INDIA: Update on likely critical changes on Offshore Indirect Transfer Tax

Article by: BMR Legal Advocates

Tax on Offshore Indirect Transfers (OITs) – also known as ‘indirect transfer tax’ – is increasingly being adopted by various nations across the globe. The OIT tax, generally in the nature of capital gains, gets triggered in a jurisdiction where the assets / value are located in an offshore transaction resulting into their transfer. India has enacted a prominent OIT since 2012 which is supplemented by detailed regulations which determine the threshold and valuation.

In this context, we would like to bring to your attention a critical development. The UN Committee of Experts on International Cooperation in Tax Matters has been overseeing changes to the UN Model Tax Convention (MTC) in a matter that would permit source jurisdictions to impose OITs within the tax treaty framework. In its meeting held on October 07, 2020, the Committee has approved the release of draft changes to the Commentary accompanying the UN MTC.

Three substantive changes are proposed to the Commentary. The first relates to modification of the Commentary to limit residuary capital gains tax entitlement of Resident States. The second proposes a draft treaty clause (within the capital gains provision) to permit source taxation of gains from certain OITs along with accompanying Commentary to explain the scope of the proposed clause. The third proposes another draft treaty article to permit Source countries to tax gains from direct transfer of (1) derivatives and securities issued by resident companies (or related to resident companies) and (2) rights granted under laws of the Source State which are used or exercised exclusively or almost exclusively in the Source State, such as telecommunication licences, mining rights, etc.

These proposed changes would be taken up for discussion and finalisation at the 21st session of the Committee. Given the resonance of the Committee’s work, particularly by developing countries and LDCs, and considering the importance of the proposed changes, a formal adoption of these changes by the Committee is expected to be followed up by negotiations by individual countries and adoption in their tax treaties.

We may highlight that the Indian tax administration has been holding a view that tax on OITs is within its entitlement and has been contesting a similar view before the Supreme Court of India against Sanofi Pasteur. It is therefore likely that the adoption of these changes by the UN Committee may form the basis for Indian tax authorities to renegotiate treaties for claiming entitlement to tax OITs.

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