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BW Businessworld

Harassed Cos Rush For Advance Ruling On Tax Matters

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Hounded and harassed, more and more companies are rushing for advance rulings on tax matters to avoid a potential Vodafone-like conflict with tax authorities in the future.

As of March, over 150 companies are believed to have applied under a new scheme (Advance Pricing Agreements) to negotiate their Transfer Pricing liability with the government. More and more consultants now advise companies to go for an Advance Ruling to get an idea of tax potentially payable on transactions more frequently.

“These days I spend more time speaking to company Boards than to CFOs”, says a top tax consultant in Mumbai, only half jokingly. The Board of Directors summon him to gain an understanding of the implications of the tax planning the company is engaged in. (Usually tax advisors interact with the CFO’s team). With the trend moving towards naming and shaming tax avoiders globally, companies are worried now that their brand image may be eroded. Multinationals are getting reconciled to an era where they pay more as taxes than they used to”, says the consultant.
Read Also: The Transfer Pricing Terminologies

Tax avoidance, as the critics love to call aggressive tax planning, is casting a dark shadow on the ethical values of corporates globally. Google (Google with the Don’t Be Evil motto) has been at the receiving end of some tough questions from the UK Public Accounts Committee on its low tax payments in the UK. Google insisted that its UK arm only provided support services to its European HQ in Ireland, and hence did not qualify as a business to pay taxes in the UK. Ireland, where the company claims it should be taxed, has a minimal corporate tax rate. This comes after another damning report by the PAC last December naming Starbucks & Amazon, along with Google as tax offenders.

On the other side of the Atlantic, a US Senate Sub Committee is investigating how Apple shifted profits to potentially avoid taxes due in other countries. This month, Citizens for Tax Justice an American left-leaning research group found that at least 18 large companies including Nike, Microsoft & Apple are shifting taxes abroad. If companies brought that money, it found that they would pay more than $92 billion in additional taxes. Even Indian companies in industries like Pharmaceuticals are known to transfer most of their patents to a subsidiary in a foreign low-tax jurisdiction, so that it can shift its taxable profits to that country in the form of royalties.

But now corporates are getting worried about the hit their brand is taking. A lawyer recently remarked that Vodafone is now known as the ‘company that didn’t pay taxes’ just as much as the telecom company. “We are in a situation where companies are worried about the negative impact to their brand image on account of tax litigation”, says Sanjay Tolia, partner at PwC.  After the Starbucks report in December, the company faced the threat of a boycott in the UK, before it agreed to pay $20 mn in taxes over the next two years. Companies would rather pay money as taxes rather than losing it in the form of sales foregone due to the negative publicity. "Tax is no more a compliance issue but a business issue", says Tolia.

Not everybody is amused. “This is like saying that you shouldn’t do tax planning, and companies should pay taxes based on ethical and moral principles”, says Shefali Goradia, partner at Mumbai based tax advisors, BMR. “You can’t wish away the step of making the laws up-to-speed with new business models”.

And that presents the biggest challenge governments are facing. Shifting of profits to low tax countries happens because it is overtly encouraged by the country as a way of attracting investments. Much of that was sought to be remedied by the General Anti Avoidance Rules mooted by the government last year, but with the onslaught of criticism, has been postponed to 2015-16.

So is smart tax planning about to disappear? No, say experts, as the savings are too substantial to be foregone. But with the new wave of scrutiny, the approach towards tax planning is undergoing a change, as evidenced by the concern of company Boards. “The focus will turn to substance-over-form”, says Sanjay Tolia, citing an old tax concept that says tax planners can’t hide behind legal transactions, if they can’t substantiate a non-tax business rationale for the same. “Aggressive positions by tax administrations around the world is encouraging taxpayers to use Advance Rulings and Advance Pricing Agreements to achieve certainty". The cost of impudence could be severe.

You could probably say, the party has ended. They will have to pay for the drinks from now.