricing rules were relatively new, they were perceived to be harder hitting and more complex compared to other countries introducing similar rules around the same time. That was a concern for people investing into India. They felt they would have difficult compliance issues. It transpires that they were right – they do have difficult issues with compliance. A lot of them are still sitting in various stages of litigation. There is a reputational issue for India that it is considered by some to be very difficult, complex, snarled up in administration and potentially in litigation. To be fair to India, that is changing fairly quickly. We have seen great strides in the inception of the advance pricing agreement (APA) programme. Some are signed, while some are waiting for signature. Those are all big positive steps. But, there is definitely more to do.

Are foreign investors facing lesser taxation hurdles now compared to two years ago in India?

In my interaction with overseas governments and clients who have issues with India, the general feeling is that things have changed for the better. Not only in legislative terms such as the introduction of retrospective measures on APAs in last year’s Budget, but also in practice. There is a ‘can do’ mentality in the APA office and that is very important. We have observed there has been a change in tone from the top, which is visible at the operational level.

While the government is allaying concerns related to retrospective taxation put in place by the previous government, it still remains in the books. Are foreign investors still concerned?

Yes, they are. People were extremely concerned before, but now the concerns have alleviated a little due to the subsequent developments. There are huge concerns of taxpayers – our clients – any time that retrospective legislation is put in anywhere. This is not just an Indian matter. But of course, the highest profile and most recent developments related to retrospective taxing measures took place in India. I can’t think of another example on the same scale. It is the most publicly noted example, at the front of people’s minds, albeit that it took place under the previous government. My colleagues tell me that when it happened, foreign investors were fleeing India. We are not experiencing that now; so things seem to have improved.

With Vodafone and Cairn tax cases moving the arbitration way, is there still scope for settlement?

We have to hope that it is possible under international norms. Increasing numbers of our clients believe that mutual agreement procedure is less bad than the litigation route.

Another segment of BEPS recommendation is the signing of multilateral instrument to modify bilateral tax treaties by the end of the next year. How cumbersome will it be to get all countries to agree to the same thing?

There seems to be a very large commitment. We are hearing that there are a lot of people who agree to the principle and more than the principle. Five years ago, I would have said it will never happen in my lifetime, but now I have to say that it probably will.

India has been pressing Mauritius to re-negotiate the bilateral double taxation avoidance agreement for a long time now, especially to incorporate the ‘limitation of benefit clause. With the recommendation also being a part of BEPS, do you see that happening?

It will only happen between parties who sign up to it. The sustainability of Mauritius as a credible treaty jurisdiction is something that needs to be evaluated very carefully in the context of some other actions of BEPS, such as preventing treaty abuse. Let me be extremely clear; I am not saying Mauritius offers any form of mechanism for creating or promoting treaty abuse. But BEPS says you can only get treaty benefit where there is a true nexus in the treaty countries to the activity relating to the transaction concerned. In the multilateral instrument, any country has to be concerned with making sure its most important economic partners are in the multilateral instrument.

What are the key taxation areas India should work on?

The ability to resolve disputes easily and quickly. There is also a degree of uncertainty, which would be best removed, about India’s adherence at a practical level related to transfer pricing elements of BEPS.

The BEPS recommendation of country by country reporting will result in huge data transfers in an out of the country. Are countries including India even equipped to handle such quantum of data?

People are worried about confidentiality. Even one single leak would be detrimental to international relations. In order to make this whole thing work, there needs to be restrictions on who can access the data and there needs to be heavy sanctions if there is leak. To maintain flow of inbound information, India will need to undertake risk assessment of foreign taxpayers; then it will have to show it will maintain integrity of that data. Some developed countries have very good practices. I understand India has been peer-reviewed by other countries and found to be in reasonably good shape. If that translates into a full confidentiality framework that is watertight, that would be helpful in creating the perception that India is “open for business” in the way that some other countries are.