India tax planning – multinationals should act before May 31, 2013

Multinationals with operations in India have only until May 31, 2013 to act before a newly proposed provision in India’s Finance Bill will affect their tax planning.

Private companies operating in India typically resort to a buyback of shares instead of payment of dividends to avoid dividend distribution tax, particularly where the capital gains arising to the shareholders are either not chargeable to tax or are taxable at a lower rate.

The Union Budget 2013 includes a provision that, effective June 1, 2013, an additional tax—at a rate of 20% (plus applicable surcharge and cess levy)—would be imposed on any amount distributed by an Indian company with respect to the buy-back of unlisted shares.

In other words, this tax would be imposed on the distributed income of the Indian company. This income would not be taxed again in the hands of the shareholder.

This tax would be:

• In addition to the normal income tax payable by an Indian company on its income
• Applied to distributed income which is to be computed as consideration paid on the buy-back of shares, reduced by the amount received by the company for issue of such shares

Because this tax would be levied on the distributed income of the Indian company, the income tax treaty protection / relief (if previously available) would not be available under the new regime.

Source: KPMG

FBAR must now be elctronically filed

The United States Department of Treasury has announced that beginning July 1, 2013, Form TD F 90-22.1 must be filed electronically. If the 2012 form will be filed after June 30, 2013, the 2012 Form must also be elctronically filed.

The  website for e-filing is: http://bsaefiling.fincen.treas.gov/Enroll_Individual.html

Please review the exceptions on the FAQ section of the Fincen website.

Withholding rate on Foreign partner’s ECI clarified

IRS recently clarified the withholding rate for the effectively connected income (ECI) allocated to foreign partners. As readers may be aware. IRC 1446 withholding rate was increased from 35% to 39.6% effective 2013. However, there was a confusion if the new rate on ECI would apply if teh partnership’s tax year was a fiscal year beginning in 2012.

IRS Ann. 2013-30, 2013-21IRB clarifies that since partnerships with fiscal years beginning in 2012 are required to file a 2012 Form 8804 (Annual Return for Partnership Withholding Tax),  2012 tax rates continue to apply. However, IRS announcement further states that a foreign partner will still be liable for tax on their share of the partnership’s income based on the tax rates in effect when included in income.

Bitcoins – biting the tax authorities worldwide?

Bitcoins are a peer-to-peer virtual currency created by a complex process called “mining.” There  are currently around 11 million Bitcoins in existence, and Bitcoin mining will end  once a finite number (21 million) of  Bitcoins have been created. Bitcoin has been making headlines as of late. It initially caught attention for its increase in value and also when it recently declined. Earlier this month, the cumulative value of the currency had been reported as high as  $1.5 billion, but it has since fallen to lower levels.

Bitcoin has been the recent subject of FinCEN guidance (2013-G001). It is to be seen if IRS and other tax authorities worldwide will follow suit in issuing guidance. Although it appears that any Bitcoins earned will be considered income, enforcement by tax authorities is perceived to be a nightmare.

Applying general principles, people who provide services or sell goods in exchange for Bitcoins would have income under Code Sec. 61, and those who exchange their Bitcoins for cash would realize gains to the extent of any appreciation (short or long-term). The capital gain treatment of Bitcoins generally follows the logic of those who argue that Bitcoin behaves more like a commodity than a currency, pointing to its volatility and the fact that people could be converting traditional currency into Bitcoin with an intent to make a profit rather than to spend it. There are a few less clear areas, including the tax implications of “mining” a Bitcoin and the effect of dealing with it on an international basis. IRS next? If Bitcoin continues its current momentum, IRS may, like FinCEN, be forced to address the issue. However, given the traceability and anonymity inherent in Bitcoin transactions, and the extreme fluctuations in value, cracking down on Bitcoin could prove difficult. Although the value of Bitcoins has recently plummeted, and some media outlets assert that the Bitcoin “bubble” has burst, the actual financial imprint of Bitcoin remains to be seen. However, it is also argued that, regardless of whether Bitcoin itself ultimately survives, it has established a model which will no doubt shape future transactions.

The information is from checkpoint news.

 

Taiwan agrees to FATCA with United States

Taiwan’s Financial Supervisory Commission (FSC) and the Ministry of Finance (MoF), jointly announced their intent to pursue an intergovernmental agreement to facilitate the implementation of the Foreign Account Tax Compliance Act (FATCA) – RIA News.

Taiwan has created an interagency task force, including the FSC, the MoF, the Ministry of Justice and the Ministry of Economic Affairs to study compliance options under FATCA. Previous consultations between the U.S. Treasury and Taiwan were focused on reducing compliance costs associated with FATCA. In addition, efforts have been dedicated to assisting local financial institutions to comply with all the domestic legal requirements and to protecting the depositors as well as the investors.

“The Taiwan authorities are supportive of the underlying goals of FATCA, and are interested in exploring a framework for mutual cooperation to facilitate the implementation of FATCA,” the statement said.
“Both sides affirm their willingness to continue their consultations and actively seek to finalize the signing of an agreement.

India budget proposals and foreign investors

Indian Finance Minister presented the annual budget yesterday that contains host of income tax provisions that need attention for an efficient tax planning by a foreign investor. Some of the key provisions are:

• Royalty and technical fee paid to a foreign person is now subject to 25% withholding tax rate instead of 10%. Lower rate maybe available for the investors from treaty countries.
• Introduction of FIRPTA kind of withholding tax – all buyers (including NRIs) of real property in India would be subject to 1% withholding tax (TDS) on the sale price of the real property. If the seeler does not have a Permanent Account Number for tax purposes, the withholding tax would be assessed at 20%
• There was a confusion if tax residency certificate is conclusive evidence to establish residency of foreign country in order to claim treaty benefits; it has been clarified that it may not be sufficient evidence although it will be necessary
• Mortgage interest is now allowed to be dedducted in a limited amount provided certain conditions are met
• Direct Tax Code will be introduced prior to the end of current budget session according to the Finance Minister
• Surcharge on foreign company’s taxable income to increase from 2% to 5% if the taxable income exceeds Rs. 100 million ($2 million)
• Dividend distribution tax surcharge to increase from 5% to 10%; however, 15% rate on dividend received by the Indian company from its foreign subsidiary will continue for one more year

Additional information is available from CPA Global Tax professionals.

IRS changes instructions for Forms 5471 and 8621

Form 5471:

1. IRS now requires a creation of Refrence ID of the foreign corporation and this must be completed for all years ending on or after December 31, 2012.

2. According to AICPA – “ The most notable change and one that the AICPA has recently addressed in a comment letter to the IRS, is the constructive ownership exception which was previously available to Category 3 and 4 filers only. The exception has now been extended to all Category 5 filers where ownership in the foreign corporation is solely through application of constructive ownership principles and the U.S. person through whom the U.S. shareholder constructively owns an interest in the foreign corporation files Form 5471 reporting all required information. “

3. Other changes can be found in “What’s new” section of Form 5471.

Form 8621:

1. In the filer identification section, a line has been added to request the reference ID number of the PFIC or QEF.
2. New Part I, Summary of Annual Information was added to reflect the new annual filing requirement of section 1298(f) which was added by section 521 of the Hiring Incentives to Restore Employment Act of 2010. However, this new Part I is not required until the underlying regulations are published. For now, they have been marked as Reserved For Future Use. Form 8621 will be revised when Part I becomes effective.
3. The elections in Part II of the form have been reordered and the filing requirements for new elections F, G, and H have been modified. Please complete Part II carefully with these changes in mind.
4. See instructions for all changes very carefully.