Faculty Author Type

Current Faculty [Wei Cui]

Published In

Virginia Tax Review

Document Type


Publication Date



indirect transfer; international taxation; Vodafone; Circular 698


Numerous countries (e.g. Canada, Australia and Japan) tax foreigners on the gain realized on their transfers of interests in foreign entities that invest in real estates in these countries. In the last few years, actions taken by tax authorities in India, China, Brazil, Indonesia and other non-OECD countries have highlighted the possibility of taxing a broader range of “indirect transfers” by foreigners. This Article argues taxing indirect transfers can have vital policy significance in countries where foreign inbound investments are actively traded in offshore markets: it may not only deter tax avoidance, but also stanch “legal base erosion” — the substitution of offshore investment structures for deploying legal mechanisms in onshore markets. However, the successful implementation of a broad policy of taxing indirect transfers depends crucially on securing voluntary taxpayer compliance. To this end, this Article proposes to rationalize existing practices for taxing indirect transfers in two major ways: (1) striking a better balance between ex ante and ex post lawmaking, and (2) consistently treating taxable indirect transfers as sales of underlying target assets (thus allowing conforming adjustments in tax basis). These improvements better target tax avoidance, result in fewer arbitrary consequences, and create incentives in the market place that facilitate compliance.

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