Bombay Chartered Accountants Society

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1 Recent Developments in International Taxation Bombay Chartered Accountants Society CA Pinakin Desai 15 July 2015

2 In the news The better the question. The better the answer. The better the world works.

3 Revision to India Mauritius DTAA 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 Page 3 CA Pinakin Desai Recent Developments in International Taxation July 2015

4 Reporting requirement under the amended s.195(6) Post budget 2015 Payment Resident NR S.195(6) amended by FA 2015 w.e.f 1 st June 2015 to require reporting of all payments whether or not chargeable to tax Submit copies of 15CA / 15CB to AD for processing remittance Whether or not sum is chargeable to tax in India File Form 15CA & 15CB Remittance by AD Remittance to Non Resident Penalty of Rs 1L for default Existing Rule 37BB based on preamended 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? Page 4 CA Pinakin Desai Recent Developments in International Taxation July 2015

5 Black Money Act (Undisclosed Foreign Income and Assets) and Imposition of Tax, 2015 and Foreign Asset Reporting The better the question. The better the answer. The better the world works.

6 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 , Kumar will offer income from overseas assets to tax in India Can Tax Authority claim that BMA authorizes FMV taxation for FY ? Kumar may have no records or evidence to correlate the source of investment with the items of investment CBDT Clarifications by way of FAQs 1 : 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 Page 6 CA Pinakin Desai Recent Developments in International Taxation July 2015

7 BMA Applicability to overseas discretionary Trust Settlor Trustee Beneficiary DT 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 and prosecution risk if willful default Page 7 CA Pinakin Desai Recent Developments in International Taxation July 2015

8 Reporting obligation in Tax Returns R and OR Schedule FA (Item B 1 / Item F 2 ) Settlor (Includes a contributor?) Trustee Beneficiary- Who has not contributed to the trust Obliged to report under Item F whether reporting only in the year of settlement or every year? 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 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 Page 8 CA Pinakin Desai Recent Developments in International Taxation July 2015

9 Issues on Indirect Transfer and Circular 04 / 2015 The better the question. The better the answer. The better the world works.

10 Dividend Indirect transfer: Capital Gain v. Dividend Parent Co SPV ICo Indirect transfer Tax Trigger Cash Rich Buyer 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? Circular 04 / 2015: Clarification out of over anxiety? Page 10 CA Pinakin Desai Recent Developments in International Taxation July 2015

11 Circular 4 / 2015 Overseas Capital Reduction X Co FCo derives substantial value from India and has Accumulated Profits (AP) of 500. FCo undertakes capital reduction and consideration of 800 is paid FCO (AP: 500) Cap Red 800 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 Overseas Assets Outside India India As per Circular 04/2015 Expl. 5 applicable to transactions in share of a foreign company, which has the effect of transferring underlying Indian ICo assets Is FCo / XCo right in suggesting that capital reduction payment to the extent represented by AP is dividend covered by Circular 4? 1 G. Narasimhan (236 ITR 327) and Kartikeya Sarabhai (228 ITR 163) Consideration in excess of AP taxable as capital gains in India, unless treaty protected Page 11 CA Pinakin Desai Recent Developments in International Taxation July 2015

12 Circular 4 / 2015 Overseas Buyback of shares FCo derives substantial value from India and has AP Parent Co FCo undertakes buyback of its shares from Surrender of shares for buy-back Buy-back proceeds Parent Co for a consideration Capital reduction is consequential to buyback FCo Transaction is neither dividend proper, nor Outside India Deemed dividend under s.2(22) India Circular 04 / 2015 not applicable ICO Does buy-back involve transfer covered by Expl. 5? TP applicability as FCo not covered by s.115qa? Page 12 CA Pinakin Desai Recent Developments in International Taxation July 2015

13 Indirect Transfer v Merger of foreign companies Hold Co, a foreign entity, holds investment in Indian Company ( ICo ) F Co Issue of shares by F Co 1 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): Hold Co Merger F Co 1 47(vii) operative only if amalgamated company is Ico Extinguishment of shares results in transfer Grace Collis (SC) Outside India India I Co 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 Page 13 CA Pinakin Desai Recent Developments in International Taxation July 2015

14 Intricacies on Specified date (SD) Impact disposal of India Assets post SD US Co UK Co I Co Transfer of UK Co on 31 May 2015 Transfer of I Co on 31 January 2015 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? Page 14 CA Pinakin Desai Recent Developments in International Taxation July 2015

15 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 Page 15 CA Pinakin Desai Recent Developments in International Taxation July 2015

16 Transfer Pricing Section 92B(2) The better the question. The better the answer. The better the world works.

17 Deemed International Transaction U/s. 92B(2) Facts: Overseas India AE Taxpayer (IC0) Supply RM (1) (2) Unrelated Party Prior agreement/ Understanding between AE and unrelated party 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 Page 17 CA Pinakin Desai Recent Developments in International Taxation July 2015

18 Deemed International Transaction U/s. 92B(2) FCo1 ICo1 Sale of global business (including India) at FMV Slump Sale of undertaking at FMV FCo2 ICo2 Outside India India 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 Page 18 CA Pinakin Desai Recent Developments in International Taxation July 2015

19 Beneficial Ownership The better the question. The better the answer. The better the world works.

20 Re Swiss Swaps Case I/A (SC decision) Danish Bank had entered into total return swaps (TRS) for Swiss equities Danish Bank (Issuer of total return swap TRS) Upward price difference + Dividend equivalent Depreciation in market price + price Counterparties in UK, USA, Germany 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 Investment hedge exposure Dividends though no withholding under DTAA No use of word beneficial owner Swiss Equities 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? Page 20 CA Pinakin Desai Recent Developments in International Taxation July 2015

21 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 Page 21 CA Pinakin Desai Recent Developments in International Taxation July 2015

22 Place of Effective Management [POEM] The better the question. The better the answer. The better the world works.

23 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 Page 23 CA Pinakin Desai Recent Developments in International Taxation July 2015

24 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 Page 24 CA Pinakin Desai Recent Developments in International Taxation July 2015

25 Corporate Residency Different 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 Page 25 CA Pinakin Desai Recent Developments in International Taxation July 2015

26 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 Page 26 CA Pinakin Desai Recent Developments in International Taxation July 2015

27 Illustrative Dos and Don ts to manage POEM risk Dos Charter documents should give power to Board to control and manage company Directors should be persons who are competent and independent to debate and decide in the interest of the company, and not of the Parent Physical meeting in the jurisdiction The secretary, books of accounts, minute books and other documents, shares, etc. should be in its own jurisdiction/office Don ts Parental control should be as a shareholder and its authority not be exceeded Avoid as directors, persons who are highly dependent on the group, as employees or otherwise. Completely avoid directors who are name lenders Avoid giving binding instructions to the directors of the subsidiary. Avoid veto powers to Indian directors. Strictly avoid brass plate presence and target good substance Mail or documents from HO often contradict the claim Page 27 CA Pinakin Desai Recent Developments in International Taxation July 2015

28 BEPS Calling The better the question. The better the answer. The better the world works.

29 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 Page 29 CA Pinakin Desai Recent Developments in International Taxation July 2015

30 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 Page 30 CA Pinakin Desai Recent Developments in International Taxation July 2015

31 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 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. Page 31 CA Pinakin Desai Recent Developments in International Taxation July 2015

32 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 Page 32 CA Pinakin Desai Recent Developments in International Taxation July 2015

33 Other Developments The better the question. The better the answer. The better the world works.

34 S. 194LC / LD a substantial relief! FCo is a tax resident of China FCo lending to ICo qualifies for FCo Interest China beneficial withholding rate 5% But for s.194c/194d, interest chargeable Loan ICo India in India at lower of DTAA, or ITL 10% on gross) Can lending company (FCo) claim tax sparing relief under India China DTAA on account of incentive under s.194 LC / LD? Page 34 CA Pinakin Desai Recent Developments in International Taxation July 2015

35 Repatriation of profits Non-compliant LLP conversion: Implications for shareholders Facts Mau Co I Co s shareholding pattern is as under: Mau Co. 90% I Co LLP 90% Indian Promoters Assets and liabilities vested on conversion 10% 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? Page 35 CA Pinakin Desai Recent Developments in International Taxation July 2015

36 Treaty Entitlement: UK Partnership / LLP UK India 50%UK UK GP Fees Services ICo 50% USA 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? 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 Page 36 CA Pinakin Desai Recent Developments in International Taxation July 2015

37 Excessive royalty or FTS payment Excess payment and/or dispute on ALP determination FCo Rate concession under DTAA, or, source rule exclusion under DTAA applicable only with regard to equivalent of ALP * Licence 100% Royalty Classification of excess of ALP: Retains its character as royalty, to be processed as per ICo domestic law? Current provision: Liability SC ** Royalty ALP - 80 How is 20 to be taxed? * Refer Art. 12(4) of OECD Model Excess if treated as receivable triggers S.2(22)(e)? Lower rate benefit for foreign companies following cash basis under DTAA in FY , though income accrued in ? Page 37 CA Pinakin Desai Recent Developments in International Taxation July 2015

38 Thank You! Page 38 CA Pinakin Desai Recent Developments in International Taxation July 2015