OECD & G20 Nations recommended

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  • Automatic Transfer of Information Clause (Country’s automatically give the detail of person who started company/bank account in their country. Detail given to the Home country of person. Initially they give only by demand but now they give detail every year without demand) – But some country not adopt it.
  • Limitation of Benefit clause - Under LoB, foreign investors who seek tax exemptions in India should produce documents that he is a resident of the said foreign country (eg Mauritius). Not submitted need to pay tax in India.
  • Principle Purpose Test (Multilateral Instrument) – After LoB, take further test to check the investment is real or for Tax avoidance. If its fr Tax Avoidance cancel the Permission.
General Anti Avoidance Agreement – Direct Tax Code & Parthasarathy Shome Committee.

General Anti Avoidance Agreement
(the agreement for add Limitation of Benefit class, Principle Purpose Test to direct tax to solve misuse of DTAA)
  • GAAR provisions empower tax authorities to declare any transaction as impermissible avoidance arrangement and determine the tax consequences, if the transaction has been entered into with the main purpose of obtaining a tax benefit and it lacks commercial substance.
  • The responsibility of proving that main purpose of particular transaction was not obtaining a tax benefit lies with the tax payers.
  • The GAAR confers wide discretionary powers on the Commissioner of Income Tax (CIT) including the power to invoke GAAR.
  • The new GAAR provisions empower tax authorities to scrutinize an arrangement (a business deal) which gets the protection of a DTAA, if that arrangement is impermissible. An arrangement is any type of transaction, operation, scheme agreement or undertaking.
  • As per the DTC provisions and amendment by the government after Shome Committee recommendations, an arrangement becomes impermissible avoidance arrangement if it has two conditions. That is if:
(1) the main purpose of which is to obtain a tax benefit.
(2) it is an arrangement, to obtain a tax benefit, with either of the following conditions:
(a) violates arm’s length principle;
(b) results, directly or indirectly, in the misuse, or abuse, of the provisions of DTC;
(c) lacks commercial substance partly or wholly; or
(d) is not for bona fide business purposes (bona fide means with good intentions).

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