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Cross Border Transactions – Tax Risk 


One of the most important of the objectives of a businessman is to earn profit out of the business activities but lack of proper tax planning may lead to abrupt closure of business due to the tax risks. During my tax practice of 25 years or more in the field of international tax in the field of Income tax and Goods and Service tax matters, situations which leads to tax risk can be managed if plan properly at the stage of its inception.  

What are the tax Risks in Cross Border Transactions ? 

Tax Risk is negative possibilities that could prevent the business entities from achieving the desired results. The following tax measures needs utmost attention of all tax payers: 

– Structure of Foreign Companies which may be considered deemed Indian Tax Resident (Applicability of POEMs) 

– Dual Tax Residency status in case of Individual specialty in the Covid-19 situations  

– Realignment of tax strategies incorporating evolving tax concepts like BEPS measures, hybrid mismatch arrangements, CFC rules, interest deductions, harmful tax practices, right use of tax treaties, avoiding PE status, TP aspects, disclosure rules, dispute resolution. 


Transactions to scan carefully? 

– Intangible transactions 

– Business transactions attracting PE 

– Intergroup charge like royalty and management fee 

– Digital transactions  


Matters fuelling Tax Risk? 

– Automatic flow of financial information between tax jurisdictions 

– High Technology Development 

– Complex and fast evolving tax Laws 

– Negative Perception for business and business leaders 

– Evolving tax laws to enhance government revenue like BEPS, GAAR, multilateral and unilateral measures by almost all tax jurisdictions. 

– Enhanced enforcement measures by tax administration like aggressive audits, reporting and penal actions. 


How to mitigate tax risk? 

Development of a Risk identification and assessment process which is well defined and documented consisting of the following: 

– Regular audit/review of all key agreements based on the latest change in law both domestic and international; 

– Use of Advance Pricing Agreements and Safe Harbour Rules for Transfer Pricing matters; 

– Define strategies to minimise tax cost through risk based analytical approach i.e. taking tax positions which are in line with the tax risk appetite and there are no surprises; 

– Regular review of tax positions based on change in laws or new land mark judgement; 

– High value/complex/innovative/high risk transactions should be pre-tested with relevant tax authorities via Advance Ruling. 

Concluding Remark 

Conclusions may be drawn from the above are that the business should definitely manage these tax risk which can eat out his business completely by just becoming aware of the such situations which leads to tax risk. 

(Disclaimer: This content is meant for our clients or professional friends only for stimulating discussion on the subject matter not to frame any commercial opinion. All efforts are made to compile correctly with no guarantee of extreme accuracy) 

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