India investigates companies' use of tax havens

By added on 16/12/2010

The Indian Finance Ministry has launched an investigation into over 100 offshore "financial structuring deals" undertaken by Indian business entities in foreign tax havens including the Isle of Man, the Economic Times of India has reported.

The international taxation wing of the Income Tax department and the foreign taxation unit in the Central Board of Direct Taxes (CBDT) are expected to look into these overseas deals to see if tax is being avoided under the guise of financial restructuring.

It is believed that investments and deals worth billions of rupees have already been executed in tax havens like the Mauritius, Isle of Man, Cyprus, British Virgin Islands and Bermuda, amongst others.

The advantage of investing in these havens is that "privacy, confidentiality and freedom from all taxes are guaranteed. And company structures are flexible and the process of incorporation is fast and efficient while doing financial structuring", sources close to the investigation are reported to have said.

The Telegraph's Isle of Man tax expert Mike Goodman said: "Every government is probing offshore deals to protect their revenue.

"A number of Indian companies have incorporated in the Isle of Man in order to float on AIM or the London Stock Exchange.

"The Isle of Man has a zero rate of corporation tax but any dividends remitted outside the island are taxable where the shareholder is resident.

"The gist is that tax doesn't end at Dover - wherever you live the local tax authority wants you to pay their share."

The investigation also hopes to uncover the violation of foreign exchange rules and money laundering to fund illegal ventures - crimes which will then be referred to the likes of the Enforcement Directorate for follow-up action.

Further efforts to reduce loss of revenue are believed to have so far included India's Finance Ministry finalising Tax Information Exchange Agreements (TIEAs) with countries including the United Arab Emirates, China, Israel and South Korea, and fine-tuning Double Taxation Avoidance Agreements (DTAAs) with more than 70 countries.