India's tax office is cracking down on tax breaks offered to Irish aircraft lessors, according to The Economic Times. The newspaper says at least three lessors, which it does not name, have been denied tax benefits allowable under an existing treaty between the two countries.

The Indian Revenue Service is relying on the Base Erosion and Profit Shifting (BEPS) Multilateral Instrument, which India and Ireland are parties to. The instrument is a treaty that allows jurisdictions to modify their tax treaties to address multinational tax avoidance, among other things.

The tax office argues that the reason the lessors operate from Ireland is to avoid paying tax. The treaty the lessors relied on lets them off paying taxes in Ireland on income earned from Indian aircraft leases. Additionally, Indian airlines are not required to withhold any tax before remitting payment to the lessors.

The matter relates to 2020/21 lease rentals and is now reportedly before a tax office-run dispute resolution panel. The BEPS treaty contains a principal purpose test whereby a benefit under a tax treaty would be denied if obtaining that tax benefit was one of the principal purposes of an arrangement or transaction. To keep their benefits, the lessors will have to persuade the panel that they have not set up shop in Ireland purely for tax purposes but for genuine commercial reasons.

While the Indian government is cracking down on Iessors doing business from Ireland, it is encouraging them to set up offices in India. Gujarat's IFSC GIFT City continues to sell the advantages of setting up an aircraft leasing business there, including offering a ten-year tax waiver on aircraft lease income and tax-free income transfers to other jurisdictions.