What is GAAR?
GAAR stands for General Anti-Avoidance Rules. It is a new tax law that India is planning to implement starting 2024. In simple terms, GAAR gives Indian tax authorities more power to tackle “tax avoidance”.
Many large companies try to legally pay lower taxes by setting up complex business structures. However, the main purpose of these structures may just be to reduce tax burden, not for real business needs.
GAAR allows tax officers to disagree with such structures if they believe the only goal is saving taxes. The officers can deny intended tax benefits and ask the company to pay more taxes than planned.
Why should UAE businesses care?
Even though you operate from the UAE, GAAR could still impact your taxes in India. That’s because many UAE companies do business between the two countries.
India wants to collect more taxes from such cross-border operations. Through GAAR, officials aim to block tax saving setups that lack real commercial reasons. They may charge more taxes than before on UAE businesses with structures seen as primarily for avoidance.
Structures GAAR may question
Several standard business setups link the UAE and India in ways GAAR could challenge:
- Holding companies that only own shares without true operations may see tax benefits removed.
- Routing investments through Mauritius to currently claim capital gains exemptions in India may lose this benefit.
- Heavy usage of debt to claim large interest deductions compared to actual invested money raises red flags.
Learning from other cases
In the past, GAAR impacted large multinationals for similar tax avoidance tactics across Asia reducing Indian dues.
For example, a drinks giant had complex webs across the region only to cutting its Indian bill that GAAR struck down. It owed hundreds of crores more to New Delhi. Reviewing such cases prepares firms.
Assessing your structure’s risk
It’s prudent for UAE businesses tied to India to scrutinize their own setups now with advisors. Key questions include:
- Do holding entities possess real operations beyond owning shares for the tax break?
- Will routing via Mauritius pass the test of having commercial reasons over just avoiding capital gains tax?
- Is debt usage in the UAE within reasonable boundaries concerning your funds invested next door?
Steps to reduce compliance exposure
Consulting experts can outline moves like:
- Assigning material responsibilities and work to any holding units to evidence financial substance.
- Considering tax treaty routes, other than Mauritius, for capital gain exemptions on exit.
- Adjusting debt-equity ratios to demonstrate balance rather than exaggerated interest tax deductions.
- Meeting “economic substance” criteria under relevant avoidance of double taxation pacts.
Conclusion
By proactively assessing structures now and implementing safeguards with advisors’ help, firms can minimize later GAAR troubles. However, the time to act is before new rules kick in – not after facing tax issues due to lack of preparedness. Approach this judiciously to stay compliant smoothly.
Frequently Asked Questions
A. Not likely if activities/funds connected to India remain modest. But know the law in case that changes over time.
A. No, GAAR applies solely for future years from its 2024 launch. Still sensible reviewing older arrangements for guidance.
A. For absolute safety, complete all changes well before 2024 ends per most experts to avoid any GAAR review or surprises.
