About Loophole Games—A Treatise On Tax Avoidance Strategies
General Contents
Preface v
About the Author vii
Detailed Contents xi
Introduction: “Don’t be Evil” 1
Part I: Profit Suppression
1. Deferral of Revenue 13
2. Exploiting the Mercantile System of Accounting 20
3. Manipulating Segmental Accounts 28
4. SPV and JDA Structures 35
5. Characterisation of Revenue as Capital Receipt 45
6. Rate Arbitrage 51
Part II: Gain Suppression
7. Avoiding Tax through Capital Receipts 63
8. Capital Loss Harvesting 75
9. Structuring through Non-compete Fees 81
10. Bonus Stripping 89
Part III: Profit Shifting
11. Intra-Group Services 97
12. Thin Capitalisation 108
13. IP Migration Strategies 115
14. Cost Sharing Arrangements Used for Tax Avoidance 127
15. Restructuring into a Contract Manufacturer 133
16. Structuring of Sourcing and Procurement Activities 145
17. The Dummy’s Guide to Structuring 153
Part IV: Base Erosion
18. Permanent Establishment Manipulations 167
19. Taxing the Cloud 179
20. Structuring of OTT Business 188
21. Circumventing the Equalisation Levy 194
22. Migrating HNWIs and Professionals 206
Part V: Sham Transactions
23. Use of Third Party Intermediaries 217
24. Colouring Loans as Finance Lease 224
25. Employer-Employee Collusion 235
26. Tax Avoidance through Merger & Acquisition 243
27. Saving on Dividend Tax 256
28. More sham characterisations 269
Part VI: Trends in Blatant Evasion
29. Shell Companies 279
30. Tax Evasion through Stock Exchanges 294
31. Under-Invoicing and Over-Invoicing 308
32. Hawala 318
33. Tax Havens 349
34. Exchange of tax information 366
Detailed Contents
Preface v
About the Author vii
General Contents ix
Introduction: “Don’t be Evil”
Part I: Profit Suppression
1. Deferral of Revenue
Booking revenue as advance 14
Delhi High Court catches revenue deferral strategy of Ansal Builders 15
Recognising revenue on project completion 18
2. Exploiting the Mercantile System of Accounting 20
Scheme: Related party payments followed by write off 20
Validity of the scheme 21
Litigation risk in the scheme 22
Scheme: Exploiting loopholes in accounting standards 23
Validity of the scheme 24
Case of Ballast Nadam Dredging 25
Case of Consolidated Construction Consortium Ltd 26
3. Manipulating Segmental Accounts 28
Transfer pricing analysis of segmental P&L 29
Mispricing transactions with LTUs 31
Overpricing expenses on a specific activity to claim greater deduction 34
4. SPV and JDA Structures 35
Using SPVs to defer capital gains tax 35
Tax incidence 36
Implications under GAAR 37
Use of SPV to avoid capital gains 38
Validity of the model 40
JDA route to tax deferment 42
JDA and accommodation entries 44
5. Characterisation of Revenue as Capital Receipt 45
Colouring remuneration as compensation for damage to capital assets 47
xii Contents
Characterisation of sale consideration as compensation for loss of business48
How India Today’s editor availed of a tax-free reward 48
Taxability of capital receipts after introduction of Section 56(2)(x) 50
6. Rate Arbitrage 51
Economics of dual tax rate regime 51
Standard deductions on income from house property 54
Royalty income from abroad 55
Colouring business income as capital gains 56
Exploiting presumptive taxation system 57
Misusing regime for new manufacturing companies 59
Part II: Gain Suppression
7. Avoiding Tax through Capital Receipts 63
Extinguishment of rights 64
Case of land aggregators 64
Using self-generated intangible assets to avoid capital gains 65
Carbon credits 71
Sham transactions involving capital receipts 73
Generating loss in related party transactions 75
8. Capital Loss Harvesting 75
Advanced methods of generating capital loss 76
When the Jindal Group lost on loss 78
Case of Vishishth Chay Vyapar 79
Case of AAA Portfolios 80
Characterisation issues 81
9. Structuring through Non-compete Fees 81
How tax avoidance happens by use of non-compete agreements? 83
When Macmillan Group exited from its Indian business 86
10. Bonus Stripping 89
Tax planning or tax evasion? 91
Validity of the scheme 91
Part III: Profit Shifting
11. Intra-Group Services 97
ActionAid’s Investigations into Sweet Nothings 98
Cases from Panama Papers and Paradise Papers 102
Contents xiii
Validity of the strategy 103
Beerfest at AAR 105
12. Thin Capitalisation 108
Modus operandi 108
Incentive for thin capitalisation 109
Approaches to discourage thin capitalisation 110
Thin capitalisation rules in various countries 110
Tax avoidance after thin capitalisation rules 113
13. IP Migration Strategies 115
Royalty model 115
Validity of the method 117
Back-to-back licensing model 118
Software IP migration model 119
Political response to IP migration 120
History of IP migration 120
The 2017 tax reforms 122
India’s response to IP migration 123
Tally Solutions case 125
Issue of Jungle Book’s copyright 126
14. Cost Sharing Arrangements Used for Tax Avoidance 127
Validity of the modus 129
Apple’s structuring arrangements 129
Cases of Amazon and Microsoft 130
15. Restructuring into a Contract Manufacturer 133
Validity of the strategy 136
Taxing the transfer of business at the time of restructuring 137
Testing PE exposure of offshore principal 139
Testing POEM of offshore principals 140
“Brutal tax evasion” charge on Sun Pharmaceuticals 140
16. Structuring of Sourcing and Procurement Activities 145
Corporate structures for sourcing 146
ActionAid’s Allegations against H&M 150
Case of Li & Fung 152
17. The Dummy’s Guide to Structuring 153
HQ and its Contractors 153
xiv Contents
Sourcing companies and intermediate trading companies 155
Marketing and selling activities 157
Haven shopping 157
Treaty shopping 159
Flipside of BEPS-style structuring 161
Part IV: Base Erosion
18. Permanent Establishment Manipulations 167
Splitting up contracts 169
Commissionaire arrangements 171
Limited attribution of profits to PEs 173
Employer of record intermediary to avoid service PE 174
Spanish Armada versus Artificial Avoidance of PE 175
19. Taxing the Cloud 179
Nexus issues of e-ticketing businesses 180
Nexus in case of e-tailing and marketplace models 183
Characterisation issues 184
New concept of Digital PE 185
20. Structuring of OTT Business 188
Validity of the model 190
Efforts to establish PE 191
21. Circumventing the Equalisation Levy 194
Old business model 195
Introduction of equalisation levy 197
New business model 199
Validity of the model 201
Google India’s AdWords program 202
Equalisation levy on e-commerce operators 204
Conclusion 205
22. Migrating HNWIs and Professionals 206
Tax advantage for HNWIs 206
Whether harmful tax practices? 210
Base erosion of professionals 213
Contents xv
Part V: Sham Transactions
23. Use of Third Party Intermediaries 217
Other reasons for using the modus operandi 221
Validity of the scheme 221
Orphan Trusts 221
24. Colouring Loans as Finance Lease 224
Loan simplicitor versus finance lease 224
Validity of the scheme 226
Case of Hathway Investments 227
Case of IndusInd Bank 229
Case of Avasarala Technologies 232
Structuring aircraft leases through Ireland 233
25. Employer-Employee Collusion 235
Abetment of employees’ tax fraud by employer 235
Validity of the schemes 236
Interest-free loans 237
Employee Stock Options 237
ESOP taxability for employees 238
ESOP taxability for employer 239
ESOP as a tool for artificially avoiding taxes 242
26. Tax Avoidance through Merger & Acquisition 243
Treatment of mergers under Indian Tax Laws 243
Merger between related parties 246
Validity of the modus 247
When NCLT smells something fishy in a merger proposal 248
Acquisition of loss-making company 251
Unintended consequences of Section 79 253
27. Saving on Dividend Tax 256
Treaty Shopping 258
The case of Molinos Argentina 259
Lack of beneficial ownership transparency 261
Intra-group services 261
Buy-back of shares 263
Merger and acquisition to escape DDT 265
xvi Contents
Conversion of company into LLP 266
Payment of dividend as business expense 267
Equity recast as debt 269
28. More sham characterisations 269
The Cullen strategy 271
Use of a conduit 272
Accounting tricks 273
Part VI: Trends in Blatant Evasion
29. Shell Companies 279
A forensic auditor’s guide to shell companies 280
(a) Phony directors and phony addresses 280
(b) Incorporation in a bunch 282
(c) Unclear beneficial ownership or benami ownership 282
(d) Curious back-to-back entries in bank account 283
An evolutionary history of shell companies 283
Shell companies after 2015 289
Shell companies post 2020 292
30. Tax Evasion through Stock Exchanges 294
Bogus long-term capital gains 295
Bogus capital loss 298
Validity of the modus 299
Mixing bogus LTCG with IPO scam 300
Tax evasion through F&O Trades 301
Case of Rakhi Trading 304
31. Under-Invoicing and Over-Invoicing 308
Trade mispricing 311
Vicious cycle of Africa’s poverty 314
Butterfly effects of trade mispricing 316
32. Hawala 318
Defining Hawala 320
Hundi under the British India 329
Migration and rise of modern Hawala systems 333
Global Hawala Networks 337
Modus operandi of settlement of accounts in Global Hawala Networks 340
Contents xvii
Trade 341
Physical movement 343
Formal channels 344
Miscellaneous methods 345
Investigating Hawala 346
33. Tax Havens 349
Top tax havens 349
The American way 351
Dubai: The Den of Smugglers 353
British spiderweb 355
Swiss Banks: Helping innocent evaders since 1815 356
Sandwich with Single Malt 358
Offshore advantage 359
Effects of Tax Havens 363
34. Exchange of tax information 366
Evading the glare of EOI 368
Challenge to India’s EOIR on bank accounts in Switzerland 369
Challenge to India’s EOIR on bank accounts in the US 370
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