In the run-up to the 2014 General Election, the Bharatiya Janata Party (BJP) under Narendra Modi’s leadership promised to bring back secretly stashed Indian money abroad. As this seems to be a tall task with protracted wait, the Modi Sarkar has of late been working on a slew of options that includes, among others, closing the glaring gap and fixing the fault lines in investment treaties New Delhi entered into various trading partners across the world in general; more so in particular in tax havens such as Mauritius, to a less extent Singapore and Cyprus. In all such moves, the aim is to remove the capital gains tax exemption so that the domestic tax authorities obtain the much-needed tax income following sale or transfer of shares of an Indian company acquired by a tax haven entity located in the latter.

With his lawyerly mastery of issues, the Finance Minister Arun Jaitley has been piloting this project with exceptional zeal as he firmly believes that here is the avenue to draw revenue to fill up the coffer to undertake developmental programmes of consequence for the nation. His sense seems spot on, given the ample hints from the latest World Investment Report (WIR) which said that India became the fourth largest recipient of FDI in developing Asia and the tenth largest in the world, with inflows of foreign direct investment (FDI) in 2015 reaching $ 44 billion. What is significant to note is that Singapore and Mauritius, alone accounted for nearly three-fifths of total foreign equity investment in India, according to UNCTAD report. This encompasses rising connections with multinational enterprise (MNE) affiliates located in Singapore and round-tripping FDI through the Mauritius route. It is small wonder that a smart Jaitley seized the opportunity gratuitously presented itself in garnering untaxed revenue from such sources of tax fugitives.

UNCTAD report highlights that India in recent time adapted a new model Bilateral Investment Treaty (BIT) which includes a chapter on investor obligations, requiring investors to comply with host State legislation and gratuitously adhere to internationally recognized standards of corporate social responsibility (CSR). Besides, it includes an Investor-State Dispute Settlement (ISDS) mechanism that provides for exhaustion of local remedies prior to initiating arbitration and strict timeframes for the submission of a dispute to arbitration. These initiatives announced by the NDA government coupled with its consolidated FDI policy should ensure a smooth sailing of overseas investors when they navigate the choppy waters of India, scouting for sound investment opportunities.

The crux of the UNCTAD WIR is that “reform of international investment agreement (IIA) regime for sustainable development remains key challenge”, even while sufficient headway to bring the IIA regime in line with contemporary sustainable development imperative is gaining traction at the national, bilateral, regional and multilateral levels. The UNCTAD-sponsored World Investment Forum 2016, to be held in Nairobi from 17-21 July offers an opportunity to discuss how to carry that reform to the next phase.

Interestingly while noting a 38 per cent jump in flows to 1.76 trillion dollars accords hope that global FDI is at long last returning to a growth path, the report punctures the optimism by observing that a surge in cross-border mergers and acquisitions to $ 721 billion from $ 432 billion in 2014, was due to large corporate reconfigurations by multinational enterprises, including shifting their headquarters, for strategic reasons and for tax investment purpose!. The latter in plain lingo meant escaping from paying crushing corporate taxes in the jurisdictions they do business in to safe tax havens. It is in this context that the Group of 20 governments including India teamed up with the Organization for Economic Cooperation & Development (OECD) to curtail base erosion and profit shifting (BEPS) initiative last year with a mandate to reform global taxation using an orderly and cohesive process. Analysts argue that the BEPS project is not about penalizing business but it is about government’s hunting for a solution to preclude double taxation and facilitate global trade. It needs to be noted that the leaders of G 20 meeting in Mexico in June 2012 tasked the OECD to suggest ways to glean the 4 to 10 percent of global corporate tax revenue that is lost annually to tax avoidance.

Be that as it may, UNCTAD report found that more than 40 percent of foreign affiliates globally have multiple ‘passports’. These affiliates are part of complex ownership chains with multiple cross-border links entailing an average of three jurisdictions. With their ownership networks involving more than five hundred affiliates across more than fifty countries, these types of affiliates are much more common in the largest multinational enterprises and sixty percent of foreign affiliates of the largest MNEs have multiple cross-border ownership links to the parent company. This means that the nationality of the investors in and owners of foreign affiliates is becoming increasingly blurred. Such “multiple-passports affiliates” are the result of indirect foreign ownership, transit investment through third countries and round-tripping, the report found. About thirty percent of foreign affiliates are indirectly foreign owned through a domestic entity; more than ten percent are owned through an intermediate entity in a third country, and about one percent is ultimately owned by a domestic entity. Cases of ‘mismatch’ in investor nationalities involve almost half of foreign affiliates in developed economies and more than a quarter in developing economies.

The implication for policy makers is that ownership-based investment policies will have to be rethought to safeguard the effectiveness of ownership rules. This will also help garner the tax income to the host country so that its development objectives are fulfilled and poverty alleviation gains traction. At a time when emerging economies like India tilts towards liberalization through the lifting of restrictions, increases in allowed foreign shareholdings or easing of approvals and admission procedures for foreign investors, the need for greater vigilance with an unobtrusive regulatory touch is all the more indispensable and crucial. Eternal vigilance with smart safeguards in place will ensure that reform does not descend to disruption or deformed development over the long haul, policy wonks caution. (IPA Service)