Ever since the OECD launched its ambitious base erosion and profit shifting (BEPS) project in 2013, countries around the world have taken concrete steps to tackle multinational tax avoidance. The BEPS project — spearheaded at the instance of the G20 nations — is a 15-point Action Plan aimed at ensuring that MNEs pay the right amount of tax, in the right country and at the right time.

India too participated in the BEPS project and has implemented key BEPS recommendations to tackle MNE tax avoidance. For instance, India has introduced strict rules on deductibility of interest expenses, a new country-by-country reporting requirement, and measures to address the direct tax challenges posed by the digital economy.

One area where India is lagging behind, however, is the absence of a legal requirement for companies and tax professionals to disclose potentially aggressive tax-planning arrangements. Action 12 of the OECD’s BEPS project sets out key recommendations on how such rules may be introduced and applied by tax authorities.

Like most developing countries, India too relies heavily on direct tax collections to ensure growth and equality.. However, abusive tax practices make it impossible for India to realise its goals and aspirations. Much of this loss is attributable to tax professionals engaged in the design, marketing and implementing of aggressive tax-avoidance arrangements.

Many sophisticated tax administrations in the world, specifically those in developed economies, already have such rules in place. The UK, for instance, has a tax disclosure requirement for few years now. And as per research conducted in the UK, the rules have significantly helped the HM Revenue and Customs in preserving UK’s tax base.

While the Indian Income Tax Act penalises tax preparers for engaging in fraudulent activities, there is nothing in the law to deter professional enablers of corporate tax avoidance. The Institute of Chartered Accountants of India or the Bar Council of India have been seriously lacking in powers to adequately discipline professionals operating in the tax and legal consultancy industries. And while the judiciary often strikes down abusive tax arrangements, it rarely calls for any disciplinary action against tax professionals.

In this context, the need to introduce a tax disclosure requirement (with serious consequences for non-reporting including imprisonment) for these professionals has never been felt more pressing.

Main advantages

Disclosure rules have three main advantages. First, these rules would discourage tax advisers from promoting, and taxpayers from using, potentially aggressive tax arrangements. Second, the rules would enable the tax authority to get access to taxpayer information in a timely manner. And, finally, as a result of timely access to information, tax authorities would be able to undertake more efficient audits.

In principle, the primary burden of filing a disclosure notification would be on tax advisers and, in the event that any client-attorney privilege prevents such disclosure, then the burden should shift on the corporate taxpayer. The arrangement should be reported to the tax authority within few weeks from the date on which such arrangement is made available, is ready for implementation, or has been implemented (that is, whichever occurs first).

Opponents of a tax disclosure regime claim that such rules infringe upon the right of a taxpayer to seek legal and tax advice and also pose a threat that to confidentiality and taxpayer privacy. However, while taxpayers are legally entitled to plan their taxes and minimise their overall tax burden, they cannot engage in ‘creative compliance” and surpass the intention of the legislature by obtaining tax benefits that are not due in the first place. As regards confidentiality of taxpayer information, rules could be put in place to ensure that sensitive information is not leaked or otherwise misused.

For too long, India did not have a law to tackle corporate tax avoidance. The wide network of tax treaties signed by India with foreign tax jurisdictions comes handy in devising aggressive tax-planning strategies. India did implement, in 2017, a domestic general anti-avoidance law (GAAR) to disregard tax-avoidance schemes and deny inappropriate tax treaty benefits. Likewise, certain tax treaties were amended to include anti-abuse provisions in the form of the principal purpose test or a limitation of benefits clause.

However, GAAR, while no doubt necessary, is not sufficient to combat corporate tax avoidance. Many developed economies realised this sooner and supplemented their domestic anti-abuse rules with a neatly structured mandatory tax disclosure requirement. India too should follow cue.

The writer is a lawyer

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