India is set to limit all benefits given to foreign investors under bilateral treaties to entities directly incorporated in India as per local laws in order to prevent offshore transactions involving Indian assets such as the Hutch-Vodafone deal of 2007 getting away with tax benefits.
The Hutch-Vodafone deal is embroiled in a bitter Rs 20,000-crore tax dispute. The new draft model Bilateral Investment Protection Agreement (BIPA) prepared by the finance ministry says that it covers only corporations directly owned and controlled in good faith by an investor and does not include an investment or holding company.
The language of the text is such that it clearly excludes investments made by entities such as CGP Investments of Cayman Islands from which Vodafone’s Netherlands arm bought 67% in Hutch-Essar having tax residency in India.
The idea is to ensure that benefits of bilateral investment agreements accrue only to entities that have India as tax domicile.
Bilateral treaties offer fair and equitable treatment, protection from expropriation and free transfer of return to foreign investments and therefore is favoured by the global investment community.
They also offer right to alternate dispute resolution such as international arbitration. Vodafone has already sought international arbitration invoking the India Netherlands BIPA. The new draft model BIPA seeks to prevent such instances of dragging the country into international arbitration on matters of indirect transfer of assets.
India has signed over 80 BIPAs and a few comprehensive economic co-operation agreements (CECA).
Besides, the proposed draft treaty text also insists that treaty benefits will be available only to corporations that have its management and real and substantial business operations in the host country.
The intention is to prevent treaty shopping, which has been a hallmark of some of India’s bilateral treaties such as the one with Mauritius. Criticism of India’s double-tax avoidance agreement with Mauritius recently forced New Delhi to change its Income Tax Act to prevent shell companies in Mauritius owned by investors elsewhere from avoiding capital gains tax in India.
The new draft BIPA text also excludes tax disputes from the scope of the agreement.
