01 March Budget Connect EY Tax Alert. Key international tax proposals of India Budget 2016

Transcription

1 01 March 2016 Budget Connect 2016 EY Tax Alert Key international tax proposals of India Budget 2016

2 Executive summary The Union Budget for was presented by the Finance Minister on 29 February The Finance Bill, 2016 (FB 2016), that was introduced in the Parliament as part of the Budget proposals, contains a number of international tax proposals. A number of proposals are influenced from the recommendations emanating from the Final Reports [1] of the OECD under its Action Plan on Base Erosion and Profit Shifting (BEPS). These include implementation of Master File and Country-by-Country (CbC) Reporting (Action 13), introduction of equalisation levy which requires withholding on gross basis for all payments in relation to certain specified digital services (Action 1) and a Patent Box tax regime for royalty income (in compliance with Action 5 ). Other significant proposals include deferment of Place of Effective Management (POEM) as a test for determining corporate residency, by one year i.e., tax year , exemption from dividend distribution tax (DDT) for companies with units in International Financial Service Centre (IFSC), phasing out of tax incentives, clarification on non-application of Minimum Alternate Tax (MAT) to foreign companies etc. This Tax Alert highlights the key international tax proposals in the FB Implementation of Master File and CbC Reporting On 5 October 2015, the OECD released Final Reports on all 15 focus areas in its Action Plan on BEPS. India, as part of its commitment to implement the BEPS Action Plan (specifically Action 13, being a minimum standard), has proposed to implement the three-tiered standardized approach (CbC Reporting, Master File and Local File), which is explained below: The CbC Report captures information pertaining to the global operations of multinational enterprises (MNEs). This Report mandates the provisioning of information such as revenue, tax paid, employee strength, capital, accumulated earnings and tangible assets for each jurisdiction in which the group does business, and would be required to be furnished prior to or along with the return of income. Master File captures standardized information relevant for all MNE group members. In general, this File is intended to provide a high level overview in order to place the MNE group s transfer pricing practices in its global economic, legal, financial and tax contexts. Local File refers specifically to material transactions of the local taxpayer. The Budget proposes to implement the Master File and CbC Reporting for international groups. While enabling provisions have been incorporated in the FB 2016, more detailed provisions, by way of rules, can be expected in due course. Equalisation Levy (EL) [1] The Final Reports on 15 BEPS Actions comprised the BEPS package. With regard to taxation of the digital economy, while the Report on Action Plan 1 indicates that the OECD/G20 countries have agreed to monitor developments and analyze data that will become available over time to address digital economy taxation, the Report also suggests that countries could introduce provisions in their domestic tax laws as additional safeguards against BEPS, provided they respect existing tax treaty obligations. EL was one of the potential options provided under Action 1 to address direct tax challenges in the digital economy.

3 In light of the above and in order to address BEPS risks exacerbated by the rapidly evolving digital economy, the Government of India (GOI) has proposed to introduce EL as part of the FB 2016 proposals. This levy 6% on consideration for specified services received or receivable by nonresidents (NRs) from the following: Indian resident which carries on business or profession; or An NR having a permanent establishment (PE) in India However, no levy is charged in the following circumstances: An NR providing the specified service has a PE in India and the service is effectively connected with such PE; or Aggregate amount of consideration received or receivable from the specified payers in a taxable year does not exceed INR1 lakh; or Payment is not for the purpose of carrying out business or profession. Specified services include online advertisements, provision for digital advertising space, provision for any facility or service for online advertisements and other services to be notified by the GOI. This levy is to be collected by specified payers viz., (1) A resident in India carrying on business or profession in India. (2) An NR having a PE in India. This levy takes effect only from the date appointed in the notification to be issued by the GOI. A corresponding provision is also included in the Indian Tax Laws (ITL) that provides for exemption from income tax on income arising to an NR from such specified services which has been subjected to the EL. Patent Box tax regime for royalty income The GOI proposes to introduce a concessional tax regime for worldwide royalty income arising from exploitation of patents. By virtue of these provisions, specified royalty would be 10% on gross basis (plus applicable surcharge and cess). Incomes eligible for the regime includes royalty from transfer of all or any rights in respect of a patent, imparting of any information concerning the working, or the use, of a patent, or use of any patent or rendering of any services in connection with the above activities. The amendments apply from tax year However, the benefits are restricted to royalty in respect of a patent developed and registered in India by Indian residents. POEM test to determine corporate residency deferred to apply from tax year onwards In 2015, the ITL was amended to provide that from tax year onwards, a foreign company would be treated as a resident of India if its POEM is in India. The applicability of the POEM test to determine corporate residency has been deferred by a year and is now proposed to apply from tax year onwards. Thus, for tax year , the test of residency for foreign companies continues to be control and management of the affairs of the foreign company wholly in India. Additionally, residency in India on account of the POEM test, triggers many provisions which have tax consequences, such as advance tax payments, withholding tax provisions etc. Therefore, a transition mechanism to address these issues was required. For this purpose, the ITL is proposed to be amended to empower the Central Board of Direct Taxes (CBDT) to notify exceptions, modifications and adaptations etc., as the case may be, subject to which, the provisions of the ITL would apply in such cases. Income exemption for foreign companies Storage and sale of crude oil stored from facilities in India: The GOI is in the process of setting up underground storage facilities for storage of crude oil in order to achieve price stability of crude oil. This project is proposed to be funded through the participation of foreign national oil companies (NOCs) and multinational companies (MNCs) engaged in storing and selling crude oil from outside India. The proposed participation of NOCs

4 and MNCs by storing and selling crude oil from India is likely to trigger tax liability for them in India. It is, therefore, proposed to exempt income of the foreign company on account of storage of crude oil in any facility in India and sale of crude oil from it to any person in India where certain conditions are satisfied. These provisions are to be applied retrospectively from tax year onwards. Activities of display of uncut and unassorted diamonds in special zones A Special Notified Zone (SNZ) was created to facilitate shifting of operations by foreign mining companies (FMCs) to India and to permit trading of rough diamonds in India. However, there were apprehensions that mere display of rough diamonds, without actual sales in India, may lead to taxable presence for FMCs in India. To address this apprehension, it is proposed to provide that, in such cases where the activities of FMCs are confined to display of uncut and unassorted diamonds in an SNZ, no taxable income arises for the FMCs in India. These provisions are to take effect retrospectively from tax year onwards. Tax incentive for a unit set up in IFSC Presently, the ITL provides for certain incomelinked incentive in respect of a unit in an IFSC [2]. With a view to facilitate and incentivize the growth of IFSC into a world class hub, the following tax benefits are proposed: 15% plus surcharge and cess is generally required to be paid by a company distributing dividends. However, where the total income of a company comprises income from a unit located in an IFSC in convertible foreign exchange, no DDT is required to be paid on such distributions made on or after 1 April 2016 out of its current income. This exemption is available both to the payer and recipient of dividends. [2] International Financial Services Centre has the same meaning as assigned to it in Clause (q) of Section 2 of the Special Economic Zones Act, The company would be subject to 9% [3] for units located in an IFSC. This proposal should take effect from tax year The long-term gains arising in foreign currency on sale of equity shares or units of equity-oriented funds or units of a business trust taking place on a recognized stock exchange established in an IFSC would be exempt from tax. Furthermore, no Securities Transaction Tax (STT) is payable on such a transaction. This proposal is proposed to take effect from 1 June Also, Commodity Transaction Tax (CTT) will not be payable on transactions undertaken in foreign currency for sale of commodity derivatives taking place on a recognized association established in an IFSC jurisdiction. This proposal should take effect from 1 June Beneficial tax rate/exemption in certain cases of capital gains income Long-term capital gains on unlisted securities are subject to a concessional tax rate of 10%. However, there is no clarity on whether such beneficial rate is available even on transfer of shares of a private company. The ITL is now proposed to be amended to clarify that the beneficial rate of 10% applies even in case of capital gains on transfer of private company shares. This applies prospectively from tax year onwards. In case of rupee denominated bonds, it is proposed that capital gains to the extent of and relating to the appreciation of the rupee against foreign currency between the date of issue and the date of redemption is exempt from capital gains tax. This amendment is proposed to apply from tax year onwards. [3] The applicable MAT rate is otherwise 18.5%.

5 Road map for phasing out of exemptions and deductions In 2015, the GOI made a commitment to reduce the corporate tax rates from 30% to 25% over a period of four years, with a corresponding phasing out of exemptions and deductions. To achieve this objective, as part of the FB 2016, illustratively, the following is proposed: Limit accelerated depreciation under the ITL to a maximum of 40% from 1 April Limit benefit of weighted deduction for research to 150% from 1 April 2017 and 100% from 1 April Sunset date prescribed for availing profitlinked deduction to new Special Economic Zone (SEZ) units; tax benefit available only to units that commence activity on or before 31 March % weighted deduction for expenditure on certain skill development projects to be restricted to 100% from 1 April Exemption from DDT on distribution made by a Special Purpose Vehicle (SPV) to Business Trusts The ITL has a special tax regime in respect of Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) (collectively known as Business Trusts). In order to rationalize the taxation regime for Business Trusts, it has been proposed to provide an exemption from levy of DDT on distributions made by SPVs to Business Trusts. The proposed exemption is subject to certain conditions: The Business Trust to hold 100% share capital of the SPV, excluding the share capital required to be mandatorily held by the GOI or Government bodies. Exemption is only in respect of dividend declared, distributed or paid by the SPV out of its current income after the date when the Business Trust acquires the above shareholding in the SPV. Such dividend received by the Business Trust and investors is not taxable in their hands. This amendment will be effective from 1 June Rationalization of withholding tax provisions on payments by Alternative Investment Funds (AIFs) to its investors The Finance Act, 2015 (FA 2015) provided for a partial pass-through regime in respect of income earned by Category I and II AIFs. Under this regime, the income of the AIF (not being in the nature of business income) is accorded a passthrough status and is taxable in the hands of the investor in the same manner and in the same proportion as it would have been had the investor received such income directly. The AIF is required to withhold taxes in respect of any such income (other than business income) credited or paid to the 10%. The withholding tax provisions with regard to distribution by AIFs have created certain difficulties. NR investors were not able to claim benefit of lower or nil withholding, which is otherwise available to it under a tax treaty, due to the manner in which the withholding tax provisions are worded. The withholding tax provisions are proposed to be amended to provide that income (other than business income) distributed to NR investors would be liable to withholding at the rates in force. This would enable tax withholding to be carried out at the beneficial tax treaty rate. Furthermore, the ITL is also amended to provide that an NR investor can now make an application to the Assessing Officer for a lower or nil withholding certificate in respect of such income. These provisions are to be effective from 1 June Modification in conditions of special taxation regime for offshore funds The ITL provides for a special regime in respect of offshore funds. It provides that, in the case of an eligible investment fund, the fund management activity carried out through an eligible fund manager acting on behalf of such fund shall not constitute business connection (taxable presence) of the fund in India. Furthermore, an eligible investment fund shall not be said to be resident in India merely because the eligible fund manager, that undertakes fund

6 management activities on its behalf, is located in India. In order to qualify as an eligible fund, the fund has to be resident of a country or territory with which India has entered into a tax treaty or Tax Information Exchange Agreement (TIEA). In respect of activities of the fund, there is a restriction that the fund shall not carry on or control and manage, directly or indirectly, any business in India or from India and shall not engage in any activity which constitutes a business connection in India. Thus, in many instances, a fund may not qualify as a tax resident of a particular jurisdiction because of the domestic tax laws or legal framework of that jurisdiction. This makes it ineligible for the special regime under the ITL. Additionally, conditions relating to a fund carrying on business or controlling fund managing business in India or from India restricted the flexibility of operation for funds. Therefore, the FB 2016 proposes to modify these conditions to provide that: Eligible investment funds shall also mean a fund established or incorporated or registered outside India in a country or a specified territory, as notified by the GOI. The condition of the fund not controlling and managing any business from India has been withdrawn. It should not carry on or control and manage, directly or indirectly, any business in India. These provisions are to be effective from tax year Exemption from requirement of furnishing Permanent Account Number (PAN) Presently, NRs without PAN (Indian tax identification number) are subjected to a higher rate of withholding tax. This tax is higher of 20% or the applicable tax rate. It is proposed to amend the relevant provision to provide that, on furnishing of alternative documents, the higher rate will not apply. Accordingly, the FB 2016 proposes to exclude the application of this provision, subject to fulfilment of certain prescribed conditions. Clarification on nonapplication of MAT to certain foreign companies As per the MAT provisions under the ITL, if the tax payable by a company on the total income as computed under the ITL is less than 18.5% of its book profit, such book profit is deemed to be the total income of the company and the company is liable to taxes on such book profits. Issues arose regarding the applicability of this provision to Foreign Institutional Investors (FIIs) which do not have a PE in India. The FA 2015 provided some relief to foreign companies in terms of allowing certain incomes of a foreign company to be reduced while computing book profits for the purposes of MAT. However, the said amendment was effective from 1 April 2015 i.e., tax year The controversy on applicability of MAT to such foreign companies for the periods prior to 1 April 2015 still remained alive. The FB 2016 now proposes to amend the ITL relating to provide for non-applicability of MAT to foreign companies (including Foreign Portfolio Investors (FPIs)/FIIs), in the following situations: The foreign company is resident of a country with which India has a tax treaty and it does not have a PE in India as per the provisions of the relevant tax treaty; or The foreign company is resident of a country with which India has not entered into a tax treaty and such foreign company is not required to seek registration under any law for the time being in force relating to companies. This amendment is to be made effective retrospectively from tax year Wider application of buyback tax (BBT) on distributed income on a prospective basis Under the present provisions of the ITL, a BBT is levied on a company which undertakes buyback of its unlisted shares. BBT is levied on the amount distributed by the company as reduced by the amount which was received by the company for issue of such shares.

7 BBT is levied only where buyback was undertaken as per certain provisions of the Indian Corporate Laws (specified provisions). The FB 2016 now proposes to extend this levy to buyback undertaken even under other provisions of the Indian Corporate Laws. These provisions are proposed to be effective form 1 June Additionally, the FB 2016 also enables framing of rules to determine taxable amount under certain circumstances of buyback, such as under a business reorganization, shares issued in tranches for different considerations, at different points of time, in lieu of existing shares etc. New Direct Tax Dispute Resolution Scheme The FB 2016 has proposed to introduce the Direct Tax Dispute Resolution Scheme, 2016 in order to reduce the huge backlog of cases and to enable the GOI to realize its dues expeditiously. The Scheme comes with certain conditions and the declarant under the Scheme shall get immunity from institution of any proceeding for prosecution for any offence under the ITL. The person who opts for this Scheme will be required to furnish an undertaking in the prescribed form and verified in the prescribed manner, waiving the right to seek or pursue any remedy or claim in relation to the specified tax which otherwise would be available to them under any law, in equity, by statute or under an agreement entered into by India with a country or territory outside India. Comments The Union Budget for shows India s commitment to implement a number of BEPS recommendations which may get implemented over a period of time through legislative amendments, as well as through changes to rules and administrative procedures. The international tax proposals implemented in the Budget could be far reaching. International investors would need to carefully monitor developments and assess the impact on their operations. International groups would need to assess readiness and begin preparing for complying with the Master File and CbC Reporting requirements.

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