Indo-Singapore DTAA amendment won't affect FPI inflows: PwC

There may not be any immediate impact in the inflows especially from Foreign Portfolio Investors after April 1, 2017, when investors stop getting full capital gain exemptions, says Abhishek Goenka, Tax Partner at PwC. The investors may not react as they already priced in the move when the Mauritius Tax Treaty was modified, he adds."This is a positive move as it creates a level playing field among all jurisdictions and would help prevent arbitrage that was rampant in India," says Dinesh Kanabar, Chief Executive Officer of Dhruva Advisors.But Goenka says the industry will be a tad dissapointed by the announcement that Singapore will get similar treatment to Mauritius. The demand was for more benefits for investors from Singapore due to the better economic ties between India and Singapore, he says."Once the Mauritius Treaty was amended this was bound to happen," says Sudhir Kapadia, Partner at EY. He says investors need not panic. They, he says, should only do their homework and organise investments in a more practical manner to avoid any difficulties.Below is the transcript of CNBC-TV18's interview with Sudhir Kapadia, Partner, Ernst & Young, Dinesh Kanabar CEO, Dhruva Advisors and Abhishek Goenka, Tax Partner, PwC. Q: What are your thoughts on LOB, we don’t have the fine print, we don’t have the press release, so, we don’t know if there has been any tweaking of the limitation of benefit clauses. What is it that you would expect or what is it that you would be hoping for in the fine print? Kapadia: Two things, I think one is that clearly now it is a level playing field amongst all jurisdictions when it comes to investments in India and I think that is a welcome move. Hitherto there has been this arbitrage opportunity because of specific provisions around capital gains exemption. As has been mentioned, this was something which was on expected lines; the template was already there. The Singapore and the Mauritius Treaties were conjoined like Siamese twins because you already had a pre-existing clause in the Singapore Treaty that once the Mauritius Treaty gets amended, the impact will be implemented in the Singapore Treaty as well. Coming to the LOB part, my personal view is that LOB or no LOB, GAAR or no GAAR, we have to recognise one very important development which is happening internationally in the tax world which is the base erosion and profit shift regime and in summary, whether you call it a principle purpose test, whether you call it the main purpose test, in summary business presence and commercial presence will be something which tax jurisdictions around the worlds, not just in India, will insist upon, will look at very closely. So, frankly my personal view is trying to continue to beat that drum incessantly to say there would be some more substance required, there would be more business presence required is a bit -- we know India can’t be isolated from what has been agreed as a G20 protocol. So, my personal view is that investors should do that homework well, should ensure that when they are organising investments in India, the substance, the business presence test is fulfilled in a more practical commercial manner because if you do that, the compliance with the LOB or GAAR will automatically follow. So, I think that is something which we have to now live with. Q: Let us just talk about what happens from April 1 2017. If you are coming from Mauritius or if you are coming from Singapore, you continue to enjoy treaty benefits as long as you can fulfill the treaty conditions and you are part of the LOB criteria. What are your thoughts on what will happen if the GAAR regime does kick in, does the treaty override GAAR or does GAAR override the treaty? Kapadia: The taxpayers have been asking for that clarification to say that if you have a treaty and LOB clause and that should prevail, the government has been saying that in no country in the world, in most countries in the world, there is GAAR does not specifically override a treaty. The point I was trying to make is that even if GAAR kicks in and it will kick in, as far as the substance test is concerned, in practical terms it will not be dramatically different from what an LOB clause will require. So, the point is simple, you cannot have going forward simply post box companies or post office companies without any substance investing in India and trying to get a treaty benefit. Therefore point is that whether you look at it from a GAAR perspective, whether you look at it from a LOB perspective, you need to have some amount of commercial and business presence which by the way is also now being insisted upon in those countries as well and Singapore is a great example where they themselves do not want fly by night investors coming in and setting up shop there. It is not something which you have to do just for satisfying conditions laid out by the GAAR provisions in India; that was the point I was trying to make. Q: Now that both the treaties have been brought at par do you expect any sort of moving around of flows or any change of existing structures the way they exists in Mauritius or in Singapore? Kanabar: First is that come April 1 2017 we have GAAR provisions which unless extended in the Budget will apply. Therefore the need the really prove the existence of a substance. There has been this ongoing demand by the industry that once they comply with limitation of benefit, GAAR ought not to apply and the government\\'s position as is stated in the law is quite clear that GAAR will still apply and therefore the provisions will be far more onerous. Therefore one was looking at Singapore where it might be possible to really demonstrate substance far better than Mauritius and Singapore might hold an edge. The other point which was mentioned earlier is with regards to interest and one needs to see how does interest stack out. Finally one small point would be that equity is one part but there are quasi equity instruments and the treatment of quasi equity instruments again would be an interesting things to watch as we look at the finer print within the thing which has been signed today. Q: What happens from April 1 2017? All this was known, we knew about the amendment with Mauritius, we knew Singapore will also happen and that has happened along expected lines. So, April 1 2017 onwards if you are making in fresh investments even if you enjoy treaty benefits you are subject to capital gains at 50 percent of the existing regime. So, right now we don't have long term capital gains, however there would be the short term capital gains burden. Do you expect any impact particularly when it comes to portfolio flows into the market? Kanabar: One of the things which we have been discussing in the past is with regard to portfolio investments and the introduction of GAAR. Clearly as we the world has moved on far from the time when the Supreme Court in the case of Azadi Bachao Andolan said that treaty shopping is a necessary event and you have come to a situation where even the OECD has now recognised that avoidance of double non taxation is also one of the primary requirements of the treaty. Therefore one has to ensure that one is taxed appropriately in a jurisdiction and that raises quite a few issues. For example come April 1 2017 we have a situation where in June next year multilateral instrument is going to be signed between about 100 odd countries. India is very clearly keen to be a signatory to that, as is expected that Mauritius and Singapore will be signatories. That is going to create its own really interesting scenario. So, if we say that double non taxation cannot be permitted under a treaty and we say that there is no capital gains taxation in Mauritius and in Singapore, how will the two countries recognise that is going to be an interesting development. Number two, substance requirement is not really going to be only a paper substance requirement, so you cannot just go back and say that there were professional directors who were sitting in board meetings, it will be far more than that. Are business decisions being made there, are the people who are making those decisions capable of making those decisions, whom do they report to? So you are going to see a whole new structure come into place. The Multilateral instrument is going to be a very key development there. Q: What are your first thoughts on the revised Singapore Treaty? Goenka: As you mentioned, exactly on the lines that we had expected. Of course the demand from the industry side was that Singapore should get something better than what Mauritius has got. However, I think if one had to do a reality check, deep down people were expecting it to be identical and that is what it seems to be based on the announcements made. Couple of details that we will have to watch out for; there was no mention in the press conference in terms of what happens to interest because the Mauritius treaty has ended up with a very favourable withholding tax on interest of 7.5 percent which currently under the Singapore Treaty is 15 percent. So, it will be interesting to see whether that also has been brought at par with the Mauritius Treaty. Secondly, whether the limitation of benefit conditions in Singapore will continue or whether since the capital gains are really being phased out, it will no longer be necessary for companies to fulfill what was kind of onerous obligation on them. So, these are the two details but otherwise on expected lines. Q: How do you see life from April 1 onwards and the fact that we are talking about gradually moving in towards the BEPS regime, do you see any immediate impact in terms of the flows that will start coming in to the market particularly portfolio flows from April 1? Goenka: I don’t see any immediate impact. I think these changes ever since the Mauritius Treaty was renegotiated in May, I think most market players have kind of factored and priced this into their decision making. In any case, if it is a long term play, this treaty change should not materially impact any portfolio flow. The big impact is really on the short term gains where earlier the protection that was available will now go away. That said, while it certainly increases the overall cost of doing business and the related changes in terms of the impact of the recent CBDT circular on offshore transactions, I think there are some tax worries that FPIs will have to brace with. However, overall I think these have been priced in and I don’t at least see an immediate impact on inflows.