India: CBDT publishes a draft notice on special transitional provisions for a foreign company based in India
The Finance Ministry on 15 June 2017, issued a draft notification of transitional provisions for foreign companies in the first year of becoming resident based on their place of effective management.
The notification has clarified that the tax on foreign companies qualifying as resident firms due to their place of effective management (POEM) will be the same as that for any foreign company and will be imposed at a rate of 40%.
The draft notification by the Central Board of Direct Taxes (CBDT) provides exceptions, modifications and adaptations for computation of total income, treatment of unabsorbed depreciation, set off or carry forward of losses, collection, recovery and special provisions for tax avoidance.
The notification, once finalised, will come into effect from April 1, 2017.
The Central Board of Direct Taxes (CBDT) on 7 June 2017, has issued a new, relaxed, safe harbour regime in order to reduce transfer pricing disputes. The move is aimed at providing certainty to taxpayers, aligning safe harbour margins with industry standards and enlarging the scope of safe harbour transactions.
The main features of the new safe harbour regime are:
- It has come into effect from 1st of April, 2017, i.e. A.Y. 2017-18 and shall continue to remain in force for two immediately succeeding years thereafter, i.e. up to A.Y. 2019- 2020. Assesses eligible under the present safe harbour regime up to AY 2017-18 shall also have the right to choose the safe harbour option most beneficial to them.
- The new safe harbour regime is available for transactions limited to Rs. 200 crore in the provision of software development services, provision of information technology-enabled services, provision of knowledge process outsourcing services, provision of contract research and development services wholly or partly relating to software development and provision of contract research and development services wholly or partly relating to generic pharmaceutical drugs.
- In respect of transactions involving the provision of software development services and provision of information technology-enabled services, safe harbour margins have been reduced to peak rate of 18% from 22% in the previous regime.
- In respect of transactions involving the provision of knowledge process outsourcing services, a graded structure of 3 different rates of 24%, 21% and 18% has been provided, based on employee cost to operating cost ratio, replacing the single rate of 25% in the previous regime.
- In respect of transactions involving the provision of contract research and development services wholly or partly relating to software development and provision of contract research and development services wholly or partly relating to generic pharmaceutical drugs, safe harbour margins have been reduced to 24% from 30% and 29% respectively in the previous regime.
- Risk spreads on intra-group loans denominated in foreign currency will be benchmarked to the 6-month London Inter-Bank Offer Rate (LIBOR) as on 30th September of the relevant year and on loans denominated in Indian Rupees to the 1-year SBI MCLR as on 1st April of the relevant year.
- The safe harbour regime is optional to taxpayers.
In addition, on 7 June 2017, the Central Board Of Direct Taxes (CBDT) also published Notification No. 46/2017 which prescribes the revised list of eligible international transactions for transfer pricing safe harbour rules.
The Finance Minister, Arun Jaitley, on 7 June 2017 in Paris on behalf of India, signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting.
About 70 countries at all levels of development have signed this Multilateral Instrument (MLI) at the OECD Centre in the presence of Secretary-General OECD at the same time. A number of jurisdictions have also expressed their intention to sign the MLI as soon as possible and other jurisdictions are also actively working towards participation in the multilateral instrument.
The Central Bank of Direct Taxation (CBDT) said in a press release that this convention will change India’s contracts to curb the loss of income through contract abuse and BEPS strategies by ensuring that profits are taxed when tangible economic activities that generate profits, and where the value is created.
The Supreme Court (SC) in the case of Raj Dadarkar and Associates v. ACIT (Civil Appeal No. 6455-6460 OF 2017), decided that the income from the sub-licensing of the property is taxable as house property income and not business income. Simply because there is an entry in the object clause of the business showing a particular object, would not be the determinative factor to arrive at a conclusion that the income is to be treated as business income.
Based on the facts of the case the Supreme Court recognised that the income earned by the taxpayer is not taxable as business income but would be taxable as income from house property.
India: Reimbursement of costs for training and general insurance not included in fee for technical services
The Mumbai Bench of the Income-tax Appellate Tribunal in the case of: Gemological Institute International Inc v. DCIT (ITA No. 4659/Mum/2014) and (ITA No. 385/Mum/2016) held that, the amounts received by the taxpayer were not taxed as technical service charges as reimbursement of training-related travel expenses, group insurance and other incidental expenses under a technical service contract. Referring to the transfer pricing study and the transfer pricing regulation, the Tribunal noted that there was no component of the profit that was embedded in the cost reimbursement and thus the reimbursements were not taxable.
The Union cabinet on 17 May 2017, approved the signing by India of the Multilateral Instrument (MLI) to implement into bilateral tax treaties the tax treaty-related measures arising from the OECD / G20 BEPS Project to tackle base erosion and profit shifting.
The BEPS recommendations combat tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid. The multilateral instrument will enable countries to adjust their bilateral tax treaties to include BEPS treaty-related recommendations without having to renegotiate each bilateral treaty.
India has recently included a country-by-country (CbC) reporting requirement in section 286 of the Indian Income-tax Act, 1961, with effect from the financial year 2016-2017.
The first round of CbC reports, if applicable, must be submitted to the Indian tax authorities by 30 November 2017. The Instructions of the Central Executive Board of Direct Taxation (CBDT) are pending. Therefore, taxpayers in India can for now look to the CbC reporting guidelines from the Organization for Economic Cooperation and Development (OECD).
In April 2017, the OECD released additional guidance for tax administrations to use in implementing CbC reporting. The guidance addresses issues relating to the definition of items; entities to be reported; filing obligations; and the sharing mechanism for the exchange of CbC reports between countries.