Mr. A forms a company to sell his products. The company pays 25% tax, but if he himself sold the products he would pay 30% Evasion – Use of illegal means to reduce tax liabilities, i. e. falsification of books, suppression of income, overstatement of deductions, etc. Example – Mr. B sells his products for cash and does not bank the cash.

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This refers to principles which are not codified in the legislation (non-statutory) • They include a range of philosophies and approaches including “substance over form” “abuse of law” General Anti Avoidance rules • It has same meaning as “anti avoidance rules based on general principles in law” except that it is codified and included in the legislation.

The Commissioner empowered to declare an arrangement as an impermissible avoidance arrangement (IAA) if: • The whole, a step or a part of the arrangement has been entered with the objective of obtaining tax benefit, and • The arrangement: ? Creates rights and obligations not normally created in arm’s length transactions, or ? Results in direct or indirect misuse or abuse of the provisions of the code, or ? Lacks commercial substance in whole or part, or ? Is not bonafide 4 Direct Taxes Code Bill, 2009 ©2009 Deloitte Haskins & Sells. All rights reserved. Impact of IAA

Once treated as an IAA, look through permitted by: • Disregarding the whole or part of the impermissible avoidance arrangement • Treating related or accommodating or connected parties as one and the same person • Reallocating amongst parties or re-characterizing any accrual, receipt, expense, deduction, rebate, etc. whether revenue or capital • Re-characterizing debt to equity or vice versa Domestic transfer pricing rule ? Thin – capitalization ? Impact of currency law ? Do we needs FAQ’s, safe harbors ? 5 Direct Taxes Code Bill, 2009 ©2009 Deloitte Haskins & Sells.

All rights reserved. Lacking commercial substance Lacking commercial substance defined to include situations where there is a: • Significant tax benefits without a significant effect upon business risk or net cash flows • Legal substance or effect differs from legal form • It involves or includes: ? Round trip financing ? An accommodating or tax indifferent party ? Any element that has the effect of offsetting or cancelling each other –

A transaction which is conducted through one or more persons and disguises the nature, location, source, ownership or control of funds Direct Taxes Code Bill, 2009 ©2009 Deloitte Haskins & Sells. All rights reserved. Round trip financing • The ordinary meaning of the word ’round-tripping’ is ‘a journey to a place and back again’ • Differential rates of tax for foreign and Indian investors have been the primary driver for this route • Reserve Bank of India averse to any such proposals • FIPB refers these arrangements to tax authorities A B Mauritius India Portfolio 7 Direct Taxes Code Bill, 2009 ©2009 Deloitte Haskins & Sells. All rights reserved. Other aspects

The GAAR can be invoked as an alternative to or in addition to any other basis of making an assessment Presumption of Purpose • The onus of proving that the purpose of a transaction is not to avoid taxes is on the assessee • The presumption applies even if the main / overall purpose of the arrangement is not to obtain a tax benefit and only if a step / part of the arrangement is to obtain a benefit Appealable order / dispute resolution ? Advance Ruling ? Penalties ? 8 Direct Taxes Code Bill, 2009 ©2009 Deloitte Haskins & Sells. All rights reserved. Other countries

South Africa – 2006 GAAR introduced appears to have been the inspiration behind Indian provisions Netherlands and Canada – Burden of proof on the tax authorities Australia – Application determined on the basis of 8 test or factors Australia and Canada will issue advance rulings 9 Direct Taxes Code Bill, 2009 ©2009 Deloitte Haskins & Sells. All rights reserved. Is the Mauritius investment route compromised ? The GAAR, applies if it can be established that there was an avoidance transaction that was a misuse or abuse of the provisions of the Canadian ITA or a tax treaty

A commercial transaction can be structured in a tax-efficient manner – i. . , once the “why” of a transaction is established to be for a nontax purpose, the “how” of implementing it may be taxdriven No inherent anti-abuse or limitation of benefits rule in the treaty led to the conclusion Does the AAR in DLJMB still prevail ? MIL 1994 Transition Cayman Islands MIL 1993 Investment 1995 Sale and Gains Luxembourg Canada DFR 1994 Exchange InCo 10 Direct Taxes Code Bill, 2009 ©2009 Deloitte Haskins & Sells. All rights reserved. Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, and its network of member firms, each of which is a legally separate and independent entity.

Please see www. deloitte. com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu and its member firms. Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in 140 countries, Deloitte brings world-class capabilities and deep local expertise to help clients succeed wherever they operate. Deloitte’s 165,000 professionals are committed to becoming the standard of excellence.

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This material prepared by Deloitte Haskins ; Sells is intended to provide general information on a particular subject or subjects and are not an exhaustive treatment of such subject(s). Further, the views and opinions expressed herein are the subjective views and opinions of Deloitte Haskins ; Sells based on such parameters and analyses which in its opinion are relevant to the subject. Accordingly, the information in this materials is not intended to constitute accounting, tax, legal, investment, consulting, or other professional advice or services.

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