Indian Tax Concerns and Considerations

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Marilyn Dean
5 years ago
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1 Indian Tax Concerns and Considerations National Foreign Trade Council Fall Meeting October 8-10, 2008 Speakers Mukesh Butani, BMR (New Delhi) Vijay Mathur, World Tax Service (New Delhi) Barry Shott, IRS Deputy Director, International and U.S. Competent Authority (Washington) Carol Dunahoo, Baker & McKenzie, Washington (Moderator) 2 September 29 October 1, 2008 Colorado Springs 1

2 Overview Overview of Indian domestic procedures Systemic issues and concerns Recommendations General remarks from Barry Shott 3 Example #1 Indian Assessing Officer: Proposes a 45% mark-up on intercompany management services, plus interest and penalties Denies many associated deductions Demands payment within 30 days Taxpayer believes that available comparables support mark-up of 5-10% 4 September 29 October 1, 2008 Colorado Springs 2

3 Example #2 Indian Assessing Officer asserts that : The services performed by Indian company create a PE for the foreign affiliate(s) receiving the services Significant profits are attributable to the deemed PE, and resulting Indian tax is due within 30 days Interest and penalties are also due 5 Current Hot Issues Concept of Service PE Concept of Agency PE Treatment of Liaison/Rep Offices Attribution of Income to PEs Transfer Pricing FTS / FIS make available Royalties Import of shrink-wrapped software India s new observations on OECD Model and Commentary 6 September 29 October 1, 2008 Colorado Springs 3

4 TAXATION AND THE INDIAN ECONOMY 140 Tax Revenue (in billion US $) 12 Tax to GDP ratio BMR Source: Economic Survey Components of tax revenue (%) Basic Corporate tax rate (%) Income tax Customs Excise Service Tax to to to Overview of Indian Procedures Examination Collection targets Appeals Commissioner (Appeals) Tribunal (+ 3-4 years avg.) Litigation High Court (+ 5 years avg.) Supreme Court (+ 10 years avg.) Lack of settlement authority 8 September 29 October 1, 2008 Colorado Springs 4

5 Indian Procedures (cont.) Alternative mechanisms Ruling from Authority for Advance Rulings Competent authority procedure In future: APAs? 9 Indian Procedures (cont.) Approx. 35% of appeals filed before the Commissioner (Appeals) go on to the Tribunal. For international tax cases, this percentage is understood to be 80-85%. 10 September 29 October 1, 2008 Colorado Springs 5

6 STATUS OF PENDING APPEALS/LITIGATION Year ending Name of the Appellate Authority Number of Appeals instituted No. of Appeals pending as at the end of the year Amount of Revenue locked up in appeal (Rs. in Lakhs) Supreme Court High Courts ITAT CIT(A) (Source: Income Tax Department) 11 STATUS OF PENDING APPEALS/LITIGATION Year ending Name of the Appellate Authority Number of Appeals instituted No. of Appeals pending as at the end of the year Amount of Revenue locked up in appeal (Rs. in Lakhs) Supreme Court High Courts ITAT CIT(A) (Source: Income Tax Department) 12 September 29 October 1, 2008 Colorado Springs 6

7 STATUS OF PENDING APPEALS/LITIGATION Year ending Name of the Appellate Authority Number of Appeals instituted No. of Appeals pending as at the end of the year Amount of Revenue locked up in appeal (Rs. in Lakhs) Supreme Court High Courts ITAT CIT(A) Figure not available (Source: Income Tax Department) 13 STATUS OF PENDING APPEALS/LITIGATION Year ending Name of the Appellate Authority Number of Appeals instituted No. of Appeals pending as at the end of the year Amount of Revenue locked up in appeal (Rs. in Lakhs) Supreme Court High Courts ITAT CIT(A) Figure not available (Source: Income Tax Department) 14 September 29 October 1, 2008 Colorado Springs 7

8 STATUS OF PENDING APPEALS/LITIGATION FY (PARTIAL) Name of the Appellate Authority Number of Appeals instituted/filed during the year No. of Appeals pending as at the end of the year Amount of Revenue locked up in appeal (Rs. in Lakhs) Supreme Court (up to ) High Courts (up to ) ITAT (up to ) CIT(A) (up to ) Figure not available (Source: Income Tax Department) 15 Systemic Issues General lack of direction / guidance? Only CBDT empowered to issue Instructions Let the courts decide approach Results in Assessing Officers following earlier interpretations Appeals filed automatically where revenue effect large Tribunal decisions not followed; appeals filed on similar issues Revenue bias 16 September 29 October 1, 2008 Colorado Springs 8

9 Lack of direction / guidance Lack of centralized system for guidance on important technical issues Lack of guidance for developing a broader and open mindset for changing business environment and requirements 17 Inadequate training? At the National Academy for entry-level officers Mid-level Assessing Officers receive hardly any training abroad Domestic law as well as international tax treaties Business practices Awareness of / interface with other laws Frequent transfers effective reduction in knowledge base 18 September 29 October 1, 2008 Colorado Springs 9

10 Inadequate training? Inadequate knowledge and practice of accounting issues in complex business environment Inadequate exposure to transfer pricing laws and methods for computing arm s length price 19 Inadequate coordination? Officers senior in hierarchy unable to direct assessment Commissioner (Appeals) seeking confirmation from Assessing Officer of an order already in appeal delay Weak communication channels among officers under different jurisdiction 20 September 29 October 1, 2008 Colorado Springs 10

11 Litigation Great deal of discretion exercised in hearing the case. Authorities often take contradictory views. Multiplicity of courts in various jurisdictions decisions of one court not binding on the others. Decision by higher authorities frequently distinguished by assessing officers and CIT(A). No finality unless it is decided by the Supreme Court. Even after decision by Supreme Court no certainty, due to frequent retrospective amendments by legislature. 21 Litigation Significant time delays No statutorily prescribed timelines gives rise to adjournments and delays in dispensing the case Much discretion exercised in dispensing the case Heavy pressure on courts on account of excessive litigation resulting from ill-founded assessments 22 September 29 October 1, 2008 Colorado Springs 11

12 Competent authority (mutual agreement) procedure Differing interpretations of treaty provisions? Inadequate resources? Inadequate authority? Insufficient desire to settle? 23 Alternatives APA program? Other alternative procedures? 24 September 29 October 1, 2008 Colorado Springs 12

13 Recommendations Advance ruling? Pros and cons Appeals / litigation? Acceleration strategies Competent authority? Best practices Proactive steps Planning? Documentation? Other recommendations? 25 September 29 October 1, 2008 Colorado Springs 13

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