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Stack Praises Indian Tax Policy Changes

MAR. 11, 2016

Stack Praises Indian Tax Policy Changes

DATED MAR. 11, 2016
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Taxsutra Speech

 

March 11, 2016

 

 

Robert B. Stack

 

Deputy Assistant Secretary (International Tax Affairs)

 

U.S. Treasury Department

 

 

It is a pleasure and an honor to speak today at the TaxSutra ALP Summit 2016. I eagerly accepted the invitation to address this Summit because, while a lot remains to be done, there is much to celebrate with respect to India's forward momentum in making India a destination for global investment. The United States has noticed, and, more importantly, American investors have noticed.

President Obama has called India one of the defining partnerships of the 21st century. Presidents Clinton, Bush, and Obama have all visited India, underscoring the increasing importance of this bilateral relationship -- one that is rooted in common values, including the rule of law, respect for diversity, and democratic government. Our bilateral trade has grown from $19 billion dollars in 2000 to almost $110 billion in 2015. In 2015, U.S. exports to India totaled $39 billion and cumulative foreign direct investment into India was $28 billion, while Indian foreign direct investment in the United States totaled $7.8 billion. According to the U.S.-India Business Council, its American members will invest $27 billion in India in 2016, beyond the $15 billion invested since Prime Minister Modi assumed office. Both the U.S. and Indian governments are keenly focused on nurturing this important relationship. In 2010, the U.S. and India launched the U.S.-India Economic and Financial Partnership, a forum specifically devoted to discussion of economic issues between the two countries, and in January 2015, President Obama and Prime Minster Modi established the first ever U.S.-India Strategic and Commercial Dialogue -- an annual forum for broader policy discussions between the United States Government and the Government of India.

I have been honored to have played a role in this increased bilateral engagement, twice visiting Delhi -- once to welcome Akhilesh Ranjan into his new role in 2013, and once with U.S. Treasury Secretary Jack Lew as part of the Treasury/Ministry of Finance Economic and Financial Partnership meetings. These visits have increased my understanding of the Indian perspective on the U.S./India tax relationship, and I am deeply grateful for the hospitality shown and the willingness of Indian officials to engage constructively on tax issues. Given this involvement, I thought today I might share a U.S. perspective on U.S./India tax issues, as well as on the broader BEPS landscape facing us.

I want to begin by noting the important and often constructive role played by India in the G20/OECD BEPS project. To say India played an important and constructive role does not mean we always agreed, but it does mean that India has sent its finest public servants to conduct this work to represent India's interests in an atmosphere of mutual respect and constructive engagement. In practical terms, it meant that Mr. Ranjan and I as members of the so-called "Bureau Plus" of the BEPS project sat regularly in the same room discussing the BEPS challenges and working towards the important consensus that was necessary to make the BEPS deliverables a reality in 2015. India played an important role in helping to achieve consensus on country by country reporting, and while India has always been clear that it could not endorse mandatory binding arbitration in tax treaties, it was and will remain a key player in building the necessary consensus for improvement to the mutual agreement procedures. This work continues through the MAP Forum of the Forum on Tax Administration. Indian delegates to the working groups, including the Digital Economy Task Force, which I co-chaired, presented India's interests honestly and forcefully, and brought the much-needed Indian perspective to important issues. U.S. and India were also able to negotiate and sign a reciprocal intergovernmental agreement to implement the Foreign Account Tax Compliance Act, or FATCA, pursuant to which both countries will collect and exchange now been globalized in the form of the Common Reporting Standard, and countries around the world, including India, will have an important new tool to combat tax evasion. The U.S. still has work to do to make the U.S.-India exchanges fully reciprocal: President Obama has included such provisions in his budget, and they await Congressional action.

Finally, the recent announcement by the U.S. and India that they will begin accepting applications for bilateral APAs is an achievement that seemed unimaginable just a short time ago.

Beyond these bilateral successes, India has been making progress on many other fronts as well, and the United States and world are taking notice. To note just a few, we can point to India's success in moving up twelve places in the World Bank's "Ease of Doing Business" Index; the government's decision to move away from retroactive laws as a tax policy tool; the manner in which the MAT controversy was resolved, as well as the resolution itself; and the decision by the government to revisit areas of tax administration, including the manner in which tax assessors are evaluated. Plainly, India has come to see that it is in its interest to move away from revenue targets as the chief driver of tax administration up and down the bureaucracy. And that is a critical advance. In order to create greater certainty and predictability for investors, the Indian Revenue Service is issuing more circulars to answer important policy questions on a broad scale, as opposed to leaving them to individual tax assessors. In the last two years the CBDT has stepped in on many occasions to clarify the legal position and give certainty on complex issues. These efforts range from clarifying that withholding obligations only apply to "net income" to helping resolve the recent MAT controversy. Specifically, in the area of transfer pricing, the Finance Ministry announced it would allow for the use of multiple-year data and ranges of comparable prices. In accordance with International Best Practices in the area of country by country reporting, the Indian Revenue Service has made clear that it will adopt special procedures to ensure that India can live up to its commitment to use the information for high-level risk assessment, and not as a back door to formulary apportionment. Finally, I would be remiss if I did not point to the painstaking and groundbreaking work of Partho Shome in connection with all manner of issues connected to improving tax administration in India. These are all examples of a government that is keenly aware of the link between growing the Indian economy and providing the certainty and predictability that investors need to make their investments.

Does the above list demonstrate that everything is fine on the Indian tax front? No. While the U.S.-India framework for the resolution of MAP cases has proven effective, there remain tough cases outside the framework that will need a principled resolution. In this connection, I am happy to announce that the U.S. MAP team will travel to Delhi for more MAP meetings beginning April 4. Further, while the Indian judiciary receives highest marks for principled decision making, internal administrative processes need to provide realistic opportunities for meaningful appeals; changing the culture from protecting the revenue to applying the law in a fair, principled manner up and down the chain still needs attention; and while being 130th out of 189 countries on the World Bank's "Ease of Doing Business" index is indeed an improvement, it is not where India needs to be to achieve the sort of growth it needs for its growing population. And investors need fewer surprises like the new 7 percent tariff on imported medical equipment. While India cannot today see the benefits to mandatory binding arbitration as part of MAP, I am willing to wager that it will get there sooner than anyone in this room might predict. Why? Because once India is able to increase the resources in and strengthen its tax administration, it will come to appreciate the payoff in terms of increased certainty and the related foreign direct investment that comes with it. But first the rest of the world needs to embrace arbitration and demonstrate convincingly that it can be a critical element of dispute resolution and of improving tax administration.

So is everything great on the tax front for investors coming into India? Far from it. Is India on a positive path? Absolutely. I have now been in government long enough to appreciate that getting things done in both of our boisterous democracies is not easy -- and so it is important to shine a light on achievement to encourage those taking our countries on a positive path.

Turning to BEPS, we move to an exciting new phase: implementation and monitoring. A key aspect of our ongoing work is broadening the net of participating countries. In that regard, the G20 Finance Ministers recently endorsed the "inclusive framework" that will permit non-G20, non-OECD countries committed to the BEPS deliverables to join the ongoing work. This is an important step to bring all countries around the table to work on these pressing issues. Turning to the specific BEPS action items, among the most important deliverables is the requirement for country by country reporting. India is in the process of enacting its legislation, and the U.S. issued proposed regulations that will result in approximately 1,800 U.S. multinationals providing country by country information to the IRS, which in turn will exchange it with our treaty and TIEA partners, including India. Just last week we announced that we fully expect to finalize those regulations by this June, so that U.S. multinationals with tax years beginning on or after July 1, 2016 will be required to file their country by country information with their tax returns. In addition to providing a risk assessment tool, I believe that companies will restructure to avoid having outsized profits in tax havens, and that is a good thing.

The work on transfer pricing focused on clarifying the arm's length standard with respect to important issues, such as the allocation of risk in a multinational group and the rules with respect to hard-to-value intangibles. In our work on BEPS, the U.S. has been a staunch supporter of a clear articulation of the arm's length standard and for the need to respect contracts when they are consistent with the economic arrangement of the parties, as well as respect the separateness of legal entities. We did not take this position because the arm's length standard is a perfect tool; we took this position because the proposed alternatives are all worse and undercut the certainty and clarity that is needed for global trade to thrive. But those who would continue to apply the arm's length standard in ways that capitalize on the mobility of capital and intangible property to shift income into low- and no-tax jurisdictions must appreciate that they are hastening its demise. Just as BEPS and country by country reporting have been driven by global outrage at the strategies employed by multinationals to lower their tax bills, the arm's length standard will be pushed aside by the world's political leaders if the arm's length standard does not produce results that make sense.

Finally, a word on the ongoing work to improve mutual agreement procedures. This work is of critical importance because it goes to the heart of a well-functioning international tax system. It is also of political importance because policy makers must understand and take into account the importance of providing the appropriate resources to revenue authorities so that they can deal with these cases in an efficient and timely manner. The MAP work outlined in the BEPS deliverables will continue in conjunction with the MAP Forum, which is part of the Forum on Tax Administration, a body in which India participates. We need the help of the Indian government in advancing this work. A key element of the work will be to set standards for MAP that all countries can agree to and then to provide for peer reviews, so that countries have incentives to become compliant with the emerging standards. As we look forward, MAP must focus on three important areas: timeliness, transparency, and taxpayer input. Governments need to set specific goals for the time in which cases will be resolved; there must be transparency with respect to each country's track record in meeting its commitments; and finally, there must be a meaningful avenue for ongoing taxpayer input as to how they perceive countries' progress in connection with MAP. Governments, including the Indian government, should welcome these principles, as they are not aimed at pointing fingers or shaming countries, but rather at improving the quality and speed of dispute resolution around the world. Only by building a strong political foundation for improving dispute resolution can we start down the road of progress, and only by holding ourselves accountable can we advance along that road. We look forward to India's support in building a robust mechanism for improving mutual agreement procedures around the world.

So where do we go from here? In preparing for this speech, I was struck by two quotes. When Finance Minister Jaitley announced last September that he was accepting the recommendation of the AP Shah Committee that the MAT provisions do not apply retrospectively to Foreign Institutional Investors prior to April 1, 2015, the President of the U.S. India Business Council Mukesh Aghi explained, "This announcement demonstrates the Government of India's commitment to attracting long term foreign investment into the country by providing greater tax certainty and ease of doing business for the global investment community." And recently, Amitabh Kant, the Secretary of India's Department of Industrial Policy and Promotion, was quoted in the Washington Post as explaining that Prime Minister Modi and Finance Minister Jaitley "have stated very clearly that there will be predictability and consistency in the tax policy."

These quotes point us to the work ahead. How do we help the world's developing countries and emerging economies balance the pressing need for domestic resource mobilization with the equally pressing need to avoid the sort of uncertainty that inhibits investment and cross-border flows? We need to move this issue forward in the G20 to better identify the dimensions of tax uncertainty, including the identification of the factors that create uncertainty for investors, as well as search for acceptable means to reduce uncertainty. This work could lead to recommendations that will reduce uncertainty and also identify best practices to be taken up by countries. It will be important in this work to consult with responsible business leaders on the drivers of uncertainty and to include them in the process. We are working with China, the current G20 President, and Germany, the next G20 President, to bring this work forward -- and we are hopeful that, with the help of the OECD, the G20 can make an important contribution in helping countries navigate these waters.

But an agenda that focuses on tax uncertainty must be accompanied by commitment on the part of the countries where multinationals are resident to accept rules that reduce the ability of their multinationals to strip income out of developing and emerging economies and other countries and into tax havens. President Obama's minimum tax proposal would let companies repatriate income earned in jurisdictions with a tax rate higher than the minimum tax rate without any further U.S. tax. Simplified somewhat, income earned in low-tax jurisdictions would be taxed in the U.S. at a rate equal to the difference between the minimum tax rate and the rate charged in the local jurisdiction. Such an approach reduces significantly the incentive to shift income out of the U.S., while at the same time vastly reducing the inventive to shift income from developing and emerging economies into tax havens. Approaches such as this -- if broadly adopted -- would bring a degree of stability to the international tax system and would increase the likelihood that developing and emerging economies could increase certainty and predictability in their tax systems, without being overly concerned that the system is stacked against them and that vast sums are flowing off into tax havens.

The U.S. was deeply disappointed that countries seeking short-term financial advantage thwarted efforts in the BEPS process to more broadly promote concepts such as the minimum tax or controlled foreign corporation rules. This was all the more disconcerting since the BEPS project was sold to the world in part on the basis that it was needed to help developing countries. We need to keep concepts like the minimum tax and strong CFC rules on the global agenda. The EU's recently proposed package for tackling tax avoidance includes both proposals for CFC rules, as well as a so-called "switchover" proposal that would turn off participation exemptions for low-taxed income. While both of these proposals need careful scrutiny to determine how they affect developing countries, they are important steps in the right direction, and we hope the world embraces approaches like them because they enhance the stability of the international tax system, reduce stripping out of the residence countries, and very importantly, protect developing and emerging economies.

In closing, let me reiterate what a pleasure and privilege it has been to have visited your great country, to have learned from your fine tax officials, and to engage regularly with them on the great tax issues of our day. There is a long road ahead, but I believe both countries are capable of great progress. The lives and economic well-being of our respective people depend on it, and we owe them all the effort we can muster to improve their lives. Thank you.

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