Finance Bill, 2011- Key international tax provisions

PrintPDF The Finance Bill, 2011 contains some international tax proposals that are focused on anti-tax avoidance, transfer pricing (TP), tax enforcement and provisions to encourage Indian companies to repatriate profits back from their foreign subsidiaries. The Finance Minister also reinforced the intent of the Government of India (GOI) to enact the Direct Taxes Code, 2011 (DTC) with effect from 1 April 2012. Here we have highlighted the key international tax provisions contained in the Finance Bill, 2011.
Transactions involving Notified Jurisdictional Area (NJA)
The lack of effective exchange of information is one of the key criteria in determining harmful tax practices. While most of India’s comprehensive double taxation avoidance agreements (DTAAs) have an article on exchange of information, there was less incentive for certain jurisdictions with negligible tax rates, popularly known as ‘tax havens’, to have a comprehensive DTAA with India. Typically, such tax havens are non-sovereign jurisdictions. Therefore, in 2009, the Indian Tax Laws (ITL) was amended to enable the GOI to enter into Tax Information Exchange Agreements
(TIEAs) with such jurisdictions India has signed 11 such TIEAs in the recent past and the first TIEA with Bermuda has already been notified on 24 January 2011.
The FB 2011 introduces a new concept in the ITL to discourage transactions with persons located in countries or territories which do not effectively exchange information with India. This provision is envisaged to take effect from 1 June 2011.
The proposed provision authorizes the GOI to notify countries or territories outside India as an NJA. This results in the following tax consequences:
Application of TP provisions: Any transaction between the taxpayer and a person located in NJA will be deemed to be an international transaction subject to the TP provisions of the ITL and all parties to such international transaction would be deemed to be associated enterprises. Furthermore, while determining the arms’ length price (ALP) of such international transaction, the benefit of allowable variance will not be available.
Transactions with financial institutions located in NJA: No deduction will be allowed for any payment made to a financial institution located in NJA, unless the taxpayer authorizes the tax authority to seek relevant information from the said financial institution.
Disallowance of expenditure and allowance: No deduction will be allowed for any expenditure or allowance (including depreciation) arising from such transactions, unless the taxpayer maintains such documentation and furnishes such information as may be prescribed.
Receipts deemed as income where information on source not available: Any sum received or credited by the taxpayer from a person located in NJA will be deemed to be the income of the taxpayer, unless the taxpayer satisfactorily explains the source of such money in the hands of such person or in the hands of beneficial owner (in case such person is not the beneficial owner). This deeming provision applies where no explanation is offered by the taxpayer on the source of the receipts and also in cases where, in the opinion of the tax authority, the explanation offered is not satisfactory.
Increase in the withholding tax rate: Any payment to a person located in NJA on which tax is deductible shall be subject to withholding tax at higher of the following rates:
- At the rate specified under the ITL; or
- At the rates in force; or
- At the rate of 30%.
For the purpose of the above provision, the expression ‘person located in NJA’ is widely defined to also include a permanent establishment (PE) located in the NJA, apart from resident persons or non-individuals established in the NJA. Also, the expressions ‘PE’ and ‘transaction’ are aligned with the existing definitions in the TP provisions of the ITL.
Extension of time limit for completion of assessment – For determining the statutory limitation period for completion of assessments and reassessments, the period commencing from the date on which reference for exchange of information is made by the competent authority under an agreement till the date the information is received by the Commissioner of Income Tax or a period of six months, whichever is less, is proposed to be excluded. Similar amendment has been proposed for extending the time limit for completion of search assessments. The above amendments will take effect from 1 June 2011.
Reporting of activities by liaison offices (LOs)
The memorandum to the FB 2011 notes that a non-resident person having an LO in India does not file a return of income in India on the ground that no business activity is allowed to be carried out in India. Now, the FB 2011 proposes that such a non-resident will be required to file a statement in a prescribed form, providing details of activities carried out by the LO in India. The time limit for filing the above statement will be 60 days from the end of the financial year. The amendment will take effect from 1 June 2011. This provision seeks to monitor the activities of the LO and seeks better enforcement if the activities are viewed creating a taxable presence.
Transfer pricing
Extension of due date for filing return of income by companies undertaking international transactions
Presently, companies are required to file their return of income on or before 30 September. It is proposed that the due date for filing the return of income by those companies, that have international transactions and are required to file an Accountant’s Certificate in the prescribed format in respect of its international transactions, will be 30 November. The above amendment will be effective from 1 April 2010.
Determination of ALP
Presently, where the difference between the ALP and the transaction price does not exceed 5% of the transaction price, the transaction price is deemed to be the ALP. Now, it is proposed that the allowable variation will be such percentage of the transaction price as the GOI may notify. This amendment will apply from the financial year 2011-12 onwards.
Extension of TPO’s power
Transfer Pricing Officer (TPO) is empowered to examine additional international transactions (which were not formally referred by the tax authority), if identified subsequently in the course of proceedings before him. TPOs will now be granted additional powers of conducting a survey. These amendments will take effect from 1 June 2011.
Concessional tax rate on dividend income from foreign subsidiary
Presently, dividend received by an Indian parent from its foreign subsidiary is taxable at the rate of 30% (plus applicable surcharge and education cess). The FB 2011 proposes that such dividend income, included as income in the hands of the Indian parent during the tax year 1 April 2011 to 31 March 2012, will be taxable at the concessional rate of 15% (plus applicable surcharge and education cess) on gross basis. For this purpose, a subsidiary is defined as a foreign company in which the Indian company holds more than 50% of the nominal value of the subsidiary’s equity share capital.
Provisions relating to notified infrastructure debt funds
The FB 2011 proposes to empower the GOI to notify infrastructure debt funds which are set up in accordance with prescribed guidelines. The income of such infrastructure debt funds will be exempt from tax. Interest received by a non-resident from notified infrastructure debt funds will be taxable at the rate of 5% (plus applicable surcharge and education cess). The withholding tax rate will be 5% (plus applicable surcharge and education cess) on interest paid by the infrastructure debt fund to non-residents. The above amendments will take effect from 1 June 2011.
Comments :- A review of the key international tax proposals of the FB 2011 suggests that a number of these are consistent with the global trend of introducing counter measures to deal with ‘uncooperative tax haven’ jurisdictions and strengthening tax enforcement. While the extension of tax filing due date for taxpayers having international transactions would allow taxpayers more time for gathering contemporaneous comparable data, the proposal to remove the 5% range may allow taxpayers far less latitude while determining the arm’s length nature of their transfer prices. Indian multi-national groups would, perhaps, welcome the reduced tax rate for foreign source dividends before the onset of the anti-tax deferral provisions contained in the DTC. One would hope that similar or other comparable provisions to relieve the disincentive for repatriation are introduced in the DTC as well.