Where one country proposes to make investment in a country and for the sole purpose of availing tax benefits under the treaty between the investor country and intermediate country and between the intermediate country and the investee country, sets up a controlled foreign corporation in the intermediate country. Such a process is termed as treaty shopping in international tax.

This article will basically show At times tax planning becomes tax evasion via treaty shopping

It is presently being debated globally as to whether treaty shopping is tax planning or tax evasion.

To stop this menace (specially so far as Mauritius is concerned) the government of India has introduced a sub section 90/90A which prescribes, that in order to avail the treaty benefit, the person has to produce tax residency certificate of that country, failing which treaty benefit cannot be availed.

Treaty shopping involves the improper use of a DTA, whereby a person acts through an entity created in another state with the main or sole purpose of obtaining treaty benefits which would not be available directly to such a person.

Example

For example, a company in a low tax jurisdiction plans to invest funds as a loan in the UK. The UK does not have a DTA with the country and therefore interest paid directly to the haven company would ordinarily be subject to deduction of UK tax at source. To avoid this withholding tax, the company channels the funds through a company set up for this purpose in, say, Luxembourg. The Luxembourg company receives interest from the UK which it then pays on to the true source country. UK withholding tax on the interest is reduced to nil under the terms of the UK/Luxembourg DTA. Luxembourg does not levy withholding tax on interest paid on to the haven country (except where the EU Savings Directive applies) under its domestic law. If there were no provisions to counteract the effect of the arrangement, the tax haven company would therefore benefit from the UK/Luxembourg DTA, though the income is subject to tax in Luxembourg only to an insignificant degree (on the marginal turn taken by the Luxembourg company) and not subject to tax at all in the UK.

 

Other Issues

The practice of structuring a multinational business to take advantage of more favorable tax treaties available in certain jurisdiction.A business that resides in a home country that doesn’t have a tax treaty with the source country from which it receives income can establish an operation in a second source country that does have a favorable tax treaty in order to minimize its tax liability with the home country. Most countries have established anti-treaty shopping laws to circumvent the practice.

Conclusion

So it is a big question regarding whether treaty shopping is tax evasion or tax planning. In this one country proposes to make investment in a country and for the sole purpose of availing tax benefits under the treaty between the investor country and intermediate country and between the intermediate country and the investee country, sets up a controlled foreign corporation in the intermediate country.

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