recent developments in international taxation...page 4 ca pinakin desai –recent developments in...

Recent Developments in

International Taxation

CA Pinakin Desai

15 July 2015

Bombay Chartered

Accountants‟ Society

http://www.google.co.in/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRxqFQoTCLvdgtXC2sYCFQgbjgodx78ANQ&url=http://www.bcasonline.org/policy/advertise_website_soli.asp&ei=2vKkVbuIB4i2uATH_4KoAw&bvm=bv.97653015,d.dGo&psig=AFQjCNF94q1w5Yvi2cdwbAly8KDrGRb70w&ust=1436959811599782

The better the question. The better the answer.�

The better the world works.

In the news

CA Pinakin Desai – Recent Developments in International Taxation July 2015

► Favoured jurisdiction due to favourable CG Article

► India – Mau DTAA has been under negotiations to prohibit treaty abuse and

round tripping of funds

► News Reports suggest ‘tentative deal’ on India – Mauritius DTAA LOB

clause likely?

► Wild guess on likely coverage on immovable property companies?

► Change in CG Article: Impact on Singapore DTAA in view of Art. 6 of

Protocol to Singapore DTAA

► Art 6: Protocol to remain in force so long as Mauritius DTAA provides that

any gains from the alienation of shares shall be taxable only in the

alienator’s state of residence

Revision to India – Mauritius DTAA


Reporting requirement under the amended s.195(6)

► S.195(6) amended by FA 2015 w.e.f 1st

June 2015 to require reporting of all

payments whether or not chargeable

to tax

► Penalty of Rs 1L for default

► Existing Rule 37BB based on pre-

amended Sec. 195(6) continues to

require compliance where the payment

is chargeable to tax in India

► CBDT yet to notify new Rule 37BB at

par with Sec.195(6)

► Compliance may be made only when

sum chargeable to tax in India?

Resident NRPayment

File Form

15CA & 15CB

Whether or

not sum is

chargeable to

tax in India

Remittance

by AD

Submit copies of

15CA / 15CB to AD

for processing

remittance

Remittance

to Non

Resident

Post budget 2015



Black Money Act(Undisclosed Foreign Income and Assets) and Imposition of Tax, 2015 and Foreign Asset Reporting


Applicability to NRIs

Facts:

► Kumar, an NRI, who was away for 5 years has come back to India, and is now ROR

► While a non resident, he claims to have acquired significant assets outside India

► From FY 2015-16, Kumar will offer income from overseas assets to tax in India

► Can Tax Authority claim that BMA authorizes FMV taxation for FY 2015-16?

► Kumar may have no records or evidence to correlate the source of investment with the

items of investment

CBDT Clarifications by way of FAQs1:

► Fully explained assets are not Undisclosed foreign assets (Q 18)

► Assets acquired out of non-chargeable income while being NR are not Undisclosed

foreign assets (Q 24)

► Assets acquired by NR out of Indian income not offered to tax may be declared

under BMA (Q 32)

1 Circular 13 of 2015


BMA Applicability to overseas discretionary Trust

► DT is a discretionary trust settled outside India

► Trustee and Settlor, if ROR, obligated to report

details of the DT under Schedule FA in their Tax

Return

► No reporting obligation if NR / NOR

► For ROR discretionary Beneficiary who has not

received any benefit from trust during the year,

any reporting requirements under Schedule FA?

► Penalty up to 10L under BMA for non-reporting in

ROI from AY 2016-17 and prosecution risk if

willful default

DT

Settlor Trustee Beneficiary


Reporting obligation in Tax Returns

R and OR Schedule FA (Item B1/ Item F2)

Settlor

(Includes a

contributor?)

► Obliged to report under Item F

► whether reporting only in the year of settlement or every year?

Trustee ► Trustee as a legal owner required to report all the foreign assets

of the trust being bank account, financial interest in any entity,

immovable property, any other capital asset , bank A/c where

signing authority exists, etc

Beneficiary- Who has

not contributed to the

trust

► For Item B: Does discretionary beneficiary hold any interest or

financial interest in the trust?

► No reporting under Item F if he has not received any benefit

during the previous year from the trust

1 Item B requires reporting of financial interest in any entity (including any beneficial interest) at any time during the previous year

2 Item F requires reporting details of trust created outside India. Item F applies to a resident taxpayer who is a trustee, beneficiary or settlor. However, for this purpose beneficiary includes only those who derive benefit from the trust during a given previous year



Issues on Indirect Transfer and Circular 04 / 2015


Indirect transfer: Capital Gain v. Dividend

► Indirect transfer by ParentCo from NTFJ

attracts tax in India

► SPV (from no treaty jurisdiction), declares

dividend to ParentCo

► Controversy on taxability under Expl.5

► Declaration of dividend by SPV not taxable

in India – Circular 4/2015

► Cash extraction has impact on sale value

of SPV shares

► Can Tax Authority re-characterize dividend

as part of sale proceeds?

Buyer

Div

ide

nd

Indirect transfer Tax Trigger

Cash

Rich

Circular 04 / 2015: Clarification out of

over anxiety?

Parent Co

SPV

ICo


Circular 4 / 2015 Overseas Capital Reduction

► FCo derives substantial value from India and has

Accumulated Profits (AP) of 500. FCo undertakes

capital reduction and consideration of 800 is paid

► Transaction amounts to deemed dividend in the

hands of shareholder up to 500

► Capital Reduction does also involve ‘transfer’ by

XCo of shares of FCo1

► As per Circular 04/2015 Expl. 5 applicable to

transactions in share of a foreign company, which

has the effect of transferring underlying Indian

assets

► Is FCo / XCo right in suggesting that capital

reduction payment to the extent represented by AP

is dividend covered by Circular 4?

► Consideration in excess of AP taxable as capital

gains in India, unless treaty protected

FCO

(AP: 500)

X Co

Outside India

India

Overseas

Assets

ICo

Cap Red 800

1G. Narasimhan (236 ITR 327) and Kartikeya

Sarabhai (228 ITR 163)


Circular 4 / 2015 Overseas Buyback of shares

► FCo derives substantial value from India and

has AP

► FCo undertakes buyback of its shares from

Parent Co for a consideration

► Capital reduction is consequential to buyback

► Transaction is neither

► ‘dividend proper’, nor

► Deemed dividend under s.2(22)

► Circular 04 / 2015 not applicable

► Does buy-back involve transfer covered by

Expl. 5?

► TP applicability as FCo not covered by

s.115QA?

FCo

Parent Co

Outside India

India

ICO

Buy-back

proceeds

Surrender of

shares for

buy-back


Indirect Transfer v Merger of foreign companies

► Hold Co, a foreign entity, holds investment in Indian

Company (‘ICo’)

► Hold Co merges into FCo 1 and FCo 1 issues shares as

consideration to FCo

► Hold Co derives 75% of its value from ICo

Tax implications:

► F Co (shareholder):

► 47(vii) operative only if amalgamated company is Ico

► Extinguishment of shares – results in transfer –

Grace Collis (SC)

► Hold Co – specifically exempt (section 47(via))

► S. 47(viab)/(vicc) inserted by FA 2015 protects

merging / demerging foreign company holding India

assets indirectly

► Shareholders still not neutralised?

► Shome committee recommendation

► Reporting requirements under s.285A on prescription

India

Outside India

F Co

Hold Co

I Co

Merger

Issue of shares by F Co 1

F Co 1


Intricacies on Specified date (SD)Impact disposal of India Assets post SD

Facts:

► Accounting year followed by UK Co is calendar

year, i.e. year ending 31 December

► As on 31 December 2014, the only asset of UK Co

is shares of I Co

► UK Co adopts fair value accounting for the

purpose of its books (£ 1M)

► UK Co sells ICo shares on 31 January 2015 for £

1M and pays tax in respect of gain, if any, realised

on the transfer

► No change in book value due to encashing of

India assets by UK Co

► US Co transfers shares in UK Co on 31 May 2015

► As of 31 May 2015, UK Co holds no India assets

but bank deposit held in UK

► Indirect transfer implications, if SD is determined

to be 31 December 2014?

US Co

UK Co

I Co

Transfer of UK

Co on 31 May

2015

Transfer of I Co

on 31 January

2015


China‟s new expanded indirect transfer rules

► Circular 698 empowered China tax authority to re-characterise an indirect transfer of

equity interest in Chinese enterprise as a direct transfer, if indirect transfer lacks “a

bona fide commercial purpose”

► Sets out safe harbour provisions to exclude -

► qualified intragroup reorganisations,

► indirect transfers occurred in public stock exchanges

► transfers exempt under treaty

► Indirect transfers (other than qualified intragroup reorganisations) deemed to lack

commercial substance, if all specified conditions are satisfied

► Minimum 75% equity value of transferred NR is derived, directly or indirectly, from assets in China;

► Minimum 90% of assets/income of transferred NR intermediary, consisted , directly or indirectly, of

investments in China/ Chinese sourced income, at any time during the one year before indirect

transfer

► NR intermediary does not have economic substance

► Foreign income tax payable (in the state of transferor and transferee) on indirect transfer is lower

than the Chinese tax on the direct transfer



Transfer Pricing – Section 92B(2)


Deemed International Transaction U/s. 92B(2)

Facts:

► AE has arrangement with unrelated party

to export goods to it for a concessional

price

► Transaction 1 and 2 are between two

unrelated parties

► Impact of proposal – Transaction 1 (i.e.

between two resident unrelated

enterprises) could be subject to TP if there

exists a prior agreement or understanding

(in substance) with a NR AE of the

taxpayer

► ICo supplies semi-finished goods to

unrelated party (at less than FMV)

► Unrelated party finishes goods and exports

to AE

AE

Unrelated

Party

Taxpayer

(IC0)Supply RM

Prior agreement/ Understanding between AE and unrelated party

India

Overseas

(1)

(2)


Deemed International Transaction U/s. 92B(2)

► Pursuant to global deal, there is sale of

undertaking effected by I Co1 to I Co2 at

FMV

► Sale was concluded as per terms agreed as

part of global deal. Price was determined as

per formula defined in the global deal

► Transaction between I Co1 and I Co2 may

not be IT u/s. 92B(2) since neither F Co1

has understanding with I Co2 nor F Co2 has

understanding with ICo1

► S.92B(1) impact to be independently

examined

FCo1

India

Outside India

Sale of global business (including India) at FMV

Slump Sale of undertaking at FMV

ICo1 ICo2

FCo2



Beneficial Ownership


Re Swiss Swaps Case I/A (SC decision)

► Danish Bank had entered into total return

swaps (TRS) for Swiss equities

► To hedge its exposure, Bank in its own

interest acquired necessary Swiss

underlying securities

► On dividend declared, Swiss WHT tax was

withheld (under retain refund system –

though no withholding under DTAA

► No use of word ‘beneficial owner’

► Swiss tax authorities refused to refund tax

under Swiss-Denmark treaty on the ground

that Danish Bank was not beneficial owner

of income & there was treaty abuse

► Question: Can Danish Bank enjoy treaty

benefit?

Danish Bank

(Issuer of

total return

swap – TRS)

Counter-

parties in UK,

USA,

Germany

Swiss

Equities

Investment hedge exposure

Dividends

Upward price difference + Dividend equivalent

Depreciation in market price + price


Re Swiss Swaps Case I/A (SC decision) Ruling

Federal Court

► Danish Bank was a BO

► No obligation on Bank to hedge the swap contracts or to purchase shares

► Obligation to pay dividend equivalent independent of Swiss source dividends

► No legal or factual obligation on bank to pass on dividends

SC ruling

► There was a de facto obligation to pay dividend

► Obligation directly tied to dividend generated by test of inter-dependency

► Bank virtually relieved of all associated risks

► Obligation effectively deprived bank of freedom to apply / dispose dividends

► Danish Bank lost BO by the time dividend received



Place of Effective Management [POEM]


Corporate Residency Amendment by Finance Act (FA) 2015

The Explanatory memorandum (EM) explains the amendment:

► Present condition of ‘whole’ C&M in India is too strict and practically

inapplicable

► Facilitates creation of shell companies outside India;

► POEM is internationally accepted principle;

► POEM is also an accepted concept by OECD for tie-break (Article

4(3))

► Set guidelines to be rolled out for determination of POEM

The EM clarifies that a set of guiding principles will be issued by the Government for the benefit of taxpayers and the Tax Authority for determination of POEM


Corporate Residency Amendment by Finance Act (FA) 2015

► POEM as introduced vide FA2015

► There is a ‘place of effective management’ in India

► Key management and commercial decisions are made in India

► Such decisions are necessary for the conduct of the business of the

entity

► Such decisions are, in substance, made in India

► All above conditions are satisfied during the relevant year


Corporate ResidencyDifferent Scenarios and its consequences

Particulars Status Tax Rate DDT?

Indian Company Resident 30% + SC Yes

Foreign Company

► POEM at any time during the financial year

in India

Resident 40% + SC No

► POEM outside India NR 40% + SC No


Some Consequences…

Consequences of POEM in India

Taxation on global income at the higher tax rate of 40%+SC

Withholding of taxes continue under s.195 as a foreign company, w.r.t. chargeable

amount

Trigger of TP provisions

Likely issues on tax credit in India, as also credit in the country of incorporation of Indian

taxes paid

No treaty entitlement in case of certain countries, e.g. USA

Benefit of presumptive taxation (a. 44BB, 44BBA) only applicable to non-resident

companies;

Denial of carry forward past losses due to non-filing of ROI

Risk of interest and penalty

Black Money Act applicable


Illustrative Dos and Don‟ts to manage POEM risk

Dos Don‟ts

Charter documents should give power to

Board to control and manage company

Parental control should be as a shareholder

and its authority not be exceeded

Directors should be persons who are

competent and independent to debate and

decide in the interest of the company, and

not of the Parent

Avoid as directors, persons who are highly

dependent on the group, as employees or

otherwise. Completely avoid directors who

are name lenders

Physical meeting in the jurisdiction Avoid giving binding instructions to the

directors of the subsidiary. Avoid veto

powers to Indian directors.

The secretary, books of accounts, minute

books and other documents, shares, etc.

should be in its own jurisdiction/office

Strictly avoid brass plate presence and

target good substance

Mail or documents from HO often contradict

the claim



BEPS Calling


„Diverted Profits Tax‟ by UK

► The new UK Diverted Profits Tax (DPT) is in effect from 1 April 2015

► The DPT is applicable to the MNCs which divert profits from the UK by:

► Avoiding a UK taxable permanent establishment (PE) or

► Involving entities or transactions lacking economic substance

► DPT is a new tax, outside the IT Act and is set at a punitive rate of 25% of

diverted profits relating to UK activity

► There is a duty on taxpayer to notify HMRC that it is reasonable to assume

that diverted profits might arise

► There is a tax-geared penalty for failure to do so

► Includes de minimise exemption for SMEs with a specified sales revenues

► Similar tax introduced by Australia w.e.f. 1 January 2016


EU questions validity of state rulings

► A well known practice to advance ruling from tax authorities in Ireland,

Luxemburg, Swiss, Netherland etc.

► Such ruling from Ireland commented adversely by European commission

► EC Ruling questions validity of currently available rulings

► Negotiated deal not based on TP principle regarded as state aid required to

be repaid to the extent of aid

► Ongoing actions may undo the benefits which the business groups believe,

they have already realized


Multilateral Instruments BEPS Action 15

►Several BEPS Actions likely to have recommendations and action plans

including amendments to treaties

► Develop MI which operates in conjunction with network of tax treaties

► MI to co-exist and avoid renegotiation of existing treaty network (comprised of 3000 +

treaties)

►Upon implementation of MI, override or modification of existing treaty to the

extent earlier treaty is incompatible with MI:

► Later bilateral treaties to be subject to ‘obedience’ covenant of MI

► Flexibility to countries to opt in or opt out – including vis-à-vis certain countries;

expression of reservations, etc.


Standard for Automatic Exchange of Financial Information in Tax Matters

► Single standard for automatic exchange of information, including the technical

modalities, to better fight tax evasion and ensure tax compliance

► Obtain information from financial agencies (banks, custodians, etc.) and

automatically exchange with other jurisdictions on an annual basis

► 61 jurisdictions, including India signed the multilateral competent authority

agreement - his agreement specifies the details of what information will be

exchanged and when, as set out in the Standard



Other Developments


S. 194LC / LD – a substantial relief !

► FCo is a tax resident of China

► FCo lending to ICo qualifies for

beneficial withholding rate u/s.194LC/LD

@ 5%

► But for s.194C/194D, interest chargeable

in India at lower of DTAA, or ITL (-say, @

10% on gross)

► Can lending company (FCo) claim tax

sparing relief under India – China DTAA

on account of incentive under s.194 LC /

LD?

ICo

China

India

Loan

Interest

FCo


Non-compliant LLP conversion: Implications for shareholders

Facts

► I Co’s shareholding pattern is as under:

► Mau Co. 90%

► Indian promoters 10%

► I Co proposes to convert itself into LLP;

turnover for preceding 3 years exceeds

60 lakhs

► Post conversion, profits of LLP are

available to partners

Issue

► Tax implications in the hands of Mau

Co?

► Is there a PE risk for MauCo in India?

LLP

I Co

Mau Co

Assets and liabilities vested on conversion

Indian

Promoters

90%

10%

Re

pa

tria

tion o

f p

rofits


Treaty Entitlement: UK Partnership / LLP

Facts

► UK GP is comprised of UK and US partners

► UK GP is taxed transparently at partner level

► UK GP has sourced service income from India which is

FTS but not FIS

► UK GP claims DTAA relief

Questions

► Is UK GP a body corporate or partnership?

► Is UK GP a person liable to tax?

► Can UK Partners (as also US partners) claim treaty

relief in their own right?

► Can UK GP seek DTAA relief as respects at least partial

income?

► Will there be any difference it is a UK LLP?

UK GP

ICo

Services

Fees

UK

India

50%UK 50% USA

Art. 4(1)(b) of UK / USA DTAA states that ‘resident’, in the

case of a partnership applies only to the extent the income

derived by the partnership is subject to tax as the income

of a resident in its hands or in the hands of its partners in

home jurisdiction


Excessive royalty or FTS payment

► Excess payment and/or dispute on ALP

determination

► Rate concession under DTAA, or, source rule

exclusion under DTAA applicable only with

regard to equivalent of ALP*

► Classification of excess of ALP: Retains its

character as royalty, to be processed as per

domestic law?

► Current provision: Liability u/s.115A @10%+

SC**

► Excess if treated as ‘receivable’ triggers

S.2(22)(e)?

► Lower rate benefit for foreign companies

following cash basis under DTAA in FY 2015-16,

though income accrued in 2014-15?* Refer Art. 12(4) of OECD Model

FCo

ICo

Licence Royalty

Royalty - 100

ALP - 80

How is 20 to be taxed?

100%


Thank You !

recent developments in international taxation...page 4 ca pinakin desai –recent developments in...

Documents