no job name...2009 wtd 190-8.) now, thanks to the excessive discre-tion conferred under the gaar...

Sarkozy in which he hopes to gather support for an aidplan to reduce Greece’s borrowing costs.

♦ David D. Stewart, Tax Analysts.E-mail: [email protected]

IndiaNEWS ANALYSIS

2010 Budget Increases Uncertainty forInternational Business

Indian Finance Minister Pranab Mukherjee on Feb-ruary 26 announced the 2010-2011 budget, which pro-poses to widen the tax brackets for individual taxpayersbut offers few benefits for the international businesscommunity.

The announcement came amid signs of a recoveringeconomy and a marked reduction in the national defi-cit. Last year India was one of the few countries toachieve a near 7 percent growth rate despite the finan-cial crisis. With the economic outlook remaining opti-mistic, the government has decided to pursue the three-pronged objective of pushing the GDP growth rateback to 9 percent levels, ensuring balanced and inclu-sive development, and improving the quality of govern-ance. Mukherjee said India’s economic developmenthas shifted the focus of economic activity to nongov-ernment actors, ‘‘bringing into sharper focus the role ofGovernment as an enabler.’’ Hence, this year’s budgetattempts to encourage enterprise and creativity in theIndian economy. The government has focused its ef-forts on encouraging investment in infrastructure, edu-cation, and clean technologies and on liberalizing thelegal regime governing the financial sector.

There is great enthusiasm on the domestic front overa proposal to widen the existing tax brackets for indi-vidual taxpayers. The maximum marginal tax ratewould remain at 30 percent. Corporate tax rates would

Greek riot police watch some of the estimated 30,000 protestors in Athens on March 11; rioters staged a nationwidestrike against the government's austerity plan.

AP Photo/Nikolas Giakoumidis

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also remain at 30 percent for residents and 40 percentfor nonresidents. However, the minimum alternate taxis proposed to be increased from 15 percent to 18 per-cent.

But from the international business community’sperspective, the budget provides little. Some of the pro-posals may even add to the prevailing uncertainty inIndia’s business and investment climate. The Indian taxauthorities’ recent aggressiveness, whether in relation towithholding taxes or in targeting offshore mergers andacquisitions, has already been a subject of internationalscrutiny. This article examines the impact of India’snew budget proposals on international business with afocus on some of the legal and policy-level issues thathave to be addressed by the government.

Direct Taxes Code

With Mukherjee’s confirmation that the governmentintends to implement the Direct Taxes Code (DTC)starting April 1, 2011, the ghost of the draft DTCseems to be very much alive. Released for public com-ment on August 12, 2009, the draft DTC proposed anumber of radical changes to India’s tax regime. TheDTC in its current form is also fraught with ambigu-ities and legislative drafting errors that are bound tomake conditions more uncertain for foreign investors.(For the draft DTC, see Doc 2009-18233 or 2009 WTD154-17; for prior coverage, see Doc 2009-18233 or 2009WTD 154-17.)

Below is a brief analysis of some of the controver-sial policy proposals particularly relevant to cross-border business. Many of these proposals may not onlyface constitutional challenges, but may also fail to con-form with principles of customary international law.These aspects and other legislative drafting issuesshould be carefully examined by an independent com-mittee of experts before the draft DTC is presented toParliament. Recent news reports suggest that the gov-ernment is planning to present a new draft of the DTCfor limited public review.

GAAR

The proposed general antiavoidance rule frameworkprovides the tax authorities unlimited powers to disre-gard specific legal entities or individual steps in a seriesof transactions, to recharacterize and reallocate incomebetween parties, to recharacterize legal instrumentsused in transactions, and even to disregard provisionsof tax treaties signed by India. (For related analysis,see Tax Notes Int’l, Feb. 1, 2010, p. 451, Doc 2010-1385,or 2010 WTD 20-10.)

The introduction of the GAAR in India would havethe effect of reversing India’s time-honored allegianceto form over substance. The Supreme Court of India inits landmark decision in Azadi Bachao Andolan, [2003]263 ITR 706, while upholding the validity of the so-

called Mauritius route,1 made it clear that all individu-als may arrange their affairs in a manner that will re-duce their overall tax burden. (For related analysis, seeTax Notes Int’l, Oct. 5, 2009, p. 63, Doc 2009-20490, or2009 WTD 190-8.) Now, thanks to the excessive discre-tion conferred under the GAAR provisions, tax au-thorities may challenge any bona fide commercialtransaction that has even a minor element of tax plan-ning. A broadly worded antiavoidance provision of thissort would likely capture most cross-border investmentstructures and would have a negative impact on India’sinternational relations. It is not surprising that coun-tries such as the U.S. and the U.K. have rejected theGAAR in favor of judicially developed antiavoidanceprinciples. If India chooses to adopt the GAAR, therules for its operation should be clearly established sothat taxpayers can plan their activities with sufficientcertainty. And, like in Canada, GAAR cases should bescrutinized by a higher body or tribunal that wouldguarantee a judicious application of focus on the factsand circumstances of each case.

Tax Treaty OverrideIn an attempt to replicate the American later-in-time

doctrine, the DTC has proposed that on application ofboth domestic law and tax treaty provisions, only theprovision that is later in time will prevail. Conse-quently, on enactment of the DTC, every tax treatysigned by India would automatically be overridden.The Indian government could then attempt to renego-tiate some of its existing tax treaties to its advantage.

The proposed later-in-time principle is a drastic shiftfrom the current regime under which the provisions ofdomestic tax law (as opposed to the treaty) would ap-ply only to the extent they are more beneficial to thetaxpayer. This proposal conflicts with the constitutionalmandate that ‘‘the State shall endeavour to . . . fosterrespect for international law and treaty obligations inthe dealings of organised people with one another.’’2 Italso derogates from the principle of pacta sunt servanda3

espoused by the Vienna Convention on the Law ofTreaties. The government has also ignored the U.S.jurisprudence regarding the later-in-time doctrine,which makes it clear that courts would attempt to har-monize the provisions of an international agreementand domestic law with a view to give effect to both.4

Change in Residency Rules

1The Mauritius route refers to investments made in Indiafrom countries such as the U.S. by setting up intermediary enti-ties in Mauritius that can benefit from the favorable capital gainstax treatment under the India-Mauritius tax treaty.

2Article 51, Indian Constitution.3‘‘Every treaty in force is binding upon the parties to it and

must be performed by them in good faith.’’ Article 26.4Third Restatement of Foreign Relations Law of the United

States (1987). It is also accepted that the later-in-time principle

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The DTC proposes that even if a foreign companyis partly controlled or managed from India, it wouldbecome a tax resident of India and hence liable to taxon its worldwide profits.

Taxation of Offshore Transfers

Under the DTC, offshore transactions leading to anindirect transfer of shares or any underlying capitalasset in India may trigger capital gains tax obligationsin India. However, the DTC provides no clarity on thescope of the term ‘‘indirect transfer.’’

Taxation of Offshore Interest

Under the DTC, interest payable by a foreign entityon offshore leverage used to finance acquisitions in In-dia may also be taxable in India.

Offshore Services Now Subject to Indian TaxIn a marked deviation from India’s existing source

rules, the budget proposes to tax nonresident serviceseven when no part of the services is rendered withinIndia.

Under India’s domestic tax law, a nonresident istaxable only on income arising from sources withinIndia. For example, business profits earned by a non-resident are taxed in India only to the extent attribut-able to a business connection (or a permanent estab-lishment) of the nonresident in India. Managerial,technical, or consultancy services provided by a non-resident to a resident of India would be considered tohave an Indian source only if the services are renderedwithin India. If the services are rendered by a nonresi-dent outside India, they would normally fall outsidethe Indian tax net. However, the budget proposaldeems income from those offshore services to be ofIndian source and hence liable to tax in India.

The proposal is likely to affect several cross-borderservice models, including engineering, procurement,and construction (EPC) contracts; turnkey projects;international financial services; and professional serviceproviders. For example, consider a standard cross-border EPC arrangement involving offshore supply ofdrawings and designs; offshore procurement and supplyof equipment; and onshore construction, installation,and commissioning of equipment. The income earnedby the nonresident contractor should be taxable only tothe extent the onshore services are provided in relationto the project. However, income from offshore services,including supply of technical designs, would ordinarilynot be taxable in India. Offshore services provided by anonresident outside India lack the required degree ofterritorial nexus to justify taxation in India. This posi-

tion was accepted by the Supreme Court in the land-mark case Ishikawajma-Harima Heavy Industries, [2007]288 ITR 408 (SC).

The principle of territorial nexus was further elabo-rated by the Bombay High Court in its recent decisionin Clifford Chance, (2009) 176 Taxman 458, in whichincome earned by a U.K. law firm from services pro-vided by its partners from outside India in connectionwith an Indian project was held to be nontaxable inIndia. The court identified a dual test for taxability ofsuch services in India: use of services in India and ren-dition of services in India. The doctrine of territorialnexus requires that both tests be met for the service tobe subject to taxes in India.5 (For the ruling in CliffordChance, see Doc 2009-72 or 2009 WTD 2-15; for relatedcoverage, see Doc 2009-36 or 2009 WTD 3-6.)

The budget proposal seems to reject the jurispru-dence on territorial nexus that was established by theSupreme Court. It has ignored the fact that this prin-ciple is ingrained within India’s constitutional system.The extraterritorial operation of India’s tax law con-templated in the budget proposal also conflicts withcustomary international law principles of sovereigntyand comity of nations. To quote the U.S. Court of Ap-peals in Timberlane Lumber (9th Cir. 1976), 549 F.2d597, domestic interests are sometimes ‘‘too weak andthe foreign harmony incentive for restraint too strongto justify an extraterritorial assertion of jurisdiction.’’Clearly, India lacks the jurisdiction to tax an offshoretransaction sans any direct, substantial, and foreseeablenexus with the territory of India.

The proposal is also likely to create tax credit issues.Questions arise as to whether a foreign service providercan get credit in its country of residence for taxes paidin India, due to the application of an inconsistentsource rule.

Another concern with this and several other pro-posals in the budget is its retroactive operation. Themodification of India’s source rule for offshore servicesis proposed to apply from 1976. Therefore, subject tothe domestic law of limitation, the tax authoritiescould pursue many already completed transactions.This would only increase uncertainty and lead to a tre-mendous amount of litigation.

Tax Trap for Foreign InvestorsLast year the 2009-2010 Finance Act introduced a

provision to tax gifts received by individuals. Under the

means a state may not repudiate its international obligations andthat it is subject to the consequences of violating any interna-tional obligation.

5A similar view was adopted more recently by the Bangalorebench of the Income Tax Appellate Tribunal in M/s Bovis LendLease (India) Pvt. Ltd., 2009-TIOL-666-ITAT-BANG, in which itwas held that income from offshore administrative, legal, andaccounting services provided by a Singapore entity was not tax-able in India. (For prior coverage, see Doc 2009-24653 or 2009WTD 215-6.)

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provision, individuals were subject to tax on the receiptof property without consideration or for considerationless than the fair market value of the property.

This year a similar provision has been introducedfor companies that buy or receive shares for less thantheir market value. Under the proposed amendment,the difference between the market value of shares andthe consideration paid would be taxed as other incomein the hands of the investor. Investors that are publiclylisted companies are excluded from the proposed provi-sion, as are transfers for which the difference betweenfair market value and transfer price is less than INR50,000 (about $1,090). Exceptions have also been pro-vided for transfers that take place during specifiedkinds of mergers and demergers.

No exception has been provided for acquisitions, sothe change could significantly affect all future invest-ments since it introduces indirect transfer pricing re-quirements on share transfers even when the transfer isbetween unrelated parties. While the proposed provi-sion does not differentiate between Indian and cross-border acquisitions, there may be unique issues in across-border context. For example, foreign investorsmay need to examine the availability of a foreign taxcredit in their country, keeping in mind that Indian taxwould be paid under the residuary category of otherincome. It may be possible to use the relevant creditprovision of an applicable tax treaty. However, whenthe benefit conferred by a tax treaty relates to capitalgains (like with the treaty benefit available to Mauritiusresidents), the proposed amendment would continue toapply to impose tax, as it relates to a residuary head ofother income and not capital gains.

Below are some other situations for which investorsshould consider the adverse tax implications of theproposed amendment. Some of these issues could beresolved through adequate valuation guidelines. How-ever, no valuation rules have been prescribed. Thisleaves the revenue authorities with the discretion toquestion a wide range of transactions on the groundsof shares having been transferred at a value below fairmarket value. It is also unclear how these proposedprovisions would apply in situations when the consid-eration is indeterminable. In fact, the proposed amend-ment appears to allow for a backdoor entry for domes-tic transfer pricing among unrelated parties.

Investment by FVCIs

The Indian exchange control regime specifies pricingrestrictions relating to the acquisition and disposal ofinvestments by foreign investors. These pricing restric-tions may be compared to the fair market value re-quirement imposed by the proposed income taxamendment. The pricing restrictions do not apply tosome kinds of investments, such as those made by for-eign venture capital investors’ (FVCI) entities. This is aconscious move by the exchange control regime to bol-ster venture capital investments in Indian companies.

However, the proposed income tax amendment pro-vides no exceptions for investments made by FVCIs.Therefore, although FVCI entities may be permitted toinvest at a lower price under the pricing guidelines,they may violate the tax law if they attempt to do so.Consequently, the difference between the fair marketvalue and the purchase price would be subject to tax inIndia.

MergersA merger of two foreign companies resulting in the

transfer of shares of an Indian company is not subjectto capital gains tax in India if requirements regardingcontinuity of shareholder interests are met. Otherwisethe reorganization would be taxable as capital gains inthe hands of the transferor company. However, the pro-posal may also result in the taxation of the acquirercompany on the difference between the fair marketvalue and the transfer price, which does not seem to bethe intention of the legislature.

Stock Repurchase by an Indian CompanyDistributions made on a stock repurchase are typi-

cally considered capital gains in the hands of the share-holder in India. However, if the proposed amendmentis applied, the Indian entity could be taxed on theshares bought back if the repurchase price is not equalto the fair market value of those shares. If the share-holder is an entity situated in a jurisdiction such as theU.S., it could consider checking the box for the Indianentity to attempt to receive credit for taxes paid by theIndian entity. However, there is some uncertainty as tothe availability of this credit because of differences incharacterization of income by the two countries.

Transfer of Shares Between a Parent and SubTransfers of shares between a parent and its sub-

sidiary are not subject to capital gains tax, but the pro-posed amendment could have tax implications in Indiafor the recipient entity.

Other RoadblocksIndia has long recognized only the traditional invest-

ment forms of companies, trusts, and partnerships.Last year the first Indian hybrid entity, the limitedliability partnership, was introduced as a structural al-ternative for doing business in India. Unlike Indiancompanies, which continue to be taxed under the clas-sical model, with tax being levied separately on profitsof the company (corporate tax) and then ondistribution/declaration of dividends (dividend distribu-tion tax), LLPs were to be subject to tax as partner-ships — that is, with a single level of tax at the LLPlevel and no tax on distributions to partners. And un-like a corporate entity, an LLP is not subject to mini-mum alternate tax.

Because of that beneficial tax treatment, it was an-ticipated that investors would consider converting com-panies to LLPs sometime soon. No moves have been

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made in that regard, as investors are still awaiting gov-ernment clarification on whether foreign investment inan LLP is permitted without prior approval from theReserve Bank of India.

This year’s budget has introduced provisions en-abling tax-free conversion of private and public unlistedcompanies into LLPs. However, these provisions areactually a new roadblock to investment in IndianLLPs. The budget proposals prescribe requirements forwhen the tax-free treatment may be permitted, one ofwhich is that the converting company should not havetotal sales, turnover, or gross receipts of more thanINR 6 million (about $130,000) in any of the preced-ing three years. Considering the low threshold, it isquestionable how many companies would be able totake advantage of the proposed tax benefit.

Other restrictions would also be imposed on LLPs.For example, the partners could not receive any distri-butions from the LLP, either directly or indirectly, for aperiod of three years from the date of conversion intoan LLP. This would effectively impose a lock-in on theprofits of the company, which are carried over to theLLP on conversion. The flexibility with which partnerscould be introduced into the converted LLP entitywould also be restricted. If the requirements are notmet, the budget would restrict the allowance of accu-mulated loss and unabsorbed depreciation to the con-verted entity.

Also, while the budget seeks to clarify the tax treat-ment of a company converting into an LLP, it fails toclarify whether the shareholder will be taxed on acquir-ing an interest in the LLP. That said, these proposalsreally have no impact on the use of LLPs as a struc-tural alternative.

Expiration of Tax IncentivesThe budget indicates no intention to extend the tax

holiday now provided to 100 percent export-orientedunits and units set up in software technology parks,hardware technology parks, and free trade zones. Suchincentives have prompted several foreign companies tomake substantial investments in India’s technology sec-tor, making the country a leading software and busi-ness process outsourcing hub. These incentives are ex-pected to expire in the fiscal year ending on March 31,2011.

Foreign entities benefiting from the incentives mayhave to rework their holding structures in light of thisdevelopment and should probably consider alternativeoptions such as the special economic zone regime,which is not limited by a sunset clause.

Service Tax ImplicationsThe current service tax rate of 10 percent would

remain unaltered. Service tax is an indirect tax payableby the service provider, with the incidence of taxpassed on to the recipient of the service. Services pro-

vided by a nonresident to a resident of India aretreated as import of service and subject to service taxat ordinary rates. The recipient (importer) of servicemust pay service tax due on the consideration paid tothe nonresident. The export of services from India,however, is exempt from service tax.

The budget clarifies the service tax exemption avail-able to service exports. There has been much contro-versy over the applicability of the exemption, which isrestricted to services that are ‘‘used outside India.’’ Inthe context of information technology and cross-bordermovement of intangibles, it can be difficult to deter-mine the place of use of services. With the proposedamendment, the service tax exemption should be avail-able to most services as long as the recipient is outsideIndia.

The budget would bring a few additional servicesinto the service tax net. Copyright licenses related tocinematographic films and sound recordings would besubject to service tax. Currently only intellectual prop-erty licenses in the nature of trademarks, designs, pat-ents, and other similar rights are subject to service tax.Considering some of the recent billion-dollar dealswith major Hollywood production houses and otherbig-ticket transactions in the music industry, it is worthconsidering the increase in product costs resulting fromthe additional service tax.

Also noteworthy is the proposed service tax levy oncommercial rentals with retroactive effect from June 1,2007. It seems the proposal seeks to override the recentDelhi High Court decision in Home Solution Retail IndiaLtd. v. Union of India, [2009] 20 STT 129, holding thatthe act of renting property was not a taxable service.The government would be free to claim service tax forall rental payments from the last two years, along withany applicable interest and penalties. Because of itswidespread impact, this amendment is likely to resultin much litigation. (For prior coverage, see Tax NotesInt’l, May 4, 2009, p. 378, Doc 2009-9415, or 2009 WTD79-9.)

ConclusionBecause of the Indian government’s frequent use of

retroactive amendments over the years, taxpayers cannever be certain whether their current transactions willbe taxed sometime in the future. Even the highestcourts have held retroactive tax levies to be unconstitu-tional.6

But what good is judicial scrutiny if the governmentalso overrides decades of jurisprudence? Amending alegal provision merely because the courts have ruled

6A constitutional bench (five judges) of the Supreme Court inLohia Machines, [1985] 152 ITR 308, made it clear that fiscalamendments imposing a retrospective levy are constitutionallyinvalid.

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against the tax department is unjustifiable, especiallywhen the amendment conflicts with constitutional pro-visions.

Because of the uncertainty it would create, com-pletely restructuring the proposed DTC seems appropri-ate. The task would ideally be undertaken by an inde-pendent committee of experts in the fields of law,economics, public policy, accountancy, and legislativedrafting.

The government should also show due respect toprinciples of international law and the sovereign rightsof other states when establishing its fiscal boundaries.

♦ Mahesh Kumar, Nishith Desai Associates, Mumbai, andShreya Rao, Nishith Desai Associates, Bangalore

Independent Storage Facilities ArePEs, Ruling Authority Says

Storage facilities provided by independent serviceproviders in India to a Singapore-based equipment sup-ply company constitute fixed-place permanent estab-lishments, according to India’s Authority for AdvanceRulings (AAR).

The February 25 ruling, requested by Seagate Sin-gapore International Headquarters Private Ltd., isbased on article 5 of the India-Singapore income taxtreaty.

BackgroundSeagate, which manufactures and sells hard disk

drives, supplies disks to original equipment manufactur-ers (OEMs) in India. To better manage the productsupply chain, Seagate entered into agreements withindependent service providers (IndSPs) in India,wherein the IndSPs store the disks in India on behalfof Seagate and, when an OEM places an order for thedisks, the IndSPs deliver them on a timely basis onbehalf of Seagate.

Generally, in the supply chain, an OEM puts in apurchase order for Seagate disks. Seagate then shipsthe disks to the IndSPs in India. The IndSPs, acting asimporters, clear the disks at the customs port and storethem in a bonded warehouse. The IndSPs provide thenecessary security bond to clear the goods through cus-toms without paying customs duty. The ownership ofthe disks remains with Seagate.

When an OEM places a request order for the diskswith one of the IndSPs, that IndSP clears the goodsfrom the bonded warehouse and delivers them to theOEM. The IndSP then informs Seagate of the delivery.Seagate issues a sale invoice for the disks delivered tothe OEM, which makes the payment against the saleinvoice directly to Seagate. The IndSPs pay the appli-

cable sales tax and file returns in connection with thesale of disks by Seagate to the OEMs.

The IndSPs then submit their own invoices toSeagate for the warehousing and supply-related servicesperformed in India (the warehouses are either ownedor leased by the IndSPs and are under their operationalcontrol and supervision).

Under the key terms of the service agreement be-tween Seagate and the IndSPs in India, the IndSPsprovide Seagate with specific earmarked spaces inwarehouses at specified locations in India, along withrelated supply logistics services. Seagate has access tothe warehouses for purposes of inventory, inspection,audit, and so on. The IndSPs establish the necessaryelectronic operating systems to support data inter-change between Seagate and the IndSPs and furnishinventory reports, delivery advice, etc. The IndSPs alsocomply with Seagate’s warehouse security requirementsand obtain insurance coverage as required by Seagatefor its warehoused products.

Seagate does not maintain any office or other placeof business in India.

Seagate’s ArgumentsSeagate maintained that the IndSPs are unrelated

parties providing independent warehousing and supply-related logistics services. The warehouses at issue arenot owned or leased by Seagate; therefore, they shouldnot be considered as a fixed place of business ofSeagate under article 5(1) of the India-Singapore in-come tax treaty, Seagate said.

Furthermore, Seagate said, the IndSPs are inde-pendent and have no authority to conclude any con-tracts on Seagate’s behalf. As such, the IndSPs cannotbe classified as a dependent-agent PE under article 5(8)of the tax treaty, it said.

Seagate thus argued that it does not have a PE inIndia and that no part of its business profits can betaxed in India. In the event that a PE is found to exist,Seagate argued that the arm’s-length fees paid to theunrelated IndSPs for their role in India should ensurethat no further profits of Seagate are taxable in India.

AAR’s RulingThe AAR found that the warehouses where

Seagate’s products are stored constitute a fixed place ofbusiness of Seagate in India. A distinct earmarkedplace with a certain degree of permanence from whereany business activity is conducted is sufficient to con-stitute a PE under article 5(1) of the treaty, and it isnot necessary that the fixed place be owned or leasedby Seagate, the AAR held.

While the warehouses at issue are a place of busi-ness of the IndSPs, considering the scope of servicesprovided by the IndSPs, the warehouses also constitutea fixed place of business of Seagate from where its

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sales activities in India are conducted, the AAR said.The outsourcing of the warehousing and supply opera-tions to the IndSPs does not automatically mean thatSeagate does not carry on any business in India from afixed place, it ruled.

Having found a fixed-place PE under treaty article5(1), the AAR did not rule on whether the IndSPs con-stituted an agency PE of Seagate.

The AAR concluded that in computing Seagate’sprofits attributable to the fixed-place PE under article 7of the tax treaty, the fees paid to the IndSPs are fullydeductible. The AAR did not rule on whether any fur-ther profits of Seagate are subject to tax in India be-cause of the PE.

CommentsWhile the attribution of profits to the PE must be

based on a functional and factual analysis, when oneconsiders the fact that the IndSPs charge Seagate anarm’s-length fee for the storage and logistic servicesprovided in India, it may be a zero-sum game forSeagate’s Indian PE.

♦ Shrikant S. Kamath, tax consultant, Mumbai

Liechtenstein

Bank to Appeal Ruling in Tax CheatCase

Fiduco Treuhand AG (previously LGT TreuhandAG), a former subsidiary of Liechtenstein’s LGTBank, announced on February 8 that it will appeal aFebruary Landgericht (Liechtenstein district court) rul-ing awarding a former client €7.3 million (plus interest)in damages, according to media reports.

German citizen Elmer Schulte filed a lawsuit accus-ing the bank of negligence for its failure to warn himthat data revealing his hidden assets had been compro-mised when former LGT employee Heinrich Kieberstole data on account holders and sold it to German(and other national) authorities. Schulte was convictedof tax evasion in 2008 in a German court, reportedlyreceiving a €7.3 million fine in lieu of prison time. (Forprior coverage, see Tax Notes Int’l, Feb. 22, 2010, p.646, Doc 2010-2977, or 2010 WTD 28-3.) The case hadbeen keenly watched as a possible prelude to other law-suits from disgruntled former LGT clients whosenames appeared in the stolen data.

Schulte also is planning to appeal the Landgerichtruling, arguing that the award is too low and that histhree other claims alleging that he received bad counselfrom the bank should not have been dismissed, accord-

ing to a February 10 report on sueddeutsche.de.Schulte alleges that LGT Treuhand bank employeesinvested his assets in so-called black funds in tax ha-vens such as the Cayman Islands and Luxembourgwithout adequately advising him of their actions.

Despite the attention the case has received, LGTBank (which will pay the fine on behalf of FiducoTreuhand) expressed little concern that the case willopen the floodgates to other, similar lawsuits if the rul-ing is not overturned.

‘‘We view this as an exceptional case,’’ LGT Bankspokesman Christof Buri said in a February 8 Associ-ated Press report.

However, as many as 30 other cases are being pre-pared, according to the sueddeutsche.de report, includ-ing a new case against Fiduco Treuhand AG. Thatcase, filed by Christian Merz, a lawyer representing anunnamed Köln woman convicted of tax evasion inGermany, seeks €395,000 in damages, according to aFebruary 10 Süddeutsche Zeitung report. Merz’s firm,Wagner and Joos, reportedly has forged an alliancewith two Liechtenstein firms, one of which includesformer Liechtenstein Justice Minister Heinz Frommelt.

The Schulte and Fiduco appeals will go to theLiechtenstein Supreme Court (Oberster Gerichtshof).No schedule has been announced, but such appealscan take months or even years to complete.

♦ Randall Jackson, Tax Analysts.E-mail: [email protected]

Malaysia

Corporate, Individual Rates to DropAfter GST Implementation

The Malaysian government has said it will start tolower corporate and individual income tax rates afterthe country’s new 4 percent goods and services tax isimplemented in mid-2011, according to Malaysian me-dia reports. (For prior coverage of the Malaysian GST,see Tax Notes Int’l, Dec. 7, 2009, p. 741, Doc 2009-26196,or 2009 WTD 228-5; for analysis of the tax, see TaxNotes Int’l, Dec. 14, 2009, p. 851, Doc 2009- 26566, or2009 WTD 233-8.)

Deputy Finance Minister Chor Chee Heung said thegradual reduction of the corporate and individual in-come tax rates once the broad-based GST is in place isthe long-term objective of the government, accordingto a March 4 report from Bernama, a Malaysian statenews agency. ‘‘I don’t think we have a timeline for it,’’he added.

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no job name...2009 wtd 190-8.) now, thanks to the excessive discre-tion conferred under the gaar...

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