International Tax Practices incorporated in DTC

Residence   of    company    to    be    based    on    Place    of    effective management

 Place of effective management‘ is an internationally recognized concept for   determination  of  residence  of  a  company  incorporated  in  a  foreign jurisdiction.       Most of our tax treaties recognize the concept of ‗place of effective management‘ for determination of residence of a company as a tie-breaker rule for avoidance of double taxation. It is an internationally accepted principle that the place of effective management is the place where  key management and commercial decisions that are necessary for the conduct of the entity‘s business as a whole are, in substance, made.

The existing tax regime prescribes that a company may be considered as resident in India if it is incorporated in India or its management and control are wholly situated in India.   However, under the code a company incorporated outside  India  will  be  treated  as  resident  in  India  if  its place  of  effective management‘ is situated in India

Controlled  Foreign Company (CFC)  provision  for  countering  deferral of repatriation of income

As  an  anti-avoidance  measure,  in  line  with  internationally  accepted practices, it is also proposed to introduce Controlled Foreign Company provisions so as to provide that  passive  income earned by a foreign company which is controlled directly or indirectly by a resident in India, and where such income is not distributed to shareholders resulting in deferral of taxes, shall be deemed to have been distributed.  Consequently, it would be taxable in India in the hands of resident shareholders as dividend received from the foreign company

Advance Pricing Agreements

A provision has been made in the DTC, allowing for the Board to enter into an Advance Pricing Agreement (APA) with any person who will be conducting an international transaction.  The APA will specify the manner in which the arm‘s length price is to be determined in relation to such international transaction.

The Advance Pricing Agreement (APA) binds the taxpayer as well as the department to the agreed transfer pricing methodology upto a period of 5 years, that the Income Tax Department agrees not to challenge provided that all terms of the agreement are followed.      The  APA brings certainty to the taxpayer that there will be no adjustment to his income if he follows the method of determining

the arm‘s length price which has been agreed with the department

Non-cooperative or low tax jurisdictions

One of the points which was agreed by the countries of the Group of

Twenty (G-20) in their meeting in London on 2 April 2009 was

―to take action against non-cooperative jurisdictions, including tax havens. We stand  ready to deploy sanctions to protect our public finances and financial systems.  The era of banking secrecy is over.  We note that the OECD has today published a list of  countries assessed by the Global Forum against the international standard for exchange of tax information.‖ [The Global Plan for Recovery and Reform, 2 April 2009]

One of the counter methods which has been employed by countries is that the  taxpayer  must  apply  transfer  pricing  principles  to  transactions  between unrelated parties where such transactions involve a NCJ (e.g. Argentina, Brazil,

and Chile). This has been provided in the DTC as detailed in para below.

 Transfer pricing to apply if transaction is undertaken with another enterprise located in a prescribed jurisdiction

 One of the measures proposed in the DTC is to define two enterprises to be associated enterprises by including a situation where they are associated with each other by virtue of any specific or distinct location of either of the enterprises as may be prescribed12.  This would enable the prescription of a low tax or non- cooperative  jurisdiction  as  such  a  location.        An  enterprise  which  deals  with another  which  is  located  in  such a  jurisdiction  would  make  both  associated enterprises,  and  therefore,  would  make  them  subject  to  transfer  pricing  as regards  the  transactions  entered  into  between  them.  It  would  also  lead  to increased  disclosure requirements with regard to transactions conducted with

entities located in these jurisdictions.

 Introduction of Branch Profit Tax on foreign companies in lieu of higher rate of taxation – Currently, foreign companies are taxed at the rate of

42.2% (inclusive of surcharge and cess) while domestic companies are taxed at the rate of 33.2% (inclusive of surcharge and cess) plus a dividend distribution tax at the rate of 16.6% when they distribute dividend from accumulated profits. It is proposed to equate the tax rate of foreign companies with that of domestic companies by prescribing the rate at 30% and levying a branch profit tax (in lieu of dividend distribution tax) at the rate of 15%.

IFRS

During evidence, the Standing Committee asked as to whether the International Financial  Reporting Standards (IFRS) have been considered while formulating DTC, the Ministry in their post-evidence reply to the said query stated as follows :The Ministry of Corporate Affairs (MCA) is in the process of notifying the new Indian accounting standard which are converged with the IFRs (Ind- AS) with suitable modification.  Under section 145 of the Income-tax Act,1961, a taxpayer is allowed to compute income chargeable under the head ―Income  from other Sources‖ and ―Profit  and gains of business or profession‖  in  accordance  with  either  cash  or  mercantile  system  of accounting subject to the accounting standards notified under the Income- tax Act, 1961.            Similar provisions are incorporated  in Clause 89 of the DTC.     As  and  when  Ind-AS  will  be  notified  by  the  MCA  under  the Companies Act, 1956, the appropriate accounting standards under section 145 of the Income-tax Tax, 1961 or under clause 89 of the DTC will be notified with  relevant modification for the purpose of computing taxable income under the Income-tax Act, 1961 or the DTC.
 Wealth Tax on international assets
 The following have been added to the assets which are liable to wealth tax mainly in order to have a reporting requirement of assets held abroad:

(i)         Bank account of any individual or HUF held in any bank outside India.

(ii)        In case of other persons, a bank account held in a bank outside India and  such account has not been disclosed in the books of accounts maintained by such person.

(iii)       Any interest in a controlled foreign company.

(iv)       Any interest in an unincorporated body (e.g. trust, partnership etc.)

outside India