Offshore mergers and acquisitions may come under the domestic tax net, with the Government mulling ways to block companies from using the shell company route to ward off revenue officials. Using this route, companies are able to split their legal ownership from the actual, or beneficial, ownership.

Since tax is imposed on the legal owner, the M&A operations instead use the shell company, which is separate from the legal entity, to finance their acquisitions. The shell company, usually located abroad, does not fall under Indian tax laws. The government is, therefore, exploring ways to expand the concept of legal ownership to include such beneficial ownership as well.

But given the strong lobbying by different interest groups, the process is proving to be difficult. The Direct Tax Code, the omnibus redrafting of Income-Tax Laws, was supposed to include the changes, but the tabling of the Code has been pushed back from the current monsoon session of Parliament.

One of the alternatives that have been explored is the concept of controlled foreign corporations to plug the dichotomy between legal and beneficial ownership. The Finance Ministry is clear that the passage of the code will have to be followed by blocking the misuse of tax treaties. It has also been looking at other means to plug revenue leakages.

The move would also be in tandem with global practices. The OECD recommends that governments should ask for upfront disclosure of beneficial ownership and control information on the formation of the corporate vehicle, to prevent tax evasion by companies.

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