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.
In the case, the taxpayer (ONGC) was an Indian resident company engaged in the exploration and development of natural oil and gas. ONGC subscribed to an online database maintained by Wood MacKenzie (WM), a U.K. resident company. The subscription, which provided information on the global oil and gas industry, required ONGC to pay a fee to WM in exchange for a license agreement that provided for an exclusive and non-transferable right to access and download information from the site. No right to sublicense was granted to ONGC under the license agreement and the use of the information was limited to what was specified in the agreement. The website was only accessible by select ONGC employees and WM provided two days of training per year to 20 ONGC employees on technical issues related to oil and gas exploration.
The Indian Income tax Appellate Tribunal ruled that the fees paid by ONCG are properly characterized as royalties, for Indian tax purposes, under both Indian domestic law and the India-UK double taxation treaty. It was therefore subject to the applicable withholding tax according to the treaty.
Number of U.S. based companies provide the database subscriptions services to the users in India. They should closely study amd monitor the case as this may have deep implications for them.
Our last blog was a precursor to the latest IR 2011-81 issued yesterday by IRS. It says:
IRS officials today announced they are taking additional steps in their continuing efforts to improve the agency’s international operations.
First, the IRS Advance Pricing Agreement (APA) Program, concerned exclusively with reaching pre-filing agreements with taxpayers on transfer pricing, will shift from the office of IRS Chief Counsel to an office under the Transfer Pricing Director in the Large Business &International division’s international operation. In addition, the IRS Mutual Agreement Program (MAP), concerned primarily with the bilateral resolution of transfer pricing disputes with U.S. treaty partners, will shift to the same office.
The resulting “Advance Pricing and Mutual Agreement program” will be under the direction of a single executive and the IRS will increase staffing available to the two program areas. The combined office will allow the IRS to reduce the time needed to complete advance pricing agreements and to resolve transfer pricing disputes with its treaty partners. The Office of Chief Counsel will remain a vital partner in the analysis and resolution of legal issues.
Second, to facilitate IRS coordination with treaty partners in an increasingly global environment, the IRS will adjust its competent authority and international coordination functions under an Assistant Deputy Commissioner (International) who will:
- coordinate international activities across all IRS operating divisions,
- oversee the IRS Exchange of Information program and IRS participation in the Joint International Tax Shelter Information Centre (JITSIC),
- manage the activities of the IRS Tax Attaches in the agency’s foreign posts of duty,
- coordinate IRS participation at the Organisation for Economic Cooperation and Development (OECD) and other non-governmental organizations,
- support the Department of the Treasury in its negotiations of tax treaties and tax information exchange agreements, and
- pursue competent authority agreements with treaty partners on issues other than transfer pricing.
“Improving how we manage transfer pricing compliance and continuing to develop our capacity to coordinate effectively with our treaty partners is ever more critical to our job,” said IRS Commissioner Doug Shulman. “These latest changes move forward to fulfilling one of my top priorities — meeting the challenge of tax administration in a global economy.”
PWC’s WNTS insight reports:
“Collaboration among revenue authorities around the globe is increasing. In addition to traditional information exchange under tax treaties and agreements, many countries now engage in other collaborative activities, including bilateral advance pricing agreements, Competent Authority agreements, and multilateral tax information exchange programs (e.g., the Joint International Tax Shelter Information Centre (JITSIC)). Countries also have been engaging in simultaneous tax audits, in which two or more countries examine a taxpayer simultaneously, each in its own territory, when there is a common or related interest and a view to exchange the information they obtain.
This collaboration has continued to evolve into more sophisticated methods and strategies. One emerging audit trend is the pursuit of so-called joint audits, in which an individual or business is subject to a coordinated audit using a single audit team comprised of representatives from two or more jurisdictions.
This new approach stands in contrast to the more typical situation in which the same taxpayer is subject to separate audits by two or more countries with respect to the same transaction or items of income or deduction. Joint audits are the next step to even greater cooperation between taxing authorities — a new era of coordinated action.”
Indian tax appeals authority has directed that the taxpayer should provide additional evidence to substantiate residence status based on the place of effective management of a Mauritius-based company to obtain the capital gains tax exemption under the India-Mauritius treaty (SMR Investments Ltd. v. DDIT); mere certificate of residence issued by Mauritius government is not enough to claim the treaty benefits. The ruling departs from the previous view of the government as well as the Supreme Court that the benefits under the Mauritius treaty are available to a Mauritius company if the company is in possession of a certificate of residence issued by the Mauritius government.
Proposed Direct Tax Code recently tabled for discussion in Indian parliament contains the general anti avoidance rules which would override treaty provisions in case of impermissible arrangements. Planning for investment in India via Mauritius? Think again….