Recent Developments in International Taxation

Speaker : M r. Pinakin Desai, Chartered Accountant

Date : 15th July, 2015

Venue : Jai Hind College Auditorium, Churchgate

Mr. Pinakin Desai commenced his talk by referring to the India-Mauritius DTAA and the fact that Mauritius has been quite popular among the Foreign Investors investing in India on account of the favourable provisions in the treaty. He mentioned that negotiations on India-Mauritius DTAA are under process and the renegotiated Treaty should be out in a couple of weeks’ time. There has been a lot of speculation around the changes which would be incorporated in the revised DTAA and looking at the same, he pointed out to a few provisions which could be a part of the new treaty. One such provision could be the insertion of LOB clause in the treaty. Other amendments could be on the lines of the India-Singapore DTAA which provides for an expenditure test for demonstrating commercial substance, a provision for insertion of a grandfather clause in regard to investments made prior to 2017. He then invited the attention to a news article which mentioned that under the revised DTAA , short term capital gains would be subject to capital gains tax under Income-tax Act, 1961.

The Speaker then commented upon the cumbersome reporting requirements contained in the amended section 195(6) of the ITA . Section 195(1) contains tax withholding obligations in case of payments made to a non-resident, provided the sum is chargeable to tax under ITA , whereas section 195(6) states that, irrespective of the sum being chargeable to tax, the person responsible for paying to a non-resident should furnish information about the same. The Speaker stressed upon the intention of the Income Tax Department of the amended section 195(6) which was to secure information about every remittance made outside India. The Speaker mentioned that though section 195(6) talks about all payments, whether chargeable to tax or not, provisions contained in Rule 37BB, the relevant rule for section 195(6), continues to talk about furnishing of information only relating to payments which are chargeable to tax under ITA . This has led to an anomalous situation and different views are taken by remitters. He mentioned that till new Rules are notified in this regard, problems would continue. However in his view, Form 15CB need to be obtained only in cases where income was chargeable to tax as mentioned in Rule 37BB and not for all remittances.

Mr. Pinakin Desai then dwelt on the provisions of the new Black Money Act and its far reaching implications. He cited a simple illustration wherein Mr. Kumar, an NRI, who was away for 5 years, comes back to India, and is now a Resident and Ordinarily Resident. While a non-resident, he claims to have acquired significant assets outside India and from FY 2015-16, Kumar will offer income from overseas assets to tax in India. Provisions of the Black Money Act empower an Assessing Officer to bring an undisclosed foreign asset to tax on the basis of FMV valuation in the year in which he receives information as to the ownership of the asset. Now in such a scenario, Mr. Kumar can have serious difficulties, if he has no records or evidence to correlate the source of investment with the items of investment.

The speaker then raised concerns about the impact of the Black Money Act on discretionary trusts set up outside India. In case of non-resident discretionary trusts where either the settlor or the trustees or the beneficiary is a Resident & Ordinarily Resident, provisions of BMA could apply. In case the Settlor is Resident in India, a question could arise as to whether he is under an obligation to make disclosures in his tax returns in relation to assets settled upon the discretionary trust set up outside India.The answer to this is possibly a ‘yes’. However, the Speaker further raised a question that, would the disclosure be required merely in the first year in which the Settlor is settling the property upon the trust or would the disclosure be required on a recurring basis in subsequent years? The Speaker discussed another scenario wherein the trustee of the discretionary trust is a ROR whereas the Settlor and the beneficiaries are non-residents. In this case too, the Speaker was of the view that the Trustee would be under an obligation to make disclosures in the tax returns since he is the holder of the assets on behalf of the beneficiaries. The speaker then referred to a person being ROR in India and is a beneficiary of the discretionary trust set up outside India. Highlighting the definition of the term ‘beneficiary’ as a person deriving benefit during the year, the Speaker commented that the beneficiary may not be required to make disclosure in this regard if he has not derived any benefit from the trust during the year.

The Speaker then drew attention to the disclosure requirements in the tax returns in case of an assessee holding a financial interest in an entity outside India. The Speaker raised a concern as to whether a beneficiary of a discretionary trust set up outside India, could be said to have a financial interest in that trust. In this regard, the Speaker was of the view that a beneficiary of a trust is merely a chance beneficiary depending upon the discretion of the trustees, and his right to the benefits of the trusts are not enforceable, and thus he may not be said to have a financial interest in the trust.

Thereafter, the Speaker commented upon applicability of BMA Act to expatriates in India. Referring to the FA Qs released by CBDT on Clarifications on Tax Compliance for Undisclosed Foreign Income and Assets, he mentioned that the expatriates who have come to India on a Student Visa, Business Visa or an Employment Visa, have been given a concession from reporting requirements in regard to assets situated outside India which do not yield any income, for example, a residential house which is not let out. However, no concession is granted to assets located outside India which yield income which is taxable under the ITA , for example, bank account or any other security yielding interest income. The Speaker raised a concern that if the spouse or the children accompany the expatriate to India, who do not come on a Student Visa or a Business Visa or an Employment Visa, theoretically no concession is available to them.

Thereafter, the Speaker discussed a few case studies relating to indirect transfers of capital assets read in conjunction with Circular 04/2015 issued by CBDT. By referring to the case studies, the Speaker conveyed that declaration of dividend by a foreign company outside India does not have the effect of transfer of any underlying assets located in India. The Circular 04/2015 has clarified that the dividends declared and paid by a foreign company outside India in respect of shares which derive their value substantially from assets situated in India would not be deemed to be income accruing or arising in India by virtue of section 9(1)(i) of ITA . The Speaker also cited an illustration highlighting the intricacies on determining the ‘Specified Date’ on which the value of a share deriving its value from assets located in India is computed.

The Speaker threw light upon deemed international transactions u/s. 92B(2). Referring to an illustration, the Speaker explained the provisions contained in section 92B(2) whereby a transaction between an enterprise with a person other than an associated enterprise would be deemed to be an international transaction if the terms and conditions of such a transaction are settled by the enterprise with its Associated Enterprise, where the enterprise or the associated enterprise or both of them are non-residents, irrespective of whether such other person is a non-resident or not.

The Speaker then shared his views on Corporate Residency in view of the amendment made by the Finance Act 2015. He mentioned that since many years, the test to determine the residential status of a Company in India was quite liberal and hence if some management decisions were taken outside India or if some directors were situated outside India, the Company was classified as a Non Resident. This had facilitated formation of shell companies which were effectively managed from India, however classified as Non Resident. To put an end to such practices, the Income Tax department has introduced the concept of ‘Place of Effective Management’ (POEM) as the test to determine the residential status of a Company. He mentioned that POEM is situated at the place where key commercial and management decisions of the Company are taken. He further mentioned that for a decision to be a key commercial or management, one would really have to look into the substance of the decision, the regularity at which the decisions are taken and the persons who are effectively making the decisions.

The Speaker then threw light on the various consequences which a Company might face if its POEM is in India. This would include taxation of its global income at the higher tax rate of 40% plus surcharge and education cess, obligation to withhold taxes u/s. 195 in respect of chargeable amounts, applicability of transfer pricing provisions, non-applicability of beneficial provisions u/ss. 44BB, 44BBB, 44BBA, since they apply only in case of non-residents, applicability of provisions of Black Money Act, etc.

The Speaker commented that in case of a US Company becoming a resident of India on account of POEM being situated in India, then the benefits under India USA DTAA will be lost, since the tie breaker test in such a situation cannot be invoked under the treaty and further there could be questions as to whether foreign tax credit would be available in respect of the transactions of the Company.

He mentioned that exchange of information is likely to be very active and relevant in the days to come and the BEPS provisions would also be having an impact. Exchange of information, multi-lateral treaty, and awareness on the part of all the foreign governments with regard to curbing of tax avoidance is going to be the order of the day.

The meeting ended with a vote of thanks to the speaker.