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 planning more enforcements for NRA athletes, entertainers and foreign government employees

Nonresident alien (NRA) athletes and entertainers performing independent personal services or participating in the U.S. and embassy and consulate employees in the U.S. can expect more enforcement and litigation, an IRS official said May 12.

Speaking at the American Bar Association Tax Section meeting in Washington, Lindsey D. Stellwagen, Special Counsel International, Office of Chief Counsel said that although there had been a lot of publicity on IRS measures to enforce compliance on U.S. persons  with offshore wealth, her agency is also stepping up enforcement of NRAs and resident aliens (e.g. green card holders) that owe U.S. tax. She discussed the IRS programs pertaining to athletes and entertainers and the embassy project.

Foreign athletes and entertainers may pose a challenge to IRS enforcement because they come into the U.S. for a brief period of time, earn a lot of money, then leave. Such persons may be able to evade paying tax on  their U.S.-source income and enforcement may be futile if they money earned has exited the U.S. without the imposition of withholding at source.

Nonresident alien entertainers or athletes performing independent personal services or participating in athletic events in the U.S. are generally subject to a 30 percent withholding on gross income. Stellwagen explained that under the central withholding  agreement (CWA) program, such persons may be subject to reduced withholding provided that certain requirements are satisfied. The agreement is entered into by the NRA athlete or entertainer, a withholding agent and the IRS and is valid for a specific tour  or series of events. Withholding is based upon the budget provided and estimated net profits.

CPA Global Tax & Accounting PLLC can assist athletes and entertainers with the CWA program and work with the IRS to minimize the exposures.

India SC judgement gives $4 billion relief in Vodafone case

In a hitorical judgemnet which was eagerly awaited by many foreign investors, Supreme Court of India ordered the Income tax department to refund $4 billion along with 4% interest to Vodafone. Here is what “The Economic Times” reported about the implications of the judgement in an excellent manner:

“Federal courts of many countries have been relying on Indian cases. The landmark judgement in case of Azadi Bachao Andolan, which reaffirmed the validity of India-Mauritius tax treaty, is a pleasure to read even today. So, what does this judgement mean for each of the stakeholders in the Indian economy?

FOR VODAFONE: This is the end of a long drawn legal battle for Vodafone and its battery of lawyers. The SC has asked the revenue to return the tax collected along with interest of 4% p.a. and vacating the bank guarantee. There must be a feeling of justice delayed but not denied in the Vodafone camp.

FOR OTHER LITIGANTS: Encouraged by the success in the preliminary round of litigation, the revenue has raised tax claim in several other cases where shares of overseas companies have been sold. This judgement is now law of the land. The revenue may not be able to collect tax on transfer of offshore holding companies with similar fact pattern. These companies will be spared of agony and legal costs. However, the SC has left a window open for the revenue to ‘look through’ the structures in case of sham.

FOR FDI INVESTORS: They can heave a sigh of relief. The SC has upheld the separate entity principle and recognised the need for holding structures. By enunciating the ‘look at’ principle this judgement asks that the revenue should look at the entire transaction to ascertain its true legal nature. Further, the onus has been placed on the revenue to identify a scheme and its dominant purpose. So, if an investor exits at the holding company level, it cannot be taxed in India on the basis that the underlying investment is in India. It is time to focus on building value in the business and not lose sleep over taxes.

FOR MAURITIUS INVESTORS: While the treaty was not the issue before the SC, The judgement sets to rest the controversy about Azadi Bachao Andolan case. In the absence of Limitation of Benefit provisions, treaty must be respected and the tax residency certificate can not be ignored unless the treaty is abused for fraudulent purpose of tax evasion.

This means that till the time treaty is amended, the capital gains tax exemption will be available to the Mauritius sellers. A word of caution for those who interpose treaty jurisdiction as an afterthought, just before the exit. In such a case, it might be viewed as a pre-ordained transaction and the revenue may challenge the treaty claim. Need for substance and razor sharp documentation cannot be undermined.

FOR PRIVATE EQUITY INVESTORS: Assurance of treaty benefits will bring in a lot more certainty. The options for exit will increase as now the buyers may be willing to buy offshore holding companies. The pressure from the buyers who were insisting on withholding tax or obtaining a nil withholding certificate will reduce. The big booster will be the reading down of Section 195 which provides for tax withholding on payments made to non-residents.

The judgement says that where the contract is executed outside India and the payment is made outside India by one non-resident to another, withholding tax burden cannot be imposed. While this is the view of Justice Radhakrishnan, in the absence of dissent note from the Chief Justice, this might be the verdict of SC.

FOR M&A ASPIRANTS: This would mean one less hurdle to cross before closing a transaction. Tax has been a deal breaker in several M&A deals. Negotiations around tax indemnities and escrows will reduce. Rule of law and clarity and certainty in tax policy will make India a worthy destination for new investors.

FOR REVENUE: While the verdict might have come as a huge disappointment, the tax administrators and their counsels have become a lot more sharper and agile. They almost had everyone convinced that Indian law was wide enough to bring indirect transfers in the tax net. Now all the focus will be on the upcoming finance bill and how the source rules can be rewritten and taxing jurisdiction can be established.

FOR GOVERNMENT: Certainty in law in dealing with cross border investment issues is critical in attracting foreign investment. In words of Justice Radhakrishnan, this case is an eye opener of where we lack in our regulatory laws and what measures need to be taken without sacrificing national interest.

We may see a renewed attempt to renegotiate the treaties and to bring in general anti avoidance rule or substance over form rule in the current statute.

FOR JUDICIARY: This is a huge leap of faith. The judiciary’s ability to interpret law without being swayed by the stakes involved will help India regain investor confidence.

FOR PROFESSIONALS: The anxiety of foreign investors and aggressive stance of revenue had led many professionals to be circumspect of advising on tax planning. Most chose to err on the side of caution and the level of confidence in expressing an opinion was on a sliding scale. This judgement should be helpful in future once general anti avoidance rule is introduced.”

Withholding for Non Resident Aliens has changed for 2012

Per Publication 15, IRS has revised the amount that must be added to a nonresident alien employee’s wages to compute withholding, effective with wages paid beginning Jan. 1, 2012. The withholding calculations for nonresident alien employees are different than for other employees, because nonresident alien employees are not entitled to the standard deduction that is built into the withholding tables. Notice 2005-76, 2005-2 CB 947, requires employers to add an amount to wages before determining withholding under the wage bracket or percentage methods in order to offset the standard deduction built into the withholding tables. The addback amount varies by pay period (i.e., weekly, biweekly, monthly, etc.). The addback amounts for the 2012 tax year are as follows:

  • Weekly Payroll: $41.35
  • Biweekly Payroll: $82.69
  • Semimonthly Payroll: $89.58
  • Monthly Payroll: $179.17
  • Quarterly Payroll: $537.50
  • Semiannual Payroll: $1,075.00
  • Annual Payroll: $2,150.00
  • Daily or Miscellaneous Payroll: $8.27

Employers should add the above amounts to the wages that the nonresident alien employee earns during the payroll period before computing withholding. Employers must also consider the number of withholding allowances that the nonresident alien employee claimed before computing withholding (generally limited to one allowance). The addback does not apply to wages earned by nonresident alien students from India and business apprentices from India. (RIA)