Monday, November 10, 2008

Law Street in The Economic Times (November 2008)

Dear Readers,
This column was written and sent much before the mayhem broke out in Bombay. Bombay, being Bombay, tried to get back on its feet pretty quickly, even as the war is still on. Today, I learnt that colleagues tried to go to work, even though they have been advised to stay at home. Perhaps Bombayites for once, need to stem this spirit - which is spoken of in awe after every disaster.
Perhaps for once, they need to just stop work, till there are survelliance cameras installed in the city, till the police work (and an independent police force please) is adequately equipped. Bombay doesn't need politicians which create further divisions on the basis of caste, creed, religion, region. It needs good sound administration.
Please do pray for those Bombayites who lost their lives in this terror which was unleashed upon them. I just spoke to some family friends, and they have lost a family which was dear to them, at Oberoi-Trident shootouts/blasts. Please pray.
Anyway, coming back to tax land, this column got published today. Please click here to read online, or else as always scroll below.
Best regards

Yes we can!
* Tax policies must be in norm with changing times
* Genuine needs of corporate entities should be addressed
* A high-handed approach is to be avoided at all costs
I was amazed with Zenobia Aunty’s enthusiasm. She followed Barak Obama’s each and every move during the run up to voting day. Agreed that guy can speak. Perhaps it was only he, who could collectively have so many Americans and even people across the world join in the chorus of: Yes we can!
Zenobia Aunty may be momentarily swept up in this euphoria, but her niece is sceptical. America is facing the highest level of unemployment to be seen in recent times. No matter, how much we try and brush the issue beneath the carpet, pink slips are more than visible even in India. Any techie, or equity analyst, even those worth their jobs, appear to be uncertain of their tomorrow, especially if they are not working for a ‘desi’ company. Zenobia Aunty’s neice, having realised the value of human life and not just corporate life, was also contemplating a change – some action in the sphere of Corporate Social Responsibility, but with funds drying up, CSR programs across India Inc seem to have taken a beating. Yes, the situation seems to be bleak everywhere, as bleak as the grey skies in Bangalore.
But, is this recession another “Great Depression”? Zenobia Aunty, who has heard many an economist on the telly, says that it isn’t so. The biggest difference is that governments are taking steps to stem the rot. Perhaps, as they say, it is better late than never. During the Great Depression, for instance, the Fed just wringed its hands and let Wall Street Banks collapse. Today, not only have banks been rescued but much more has been done.
Steps have also been taken in the United States to promote liquidity. For instance, the IRS has issued guidance increasing the opportunities for a US corporation to borrow, interest free, money from a controlled foreign subsidiary (CFC) without triggering tax on a deemed dividend in the US. Generally, an obligation owed to a CFC by its US parent is treated as an investment in the US property and thus a deemed dividend which is subject to US tax. Today it appears that a CFC may loan funds to its US parent provided that such loan is repaid within sixty days and the total number of days in a taxable year that the CFC has such loans outstanding is less than 180 days. In such circumstances, there will be no tax incidence in the US on receipt of the loan.
However, like most legislation, it is a unilateral approach and this in itself may hamper its success. For instance, RBI regulations permit an Indian company to lend money to its foreign subsidiaries. Can interest free loan be given to a parent? Second, will such a transaction be a deemed dividend distribution under Indian tax laws? What about transfer pricing provisions? The issues that one can visualise are endless. Well, cross border tax as we all know is not simple. So yes, US companies may perhaps find themselves in a nice pickle. Other countries are bound to have some regulation or the other which could hinder flow of loans to US parent companies.
India is also facing a slowdown. IPOs have been postponed, some indefinitely. Thus, it is not just US companies which are in a pickle. So are Indian companies. There is an added twist to this entire issue.
Hob-knobbing with the who’s who in tax land in Mumbai, Zenobia Aunty was inquiring about the fate of these companies. She knew that expenditure incurred in connection with an IPO (and believe me, these expenses can be heavy) are treated as capital expenditure that can be amortised over a period of time under the provisions of section 35D of the Income-tax Act, 1961, rather than a revenue expenditure that can be written off at one stroke. Now, if the company is not able to raise funds at all, either through an IPO or otherwise, it is likely it will have to face a prolonged litigation to claim the fund raising expenses, as bonafide business expenditure. In this very cocktail party, merchant bankers argued themselves hoarse with the wise men from tax land, but no consensus was reached.
Zenobia Aunty feels that the government should recognise this problem and in genuine cases help resolve it, so that companies do not have to face an endless bout of litigation – just because the market tanked. Unfortunately, this time, Zenobia Aunty is leaving us, not with solutions but just questions. She hopes that these will be appropriately addressed. After all the mantra of today is: Yes we can!
In fact, this columnist’s boss is now eager to delve into the entire scenario of how governments have tackled downturns through appropriate policy changes. It is a question of the survival of the fittest. But then, this is another story to watch out for!

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