Multiple Taxation Faced by Corporates
Swarup Mukherjee,President-Projects, Walchandnagar Industries Limited

Swarup Mukherjee, President-Projects, Walchandnagar Industries Limited. Taxation as a subject is primarily imposed either based on the residency or based on the origin of generation of income or both. Most sovereigns preferred to tax the income both based on origins of income as well as residency defined as per various rules. This process immediately brings up issues of double taxation by different sovereigns by corporates operating internationally.

The issue of multiple taxation remained a bane to the international trade and commerce since the early days of starting of barter system with different sovereigns. The matter has evolved a long way since then. The General Agreement on Tariffs and Trade (GATT) treaty since 1948 and then WTO regime, tried to bring some sanity and principles in the execution domain of international commerce.

The matter of taxation on individuals or bodies akin to individuals is rather simple and also has rather limited value levels. Corporates, being an artificially created person, not only work in integrated but diversified work areas but also have significantly large transaction values. These corporate transactions increasingly attract the fancy of sovereigns for looking for avenues to get their pie wherever possible.

Taxation as a subject is primarily imposed either based on the residency or based on the origin of generation of income or both. Most sovereigns preferred to tax the income both based on origins of income as well as residency defined as per various rules. This process immediately brings up issues of double taxation by different sovereigns by corporates operating internationally. The concept of Double Taxation Avoidance Agreement (DTAA) between countries has been the pillar of relieving the Corporates from the burden of double taxation by different countries. The DTAA s primarily aim at the following:

a. Lower Withholding Taxes (Tax Deduction at Source);
b. Complete Exemption of Income from Taxes;
c. Underlying Tax Credits.

However the DTAAs are also riddled with various clauses to make the Corporates have multiple residencies resulting in multiple taxation. The various regime of foreign exchange management despite DTAAs complicate the matter multi fold. The erstwhile Foreign Exchange Regulation Act (FERA) was a major deterrent for Indian companies for operating abroad till the new FEMA acts and rules were promulgated. The various interpretations by the tax collection agencies put a major hurdle. In all cases the burden of proof is with the corporate and not with the department imposing taxes. The scenario is further complicated when the transactions is between countries where DTAA s is not in place. In all such cases the tax imposed is a complete additional cost to the corporate. The methods of accounting treatment also poses a significant question on the unclarity or clarity of the books itself as both foreign exchange accounting norms as well as earnings calculation methodology are juxtaposed. Sometimes corporate does take due advantage of the complexity to the chagrin of the sovereigns imposing tax on their operations.

Further the issues of General Anti-Avoidance Rules (GAAR) being promulgated by various countries continue to put a threat on the legitimate tax management endeavors of the Corporates. The point of bring up holding companies or investment companies in tax havens like Caymen island or country specific tax shield (like those given by Indo- Mauritius treaty) Further complication comes with respect to legislators resorting to retrospective modification of taxation rules. Such retrospective modifications done both in UK and France have resulted in severe ire to the corporate world. Such taxation issues are primarily driving corporate to change their declared residencies to the tax havens (eg. Arcelor Mittal with Head Office to Luxemburg, Vedanta with Head office at UK).

The taxation on capital gains has come to the forefront with a classic legal wrangle for Vodafone case in India. The finals of these wrangles between the legislatures and corporate is yet to unfold and corporate world waiting anxiously to see the outcome.

Considering the sluggishness of the WTO to reach to an agreement towards universal rule, bilateral treaties, multilateral and regional treaties came up to smoothen the investment requirements of Sovereigns. However such bilateral treaties (like the investment treaty between countries like Mauritius and India) could also be treated for various money laundering activities.

While legislatures have the onus of ensuring inflow (to the consolidated funds of India, for Indian context), the means of achievement of such objective mostly wrenched the Corporates from their planned endeavors for making profits based on historical position. In short the legislators are continuously modifying the rules of the game or the playing field to make the matter absolutely difficult for Corporates to reach the goal of profit .

This scenario was played out in India very elaborately in 80s w.r.t. Excise Duty imposition by the department of Central Excise to various corporate entities. It needed long drawn legal battle for simple issues like establishment of the meaning of ¬manufacture . These legal battles (like DCM vs CIT and Triveni Engineering vs CIT) was the only means available to corporate to bring sanity to the Department of Central Excise on levy of Excise Duty on sundry cases like duty on non-marketable product or works of erection etc.

Similar scenario also was played in 90s w.r.t. imposition of service tax. It may be worth recalling that service tax came into being as a part of Finance Act 1994 under the residual entry of the Union List(empowering Union of India to tax any item not covered either in the state list or in the Union List or in the concurrent list). The entire service tax is continuing as a Finance Act appendage though constitution amendment has been done to include service tax.

Though there are existence of adequate WTO guidelines for international trade and various international conventions has taken the issues of international economic law to a logical end, implementation of international private law remains major area of concern. Corporates are continuously affected by the sovereign rights on imposition of taxes. International Private Law primarily aims at bringing in uniformity of taxations to all private bodies (Read Corporates) operating in any country at uniform levels. However depending on the portions of affected zone the countries frame their own regulations, which very often are contrary to the norms, set by the good intentions of the policymaking bodies of international trade and affect some calculated areas.

The cases like promulgation of carbon tax by EU nations, anti dumping duties by nearly all nations adds further to the issue of double taxation and make a mockery of DTAA s and WTO recommendations. The situation remained very volatile and double taxation and sometime triple taxation by sovereigns on various pretexts continues to impede international trade scenario. This process is not only an irritant to the corporate but also effectively blocked the innovation and efficiency brought by the corporate (due to economics of scale). Fundamentally, international laws being a weak law and punitive implementation primarily needs clearance from ICJ and Security council, there is hardly any case in the history of corporates resorting to international justice system for redressal of their grievances in Taxation. (Though there are few cases of success under WTO regime like Auto Component case of Canada under NAFTA, these are rather an exception).

In my understanding, the only methodology of forcing the sovereigns to stop overexercise of the fundamental sovereign rights of taxation that has been proven useful is the force of public opinion and condition of the economy. The public opinion normally comes in the form of rating agencies evaluation and consequent change of pattern of capital flow. So far only media glare and country ratings by Moody s or S & P ¬s only helped corporate to get some relief in the cases of unfair taxation situations by various countries.