Relaxed tax residency rules to help MNCs

While Indian-incorporated firms (Indian companies) are taxed at 30% plus dividend distribution tax (DDT), non-resident (foreign) companies are taxed at 40% on Indian income without DDT.

Foreign companies with Indian shareholders won’t have to pay taxes here for their worldwide income unless they are managed from India on an everyday basis. If these foreign companies are managed from outside India, whether or not they are promoted by resident Indians, they will have to pay taxes in India only for the income they earn in the country.

This major relaxation is being built into the place of effective management (POEM) rules being finalised by the finance ministry, government sources told FE. The POEM concept that was included in the I-T Act early this fiscal had raised fears among many multinational companies with Indian promoters or major shareholders that New Delhi would lay claim to taxes on their incomes attributable to other geographies.

While Indian-incorporated firms (Indian companies) are taxed at 30% plus dividend distribution tax (DDT), non-resident (foreign) companies are taxed at 40% on Indian income without DDT. Although the tax rates on foreign companies are higher, the prospect of subjecting the worldwide income to taxation here could have potentially hit many MNCs with Indian stakeholders.

The proposed lenient POEM rule, analysts said, would give the likes of UK’s Jaguar Land Rover (which has the Indian parent Tata Motors) a chance to convince the Indian tax authorities that the UK firm’s commercial decisions are taken by the local management there and avoid paying taxes for the income in the UK and elsewhere in India.

Similarly, foreign subsidiaries of state-owned oil companies such as ONGC Videsh’s Imperial Energy incorporated in Cyprus and ONGC Nile Ganga doing oil exploration in Sudan, Syria and Venezuela can potentially show that their managerial and commercial decisions are ‘in substance’ made at the local level although OVL, the Indian holding company, is under the direct administrative control of the government of India. The same is true for HPCL’s Singapore subsidiary Prize Petroleum International.

“Putting a management in place is a shareholder decision, not a management decision. Promoters getting into any other role would amount to overstepping shareholder rights, going by the strict interpretation of law. The POEM as a principle must cover only management decisions,” said Rahul Garg, leader, direct tax, PwC India.

According to experts, seeking permission from an Indian parent on a decision taken by an overseas subsidiary to see if it is in line with the global policy of the parent may not ordinarily amount to the parent exercising management control, unlike the parent passing on a centrally taken decision to the foreign associate. However, where the senior management of foreign associates of Indian firms are based in India or have common board members based in India, the overseas entity may find it hard to prove that management decisions are taken from outside India. Also, foreign associates of Indian companies lacking skilled managerial personnel or do not assume business risks on its own, could have a tough time convincing the taxman in India that they are not Indian residents.

Prior to the Finance Act, 2015, a company was considered an Indian resident if its control and management were wholly in India throughout the financial year. Since some Indian companies sought to avoid resident status and taxes on their worldwide income by holding one or two board meetings outside India, the government changed the residence definition saying that any company, the ‘place of effective management’ of which is in India, would also be a resident company. Tax residence is a place from where key management and commercial decisions necessary for running the company are, in substance, made. According to experts, this OECD definition of tax residence relies on the substance of the organisation’s structure than its legal form. The government is bringing out clarifications as there is not much global guidance on the concept.

Points to note:

* Mere shareholder rights with Indians won’t result in resident status
* Only managerial decisions taken here will make foreign firms Indian residents and liable to pay tax for entire global income here
* Foreign firm has to prove management independence to avoid tax residence if board members are common with that of Indian ones.



Ease of doing business in India – Related Party Transactions

Related party Transactions.

As part of its ongoing efforts to improve ease of doing business in the country, the Corporate Affairs Ministry has notified changes that further relax compliance requirements.

As another major step, the Companies Amendment Act, 2015 addresses “problems faced by large stakeholders who are related parties”.

In this new amendment, it replaces “special resolution with ordinary resolution for approval of related party transactions [Section 188] by non-related shareholders”.

Besides, related party transactions between holding companies and wholly owned subsidiaries have been exempted from the requirement of approval of non-related shareholders.

As per the amendment, the requirement of passing special resolution for approving certain related party transactions has been done away with. With this, certain related party transactions can now be approved through ‘ordinary resolution’ instead of ‘special resolution’.

Further, it has also been provided that for related party transactions between a holding company and its wholly owned subsidiary, no resolutions are required to be passed if the accounts of the holding and subsidiary company are consolidated and placed before the shareholders in a general meeting for approval.

Income Tax dept lowers pitch on tax demands on multinationals

The income tax department will withdraw from a few hundreds of tax cases with multinational corporations pending in tribunals by the end of this fiscal.

This marks a significant softening of approach given its high-pitched income reassessments for MNCs in recent years, mainly by contesting the pricing of their cross-border transactions.

Sources said the department, which has advance pricing arrangements (APAs) with 16 MNCs and aims to sign 150 such deals on the broad principles for future valuation of inter-country transactions for tax purposes, is willing to extend the conciliatory approach to transactions in the past four years too. Once the mutually agreed principles in an APA are applied to past transactions, the department would not pursue tax demands made earlier.

Wherever the department is the appellant in tribunals, it will withdraw the appeals. The move, part of the government’s efforts to reduce tax litigation and boost investor confidence, is set to benefit several large corporations including technology companies like Microsoft and IBM.

Tax tussles

* I-T department has resolved 45 double taxation disputes so far with the US bilaterally
* India and 16 MNCs have agreed on pricing of cross-border transactions under APA scheme, target 150 for the year
* APAs to allow agreements on pricing of transactions in the past years as well
* On this basis, tax department will withdraw from many disputes pending before tribunals

In the case of related-party cross-border transactions of MNCs alone, alleged tax dues has touched Rs 2.7 lakh crore. Earlier the government had decided not to appeal to the Supreme Court decisions of the Bombay High Court that held companies like Shell and Vodafone were not liable to tax on the alleged undervaluation of certain share transactions among group companies.

So far India has signed 16 APAs in the business of telecommunication, oil exploration, pharmaceuticals, finance, banking and software development and expects another 140 or so to be completed by the end of the fiscal. An APA is an agreement between the tax authority and companies on the principles of valuation of certain transactions, which will exempt the company from rigorous tax audits on cross-border deals.

Many of the tax demands raised on MNCs on cross-border transactions in the last few years have led to disputes. Scores of cases are pending with the Income Tax Appellate Tribunal. The government wants to stop these disputes from escalating to the higher judiciary. The number of cases in which the tax department has received favourable orders from tribunals are not very encouraging.

Finance minister Arun Jaitley has promised that all legacy tax disputes would soon be resolved through administrative or judicial means.

While an APA between a company and the tax department will resolve a dispute in India, the possibility of double taxation would be fully addressed only when the tax authority in the company’s home country too becomes party to such agreement. The US, which is home to many technology firms facing tax disputes in India, has recently started steps to implement such “bilateral APAs”.


Vodafone gets a reprieve in Rs. 8,500-cr transfer pricing case

The Bombay High Court on Thursday gave a favourable ruling to Vodafone in the transfer pricing case related to the sale of the company’s call-centre business to Hutchison and assignment of call options to Vodafone International.

The tax dispute, which dates back to 2007-08, arose after the tax authorities added Rs. 8,500 crore to the taxable income of the call centre unit. It had initially received a tax claim of about Rs. 3,600 crore.

While the Income-Tax Appellate Tribunal had upheld the I-T department’s claim, the High Court has accepted Vodafone’s position that the Department had no jurisdiction.

The court was of the view that there is no transfer of the ‘call options’ and, hence, the transaction does not fall within the purview of transfer pricing.

The I-T Department can challenge this order in the Supreme Court.

“We will study the order of the Bombay High Court on the Vodafone transfer pricing issue and then take a call,” Revenue Secretary Hasmukh Adhia said.

The I-T Department had issued its draft transfer-pricing order in December 2011. In 2012, Vodafone India Services moved the High Court challenging the Department’s jurisdiction.

This is the second major victory for Vodafone in tax-related cases in India. In October, the Bombay High Court had ruled that Vodafone is not liable to pay Rs. 3,200 crore in taxes in a 2009-10 transfer pricing case.

However, a verdict is still awaited in the $2.5 billion capital gains tax case, where the Department had asked Vodafone to pay tax for acquiring Hutchison’s telecom operations in India.

(This article was published in the Business Line print edition dated October 9, 2015)

India signs 16 advance pricing pacts with MNCs

The income tax department has signed 16 advance pricing agreements (APAs) with multinational companies (MNCs) so far, exempting their transactions with local units from rigorous tax audits.

APAs were introduced to give tax certainty to MNCs that agree on certain principles in the valuation of their cross-border transactions.

These companies are in the business of telecommunication, oil exploration, pharmaceuticals, finance, banking and software development.

India has also resolved 45 tax disputes with multinational companies, especially US-based IT and IT-enabled services firms, under provisions in a bilateral tax treaty for avoiding double taxation. Sources said the tax department is working on another set of disputes for resolution. The India-US treaty provides for tax authorities of both the countries to bilaterally apportion the income of MNCs from cross-border operations to be taxed in each country and avoid double taxation.

The scheme, called mutual agreement procedure (MAP), offers MNCs a quick dispute resolution mechanism.

Most of the large US-based software companies having contract research and development operations in India have faced tax disputes on how much of the local arms’ revenue from services to the offshore parent is taxable in India.

“We are working on signing as many as 50 APAs, including some bilateral ones and resolving about 100 tax disputes under MAP soon,” said a person privy to the development.

Income Tax Ready Reckoner

Income Tax Calculator

Here is the quick guide to calculate your income tax calculations.

This tool is to be used to enable public to have a quick and easy way to do tax calculations. It is advised that, for filing of income tax returns, the exact calculation may be made as per the provisions contained in the relevant Acts, Rules etc.

Income Tax Calculator – Assessment Years 2010-11 to 2016-17