13 th February 2013 The Chief Commissioner of Income-Tax, Aayakar Bhavan, Maharshi Karve Road, Mumbai 400 020 Dear Sir, Re.: - Your letter No. MUM/CCIT/Coord/U-I/FTC/2012-13/326 dated 14 th January 2013 We refer to your above letter and thank you for providing us with an opportunity to give our suggestions on various issues relating to Foreign Tax Credits. Annexed to this letter are the issues commonly faced while trying to obtain credit for taxes paid/deducted abroad along with suggestions for mitigating the hardships that taxpayers may face while claiming credit for the same. We hope you will find the suggestions useful. If you need any further information/clarification in respect of the above we shall be glad to provide the same. Yours truly, For Bombay Chartered Accountants Society Deepak R. Shah Kishor B. Karia Rajesh S. Kothari President Chairman Co-Chairman International Taxation Committee 1
BOMBAY CHARTERED ACCOUNTANT S SOCIETY Representation on Foreign Tax Credit Rules 1. Proof of Payment Many times it is noticed that difficulties arise as to the acceptability of proof of payment of taxes in the source country due to various reasons. FTC Rules can provide various documents that can be accepted as proof for granting credits for taxes paid / deducted overseas. Some such proofs may be: - (i) (ii) (iii) (iv) Confirmation from the Revenue Authorities; Certificate from the Employer in case of TDS on salaries; Acknowledgement of Payment in case of online payment or payment across the Bank counter; and Where appropriate proof is not available based on the domestic law of the source country than the Officer processing the return must be empowered to grant credit on being satisfied that the taxes are paid / deducted in the source country. 2. Timing Difference More often than not the tax assessment year in India is different than it is in the foreign tax jurisdiction. For example: An assessee in India has to follow tax year from April- March whereas in US it is based on the calendar year which results in timing difference and overlapping period. The FTC Rules should provide for granting proportionate tax credit based on the quantum of income falling within the previous year in line with section 199 i.e. credit for foreign taxes must be granted in the assessment year in which the income is taxed in India. 2
3. Unilateral Credits even where DTAA exists if payment is as per domestic tax law of the Source Country Section 90(2) grants an option to a non-resident earning income from sources in India to either opt to be governed by the provisions of the DTAA (in case there is a DTAA between India and the country of residence of the non-resident) or opt to be governed by the provisions of the Domestic Tax Law of India, whichever is more beneficial. However, a similar choice is not available to a resident who receives income from sources outside India. He has to be governed by the provisions of the DTAA (in case there is a DTAA between India and the country from which income is sourced) and where there is no DTAA to be governed by the provisions of section 91 relating to unilateral tax credit. Many times a situation may arise when a person would not like to opt for DTAA provisions (inspite of there being a DTAA) and chooses to be governed by the provisions of domestic tax laws of the source country if they are more beneficial to him. FTC Rules may provide an option to claim credit based on the rate at which taxes have been actually withheld / paid in the source country i.e. either as per DTAA or Domestic Tax Code of the source country. 4. Exchange Rate for conversion of Foreign Taxes Since Foreign Taxes are paid in the local currency of the concerned State, an issue arises as to which of the following rate to be applied for conversion to arrive at their rupee equivalent. (i) Exchange rate on the date on which the taxes are paid / deducted; (ii) Exchange rate on the date on which the income is recognised in the Indian books; (iii) Exchange rate on the date on which income accrues in India; (iv) Exchange rate on the date of remittance of income to India; Where income is recognized by the recipient in India on accrual basis on a particular date, FTC Rules should provide that the RBI Reference Rate as prevalent on that date should be considered as the rate of exchange. 3
When income is booked on receipt basis at the time of its remittance to India during the previous year the actual rate of exchange should be taken as the rate of conversion for FTC. 5. Corresponding Adjustments on completion of Assessment Taxes paid in foreign jurisdiction may be increased or reduced depending upon the tax liability after regular tax assessment. An issue may arise whether India should consider such changes in tax demand or refund while giving tax credit? It would be fair to provide a mechanism for Corresponding Adjustments on increase or decrease of tax liability upon completion of assessment in the source country. 6. Underlying Tax Credit (UTC) Taxation of dividends invariably results in economic double taxation. In order to encourage declaration of dividends by foreign subsidiaries of Indian companies, Section 115BBD provides for concessional rate of tax. This is indeed a welcome step. However, underlying tax credit is the only solution to mitigate economic double taxation. Unfortunately very few Indian Treaties provide for UTC. FTC Rules should provide for unilateral UTC. This will further encourage Indian MNCs to bring back precious foreign exchange to the country by declaring dividends. UTC will be imperative if the Govt. is thinking of introducing Controlled Foreign Companies Regulations (CFC). However, as a safeguard against possible misuse a minimum direct shareholding % may be prescribed for availing UTC. 7. FTC in case of a Tax Sparing situation Many Indian Tax Treaties provide for tax sparing clauses where by India will give deemed credit for taxes on exempt income in the source country. Issue may arise as to determination of the credit amount in absence of proof of payment. 4
FTC Rules may provide for acceptance of certificate issued by the Auditor s or tax authorities to determine the tax relief for giving FTC in cases of tax sparing. 8. FTC in case India becomes country of residence under a tie-breaking test Worldwide major issue of debate or challenge is determination of the place of Source of income and place of residence of a tax payer. In a Jurisdictional tax system, taxes are levied on Residence link as well as on a Source link. Under this system the tax payer is taxed on his worldwide income in the State of residence and the credit is given for the taxes paid / deducted in the source State. A problem arises when a tax payer is held to be resident of two contracting states based on different criteria / due to timing difference. (For example a US Citizen present in India for more than 182 days would be regarded as resident of both States). Although DTAA provide for series of tie-breaking tests to determine the State of residence and State of source difficulties will arise in claiming FTC. FTC Rules must provide clear guidance for claiming tax credit in cases of dual residency of individuals. 5