Law Street (The Economic Times, June 29, 2012)

Dear Readers,


Our newspapers continue to report about the menace of black money. Zenobia Aunty wonders why India is hesitant to enter into revenue sharing agreements with Switzerland. After all, if there is tax imposed on Swiss bank accounts, there would be less inclination to hoard money there, plus the disclosure norms that have just kicked in will also act as a deterrent. For her views, read Law Street online, by clicking here or scroll down.

Best regards,
Lubna


Black isn’t beautiful

• Revenue sharing agreements can help in tax recovery
• Tighter disclosure norms will provide transparency
• Special courts must be suitably equipped

When this columnist was a school-kid, Ten-rupee notes were black in colour and she thought these notes were black money. Notes have given way to shiny coins, but black money continues to plague our economy. The MoF has decided not to leave the definition to a child’s imagination and its recent White Paper, defines black money as: ‘Assets or resources that have neither been reported to the public authorities at the time of generation nor disclosed at any point of time during their possession’.

Recent years have witnessed more pro-active measures by the government to tackle the problem, with exchange information being introduced in tax treaties and ‘tax information exchange agreements’ being signed.

A very recent move, introduced by the Finance Act, 2012, has been the disclosure requirements in tax returns. The White Paper also covers this move: ‘Reporting mechanisms for those operating assets and banking accounts abroad is strengthened by making filing of return of income mandatory for every resident (excluding a person who is not ordinarily resident in India) having any assets or banking accounts located outside India even if such person does not have taxable income’. Any false information or withholding of information will result in prosecution.

‘Tut-tut’ says Zenobia Aunty. She thinks that those who stash black money abroad are not deterred. For once, the MoF seems to agree with her. In the White Paper it admits: ‘Sometimes taxpayers may be willing to take a calculated risk of tax evasion and may even justify it as a 'commercial risk', which can be deterred by effective prosecution. The prosecution calls for rigorous imprisonment of up to seven years and a fine. However, the actual state of criminal prosecution in tax matters in India is somewhat dismal. In very few cases, do the tax authorities opt for prosecution and subsequent conviction in tax evasion cases is rare and cannot be found even in high-profile search cases. The absence of a specialized prosecution wing and the cumbersome procedure contribute to this state of affairs’.

The Government is taking measures to remedy this situation. A separate Directorate of Criminal Investigation has been established to deal with tax offences and special courts are to be set up. One hopes that the Directorate and Special Courts will be adequately staffed with the right people; else this plan will just remain on paper. ‘Time is of the essence,’ comments Zenobia Aunty and examines the tax revenue sharing agreements that Switzerland has entered into with UK, Germany and Austria. It has plans to enter into such agreements with several other countries.

While the agreement with UK was entered into last year, it was recently modified. From January 1, 2013, investment income earned by UK residents in Swiss financial institutions will be subject to 48 per cent withholding tax; while dividends at 40 per cent and capital gains at 27 per cent. There will also be a first time one off tax imposed to make up for tax lost in the past years. This will vary between 21 to 41 per cent, depending on the value of the account and period for which it was held. The taxes withheld will flow into the UK treasury. However, an option is provided to the UK residents. Both the future and retrospective withholding tax provisions will not apply to anyone who authorises their Swiss financial institution to disclose their accounts to the UK revenue and declares and pays tax in their UK tax return. This agreement is a win-win situation, as Switzerland gets to keep its prized banking secrecy and UK their share of taxes. The agreements with Germany and Austria are based on almost the same norms.

Our Government is well aware of such agreements, but the White Paper adds: India will have to take a decision first as to whether these will meet its national objective. The main concern is that while India will get its tax revenue, Switzerland under the agreement will not part with the identity of the banking customer. The Indian government has proposed further discussions and debate.

Do we really need another endless bout of discussion? Haven’t countless Bills being stuck up because the Parliament is not functioning as it ought to? Let us sign such agreements, let us continue with the requirement of disclosure in tax returns and let us strengthen the arms of the prosecution department and set up special courts. To begin with, we will get our much needed funds, at the same time domestic disclosure norms coupled with the fact that tax will get withheld on money stashed in Switzerland may prompt many Indian residents to come clean. The option of coming clean should exist as has been done in the UK. We need to make headway. Black is no longer beautiful.


Source of the photograph: Downloaded from Flickr and used as per the terms of the Creative Commons License.

Law Street (The Economic Times:April 27, 2012)

Dear Readers, Newspapers are filled with analysis of how draconian the Finance Bill really is and the fears of investors in India. Zenobia Aunty agrees. For the online version of Law Street in The Economic Times, click here, else please scroll below. Owing to certain circumstances, Zenobia Aunty will be taking a break and is unlikely to publish her monthly column in May. But she will be back, soon after the Finance Bill is enacted with her views. So stay tuned. Best regards, Lubna
A stretch too far

• Knowing the source of income of your shareholder is difficult
• Terms in tax treaties can be defined by Indian tax authorities
• Tax withholding provisions have been widened
Zenobia Aunty is proceeding on a short sabbatical to an undisclosed address. The tedious, convoluted provisions of the Finance Bill are making her head spin. While the retrospective amendments relating to indirect transfer of a capital asset (where one can immediately relate to the long drawn out Vodafone battle) have been much spoken about, this isn’t the only provision that is causing strife to taxpayers.

Certain things have been stretched too far. Let us take a few illustrations.

(i) Stretching the ‘know your shareholder’ rules too far: Not only do closely held companies have to know their shareholder, but they also have to know the source of funds of such shareholder. If the closely held company fails to discharge this additional onus, the sum contributed as share capital will be treated as income of the company (and of course taxed!). This proposed amendment comes into force from April 1, 2013 (It is applicable to the FY 2013-14) onwards. By doing so, the Finance Bill has overturned several court decisions including the one of the Supreme Court (SC) in the case of Stellar Investments Limited. Here, it was held that if the shareholders are not genuine, the amount received as share capital cannot be taxed in the hands of the company.

(ii) Tax to be withheld on import of computer software as the payments will be characterised as royalty: This amendment is effective retrospectively from June 1, 1976. Why this date? Because, as Soli Uncle the tax guru, explained, the provisions relating to Royalty were introduced in this year in the Indian Income-tax Act. “Else perhaps this provision also would have been introduced with retrospective effect from April 1, 1962 when the current draft of Indian Income tax Act, first came into being”, adds Zenobia Aunty, wryly. Several courts had said the right to use software is akin to reading a book, it is the use of a copyrighted article instead of a copyright and cannot be treated as royalty. It may be possible to argue that exporters from treaty countries could take protection under the narrow definition under the tax treaty to argue that it is not royalty and is not subject to tax in India. However, it is likely that the Indian importer may want to withhold tax at source to avoid litigation and avoid any disallowance or penalties in its hand. The end result – the exporter will suffer, as its home country is unlikely to give a tax credit for tax wrongly deducted in India. It is true, that our country is growing and is a major market, but do we want to arm-twist those wanting to do business with us?

(iii): Tax treaty? We define it: Through a notification a term in the tax treaty can be defined (provided the definition is not contained in the tax treaty), this interpretation would date back to the date the tax treaty entered into force. India has entered into tax treaties with as many as 80 countries. One can only wonder about what can be unleashed on residents of such treaty countries, through issue of deadly notifications.

The requirement of obtaining a Tax Residency Certificate (TRC) for claiming tax treaty benefits has been much spoken about. Everyone is rightfully upset. Not all countries issue such a certificate. For instance: Indian tax laws itself do not contain any provision empowering its tax authorities to issue a TRC. Yet, obtaining a TRC containing the prescribed details, by a person doing business with India, is now mandatory. Further the TRC, even if obtained, will not act as sufficient proof and inquiries can be made to determine tax residency of the other country. The SC in the case of Azadi Bachao had upheld circular 786, issued by The Central Board of Direct Taxes (CBDT) which provided that: Obtaining a Mauritius tax residency certificate was sufficient proof to avail the benefits under the India-Mauritius tax treaty. The only saving grace is that this non-practical provision is not retrospective.

There are yet other provisions that require a class of persons or cases (to be notified by the CBDT) to apply to the tax officer to determine the proportion of sum chargeable to tax in India. It was a set rule that there is no obligation to deduct tax at source when making payment to a non-resident if such sum is not chargeable to tax in India. It sure looks like anything and everything will be chargeable to tax in India.

Both Zenobia Aunty and her niece, this columnist, are seriously considering a change of career, to a less taxing one. We are seriously contemplating learning how to cultivate mushrooms, herbs and strawberries. After all agricultural income will never be taxed in India.







Source of the photograph: http://www.flickr.com/photos/64818595@N02/5902541250/ (Creative Commons License)

Law Street (The Economic Times: March 30, 2012)

Dear Readers,

The Finance Bill, which contains tax proposals was tabled in India in the lower house of the Parliament on March 16. We all knew that the Direct Tax Code - DTC (which would provide a new tax code) would not be introduced in this budgetary session owing to delays by the Parliamentary Standing Committee in giving their comments on the DTC. Yet, everyone was waiting and watching whether certain provisions, especially those that would enable more tax revenue to be garnered would be introduced. This is precisely what happened. Among several other amendments, General Anti Avoidance Rules were introduced.

As the Parliamentary Standing Committee in its report on the Direct Tax Code had called for caution when introducing GAAR, stakeholders were breathing easy. However, none of their suggestions have been taken into consideration.

As the provisions of the Finance Bill stands today, the onus of proof continues to be on the tax payer, the provisions continue to be wide-sweeping, and the orders of the Commissioner invoking the GAAR provisions continue to be subject to the approval of a panel of tax commissioners and above. One hopes rationality will prevail and the provisions that are enacted will be fair and just.

You can read Zenobia Aunty sharing her woes in today's edition of The Economic Times. If the link doesn't work, scroll down below.

Have a nice weekend.
Lubna


Aaargh: GAAR is here
• The recommendations of the Parliamentary Standing Committee (PSC) have been ignored
• Current wording may cover genuine transactions
• It isn’t a fair mechanism as the advisory panel is not independent

After reading the Finance Bill (Bill) and the Explanatory Memorandum, Zenobia Aunty picked out this quote from Hamlet: “O woe is me, to have seen what I have seen, see what I see.”

The Bill is riddled with several retrospective amendments, it has sought to overturn several court decisions, including those of the Supreme Court, it has turned the Dispute Resolution Mechanism available for transfer pricing cases into another farce with the tax department being allowed to file an appeal against its orders and above all without paying any heed to the comments of the Parliamentary Standing Committee or the voice of various stakeholders, it has introduced a wide sweeping GAAR.

Soli Uncle, the famous personality in tax-land, speaking to an assembled group CAs at an event organised by the BCAS, agreed that “the most obnoxious part of the Direct Tax Code (DTC) has been implemented.”
Let us look at one clause of the GAAR provisions. It states: It shall be ‘presumed’ that obtaining of tax benefit is the main purpose of an arrangement unless otherwise proved by the tax payer.

Four alternative additional tests have been laid down to determine whether or not a transaction could be covered by the GAAR provisions. These are: (i) the arrangement creates rights and obligations which are not normally created between parties dealing at arm’s length; (ii) it results in misuse or abuse of provisions of tax law (iii) it lacks commercial substance or is ‘deemed’ to lack commercial substance (which is further defined), or (iv) it is carried out in a manner which is normally not employed for bona-fide purpose.

As per the Bill, even if one part of the arrangement is found to obtain a tax benefit then the entire arrangement will be declared as impermissible. GAAR also has an over-riding effect over tax treaties.

Soli Uncle narrated many illustrations to elucidate the absurdity of these provisions. Let’s take two. An entrepreneur sets up an undertaking in a backward area to claim tax benefit. The provisions, as they exist, give the right to the tax authorities to disallow the tax benefit saying there was no commercial substance, as the sole purpose of such a location was to claim a tax benefit.

Take another example: A person makes a capital gain and makes investments in bonds eligible under section 54EC, owing to which he does not pay capital gains tax. The tax authority can argue that the main purpose of investment in such bonds (which incidentally have a lower rate of interest) as opposed to investments in more lucrative securities which did not carry a tax benefit was devoid of commercial substance. Enter GAAR!
Tax authorities have been given the widest powers imaginable. They can disregard or combine steps or parties in the transaction; they can reallocate expenses and income between parties; they can relocate place of residence of a party or location of a transaction or situs of an asset to a place other than provided in the transaction; they can re-characterize equity into debt, capital into revenue etc; they can even look through the arrangement by disregarding any corporate structure. Thus Mr. A of Country A, can be told that he is now Mr. B and that he is a resident of Country C. Anything is possible by a wave of the GAAR sword.

On another note, the Bill makes it vital to obtain a tax residency certificate, in the form prescribed by India, to obtain tax benefits falling under a particular treaty (say between Country A and India). Now why will tax authorities of another country, issue such a certificate in a format prescribed by India?

There is an additional twist. Even if such certificate is obtained, it will not be a ‘sufficient’ condition for claiming treaty benefits. Why then call for such certificate?
In its report, the Parliamentary Standing Committee (PSC) examining the DTC recognised the gravity of a wide sweeping GAAR and had said it must not impact bona-fide transactions entered into for genuine reasons. Further, it stated the onus of proving tax avoidance should rest with the tax department and not with the tax payer. It had also called for an independent body (rather than a panel set up from within the tax department) for approving the order of the Commissioner invoking the GAAR provisions. This would be fair and just to the tax payers.

The Explanatory Memorandum to the Bill agrees that the wide discretion and authority to the tax administration which at times is prone to be misused, is the foundation for criticism of GAAR provisions worldwide. Yet it does nothing about it!
As the Bill stands today, the onus of proof continues to be on the tax payer, the provisions continue to be wide-sweeping, and the orders of the Commissioner invoking the GAAR provisions continue to be subject to the approval of a panel of tax commissioners and above.

Thus, is it fair for the tax payer to presume that revenue collection is the main purpose of such wide sweeping powers to the tax department? One hopes that rationality will prevail.

Source of the photograph: https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjchceK1q-gwMhvGxLD1ymSjy-Ero9tYeXwhcFWN7BrP9dr9tXOdWEbKUU1OmOKh5d2RAYa4cj9-EUzauWf9KINL9t1TIyMQH8-MxS2MsAbQuqgZQOq9vjUzcU_ZujD02e41qbDFQ/s320/Puzzled.jpg

Law Street in The Economic Times (Feb 24, 2012)

Dear Readers,

Just when we had thought that the Supreme Court's verdict in Vodafone's case had brought about clarity on India's right to tax in instances of indirect transfer, a review petion filed by the tax authorities has once again created an element of uncertainity.
The Economic Times has reported a few days ago: The Income-Tax Department has filed a review petition in the Supreme Court asking it to reconsider its verdict dismissing the government's $2.2-billion tax claim on telecom company Vodafone, but the UK-based group appeared unfazed.The department has sought the review on the grounds the judgement suffered from errors, failed to consider its submissions, and that certain provisions in the income-tax law had not been correctly interpreted.
Meanwhile in the February column of Law Street, Zenobia Aunty looks ahead at the provisions contained in the draft Direct Tax Code and wonders whether the government will cherry pick some of the provisions, especially those relating tax in India on indirect transfer of shares and introduce them in the Finance Bill in the coming month. The column is available online here, and as always it is also cut and pasted below.
Best regards,
Lubna


Taxing indirect transfers

Tax provisions on indirect transfers must be clear
Exemptions must be granted for intra group transfers
Valuation comparisons should be date specific

Lately Zenobia Aunty has been very busy. Seminars, lunches and dinners, to discuss the landmark Vodafone judgement are still going strong. Understandably tax practitioners are jubilant with the Supreme Court’s verdict. As we wait for the Finance Bill, 2012, to be unfolded the question uppermost in everyone’s mind is whether this joy of the tax practitioners will be short-lived.

It is well known that in 2009, China introduced a legislation to tax an indirect transfer of a capital asset situated in China. It is believed that the Chinese authorities borrowed a leaf from the Indian tax authorities’ action in Vodafone’s case. Circular Number 698 requires non-resident transferors to report their share transfer transactions, together with the relevant supporting documentation, including share transfer agreements, after they indirectly transfer their equity interests in Chinese resident companies, via disposal of intermediate holding company. This is required to be done if the resultant tax on the transaction through the use of the intermediate holding company is less than 12.5 per cent.
Chinese tax authorities then examine the transaction. If it is found that the intermediate holding company has no business substance and was set up only for tax avoidance, the transaction is regarded as transfer of shares of the Chinese resident company (and not that of the intermediate company) and is subject to tax in China. Since issue of this circular, in a number of cases, the Chinese tax authorities have ‘looked-through’ the intermediary companies and taxed the transaction in China.

From a technical legal perspective, the provisions of Circular 698 or even Chinese General Anti Avoidance Provisions (GAAR) apply only to corporate tax payers and are governed by the framework of corporate tax laws. However, in recent months, a case has been reported on the collection of individual income tax of close to USD 2.1 mn on the capital gain arising from an indirect transfer of an equity interest in a Chinese company through an offshore transfer of its Hong Kong parent by a Hong Kong resident individual. The fear among the business community is that this case could be used as a guiding principle when dealing with non-resident individuals and not just corporate tax payers.

At one point of time, when grey clouds shrouded the tax frontier in India, global tax payers had felt that at least the Chinese tax laws provided some clarity on tax incidence as regards indirect transfer of capital assets. But with the wide interpretation now given to this circular by the Chinese tax authorities, which has roped in even individual tax payers, there is understandably a sense of apprehension.

Coming back to perhaps what the future holds in India. Section 5 (1) (d) of the Direct Tax Code (DTC) seeks to bring within the tax ambit direct or indirect transfer of a capital asset situated in India. Section 5(4) (g) adds that: The capital gains would not be deemed to arise in India from such transactions unless at any time in twelve months preceding the transfer, the fair market value of the assets in India, owned, directly or indirectly, by the company, represent at least fifty per cent of the fair market value of all assets owned by the company.
The intent of introducing the above provision seems to be to cover cases where ‘controlling interest’ in an Indian company is sought to be transferred outside India, by transferring shares of the foreign company which holds shares in the Indian company. Considering the unintended consequences that could arise owing to ambiguity in the language, the coverage of indirect transfer may be restricted to cases where: (i)The foreign company whose shares are transferred owns, directly or indirectly, more than 50% of the share capital of an Indian company and (ii) The shareholder transferring the shares of the foreign company, should own more than 50% of the share capital of the foreign company.

Further the window period of twelve months referred to in valuation could lead to practical difficulties. For the purpose of comparison of the values, the comparison should be should be restricted to the balance sheet date immediately preceding the date of transfer. A merger of two foreign companies should also not result in tax implications in the hands of the shareholder on account of indirect transfer of capital asset. Additionally, an exemption should be granted for intra-group transfers. Indian tax laws do provide for tax incidence in the hands of the representative assessee. From a practical perspective, a representative assessee must be one who has possessed the non-residents money in the course of the transaction.

Be it China or India, tax authorities are keen to gain a bigger slice of the tax pie, but ambiguity hurts. Investor confidence is now riding high as far as India is concerned, appropriate amendments in the DTC will be of an added help.


Source of the photograph

Law Street in The Economic Times (January 2012)

Dear Readers,

As the press had a rare holiday on India's Republic Day, viz January 26, we did not get a printed copy of the newspaper the next day. However, my column was duly uploaded on the website.

It is likely that the Companies Bill, when reintroduced, will continue with its proposition to make CSR disclosures mandatory. That said, shouldn't the tax laws be in synch so as to propel the corporate sector towards CSR activities? Perhaps a weighted deduction for CSR activities would be a blessing. It would also reduce the litigation on whether a CSR expense is a business expenditure or a CSR expenditure. Click here to read the online edition of The Economic Times, or scroll below.


Tax Karma

CSR activities may be mandatory
Appropriate tax deductions should be introduced
The Finance Bill and Cos Bill must be in synch

Zenobia Aunty firmly believes in Karma, little wonder then, that Spot is forced to share his biscuit treats with the alley cat. In an ideal world, if a Company contributed towards the society, it would be amply rewarded by its various stakeholders in myriad ways. However, without expecting anything in return, many companies do contribute by building townships, providing funds or assets for schools, hospitals and the like. Yet, there are others who firmly believe that this is not their role and the taxes paid by them should cover take care of their social obligations.

Perhaps, it is only a matter of time before contribution towards Corporate Social Responsibility (CSR) will be mandatory. The Companies Bill, 2011, at the insistence of the opposition was withdrawn from the Parliament in the winter session, but it is likely to be reintroduced in the budget session in March. This Bill called upon corporate entities meeting certain parameters to engage CSR activities. In the budget session, the Finance Bill, 2012 will also be tabled and perhaps also the Direct Tax Code. Thus, here is an opportunity for our draftsmen to ensure that the tax laws cover the treatment of CSR expenditure.

The Companies Bill had prescribed that every Company having a net worth of Rs 500 crore or more; or a turnover of Rs one thousand crore or more; or a net profit of Rs 5 crore or more; during any financial year shall set up a CSR Committee, which would guide and monitor the company’s CSR agenda and expenditure. Companies meeting this criterion were required to spend at least 2 % of their average net profits made during the three previous financial years towards CSR activities. Proper disclosure of the CSR policy including reasons for not meeting the required expenditure was called for.

Schedule VII prescribed the various activities that would fit into the CSR policy agenda. Besides contribution to the PM’s National Relief Fund and certain other funds of the Central and State governments, the CSR activities covered those relating to eradicating hunger, promoting education or health, ensuring environmental sustainability and everything that could fall in the definition of social business projects.

Let us assume that the Companies Bill, containing mandatory CSR spend in some form or the other gets passed in the budget session. To ensure that the corporate sector gets its due recognition for such activities the Finance Bill should also contain suitable provisions providing for tax deductions for CSR activities.

At present tax exemption for cash donations can be broken up into various categories: donations which entitle the donor to a 100 % or 50 % tax exemption without any qualifying limit such as the PM’s National Relief Fund and PM’s Drought Relief Fund respectively; and donations which are subject to 100 % or 50 % deduction subject to a cap of 10 % of the adjusted gross total income. In such cases, even if you make a donation larger than 10 % of the adjusted gross total income the total donation amount eligible for a tax deduction would be capped at this 10 %limit.

The Companies Bill, by defining CSR activities has widened the field. Currently, it may be possible for a Company to treat a particular CSR related activity as a bondfide business deduction, say installation of solar panels in its office premise (which helps environment sustainability) against which it claims a tax depreciation. But, claiming expenses for a medical camp in a nearby rural district as a business deduction may result in litigation.

To avoid any further litigation on the issue, any expenditure that qualifies as a CSR expenditure, whether it be capital or revenue in nature, should be entitled to a separate tax treatment. A deduction, for tax purposes of 120-150 per cent of the CSR expenditure should be permitted with a prescribed cap. As, the Companies Bill calls for a minimum spend of 2% of the average net profits during the previous three years, perhaps a cap of 5% of this amount should be set for the purpose of claiming a tax deduction. Any excess expenditure beyond 5% should not be permitted, as this would ensure that scrupulous companies do not overspend under the CSR banner just for the sake of a tax claim.

Several companies have set up their own trusts or foundations for CSR activities. Perhaps companies may need to move these activities within the corporate fold so as to take the tax benefit. However, it would be best for the tax laws to provide that a contribution to the trust or foundation is also regarded as a CSR expenditure, provided the trust or foundation has spent that money fully during a financial year.

While internal CSR committees would bear the responsibility of ensuring that the prescribed funds are used for genuine CSR activities, appropriate tax policies would ensure clarity and also prompt India Inc to fully support this initiative.

Source of the photograph

Law Street in The Economic Times (December 2011)

Dear Readers,

As this year draws to a close Zenobia Aunty wonders which way India is headed. The true worth of a democracy lies in a strong government and a strong opposition. But clearly both the sides in India are playing foul. Zenobia Aunty feels that the opposition parties clearly did not let the government function, this winter session or for that matter during the earlier monsoon session. Just as the ruling party should know how to lead, the opposition parties should know how to oppose in a responsible manner.

Thus, the Companies Bill was tabled and hastily withdrawn, the Lok Pal Bill was passed in the Lok Sabha (lower house) but could not meet muster in the Rajya Sabha (the Upper house), the standing committee led by the opposition is still sitting on the Direct Tax Code, so it could not be presented during the winter session and will not be in place for us to usher in a new Tax Code in the coming fiscal April, 1. The petty politics is just sickening.

As they say, each dark cloud has a silver lining. The Companies Bill, 2011, had called for rotation of auditors. Since it now stands withdrawn, perhaps this issue can be revisited.

For the online edition of this column in The Economic Times, click here.

The column is also pasted below.

Zenobia Aunty and I wish all our readers a joyous 2012.

Warm regards,
Lubna




Playing musical chairs

• Audit rotation could be a short sighted approach

• Joint audit mechanism may ensure better quality checks

• A pragmatic well thought out view must be taken


The Companies Bill, 2011, which was tabled in the Lok Sabha and withdrawn almost immediately owing to opposition pressure, prescribed for audit rotation. Zenobia Aunty wonders whether this measure would have achieved the intended objective of greater audit independence and better shareholder protection. Hopefully, before a revised Bill is tabled in the next calendar year this issue will be revisited.

For listed companies, this Bill prescribed that an individual cannot be an auditor for more than one term of five consecutive years and it also proposed a change in the audit firm every ten years. While the above prescription was mandatory, in addition the Bill gave the leeway to companies to rotate the audit partner and audit team each year or appoint joint auditors.

The European Union (EU) has also issued a proposal for discussion calling for mandatory rotation of audit firms of listed companies and those in the financial sector, after six years with a cooling off period of four years before the audit firm can be reappointed. Joint audits, where two or more auditors or audit firms conduct the audit are not proposed to be mandatory but are implicitly encouraged by extending the period of mandatory rotation from six to nine years.

In the United States, the Public Company Accounting Oversight Board (PCAOB) has sought public comments on ways that auditor independence, objectivity and professional skepticism could be enhanced; it has not concentrated on auditor’s rotation as the only or best solution.

Zenobia Aunty decided to don a journalist’s cap and interviewed a few prominent CFOs. The tenure prescribed for an audit firm was logical and doable, rotation of auditors could bring in fresh perspectives, yet this had its own evils and was not the best measure, is the overall view.

“Rotation will only result in one-upmanship with the new audit firm wanting to prove its worth vis-à-vis the previous firm, audits will remain open and audit committee meetings will cease to be productive,” predicted one CFO. Another chimed in: “When auditors change, a Company will have to battle with differences in interpretations, disclosure requirements etc. Rotations will result in either pushing up the cost of audit higher or quality of audit lower.”

PCAOB has queried: Does payment of fees by the audit client create systematic distortion which can be dramatically reduced by audit rotation? One CFO bites the bullet: “If we really want auditor independence the fees would need to be fixed by a formula based on various parameters as opposed to being fixed by the company.”

But this could be difficult, as the audit complexities vary widely from company to company. “Thus perhaps, if independent directors and consequently the audit committee were to appoint the auditors and fix their remuneration there would be greater independence,” he adds.

Joint audits found strong favour, thus perhaps before the next Companies Bill is tabled this concept should be examined in-depth. It was felt this mechanism would also resolve the constraints, weakness and loopholes contained in the mechanism of mandatory rotation, such as increased audit costs, lack of historical knowledge of the audit client, consolidation issues for global companies, and lack of specialization at the audit firm level.

Large listed companies which have met the threshold limit (based on turnover or assets) should be mandated to have joint auditors. The audit work scope and areas should be equally divided each year and mandatorily swapped after each year, such that no single audit firm audits the same area in consecutive years. Although the audit firms need not necessarily be rotated at regular intervals, perhaps the audit partner and senior audit team members of each joint audit firm could be changed every five years. The auditors opinion would be a joint opinion of the two or more firms, thus both responsibility and liability would be joint.

“Joint auditors will, most essentially, ensure that there is an in-built quality check on the work of the audit firms. This is because each audit firm will be required to satisfy itself as to the extent and adequacy of the audit work performed by the other before issuing the joint audit opinion. A natural quality control system far better than the regulatory bodies conducting third part external checks on the quality of audit work across an audit firm, would thus exist,” concluded a CFO.

All said and done, the bottom line is that an auditor is a watch-dog and not a bloodhound. Zenobia Aunty has no straight answer on the effectiveness of audit rotation. But adds: Since time is available, in addition to India Inc’s views perhaps even the views gathered at the EU level and by the PCAOB will provide more insight into this issue.

Source of the photograph.

Law Street in The Economic Times (November 2011)

Dear Readers,
Technology! What would life be without a fast internet connection. Sadly, even as technology moves forward rapidly, the tax-men are left grappling with how to deal with new emerging issues. Take the issue of withholding tax on import of software, it hasn't been resolved till date. Now comes cloud computing. It is a mystery how this will be dealt with.
For the first time ever, The Economic Times, cut the few last sentences to fit the copy (owing to a change in format), hence perhaps you may want to scroll below for the entire column, instead of reading the online version.
Have a nice weekend.
Best,
Lubna


The grey tax clouds

• Tax laws must rapidly evolve to meet technology advancements
• Tax on software continues to be litigative
• Tax on cloud computing needs an answer

Will tax be able to keep pace with changing technology issues? Going by recent trends, at least in India, Zenobia Aunty thinks the pace of keeping up is sluggish, much slow than the slowest internet connection.

A recent news item took her by surprise. The Karnataka High Court has recently held that import of computer software would result in transfer of a copyright and the payment made to the foreign supplier would be in the nature of a royalty payment. Thus, the Indian buyer would have to withhold tax on the same, both as per the Indian Income tax Act and the relevant tax treaty.

Transfer of a copyrighted article, such as shrink wrapped software ought not to result in a royalty payment. It is similar to buying a book off the shelf. However, Zenobia Aunty is given to understand that the High Court in the given case, observed that the right to make a copy of the imported software and use it for internal business, store it in the hard disk of the designated computers and take a back up would amount to copyright under the Indian CopyRight Act. It was actual transfer of part of a copyright, rather than an outright sale of a copyrighted product. Hence, the need to classify it as royalty, which both you and I know suffers a withholding tax in India.

In the past there have been several rulings of tax tribunals and Authority of Advance Rulings which have appreciated that a distinction needs to be made between a copyright right and a copyrighted article for the purpose of characterization of computer software transactions. In case, the transaction is held to be a sale of a copyright right, then unless and until the foreign supplier has a permanent establishment in India, India cannot tax the payment as it constitutes a business income of the foreign supplier and is not a royalty payment.

The issue of withholding tax on import of computer software is a hot bed of litigation globally. Tax experts state that a few countries, such as Singapore, US, UK have taken a clear stand and do not advocate imposition of withholding tax at source, either owing to the existence of clear cut guidelines or practice adopted by the tax authorities and the judiciary. On the other hand, countries such as China and India seem to have adopted an ambiguous stand with divergent views.

Ambiguity doesn’t help. Now we need to wait till the Supreme Court addresses the issue. Perhaps clarity in the Direct Tax Code would help. A final decisive answer is needed. While a foreign tax credit can be availed of in the home country (foreign supplier’s country) if tax has been legitimately with-held at source in the other country, it can be cumbersome to get a foreign tax credit if tax has been presumed to be wrongly withheld. No wonder then that this issue continues to be in the forefront of tax litigation in India.

Zenobia Aunty saves some of her data in cyberspace on the cloud. Thus, she has begun to have nightmares of the possible tax consequences that will arise if payment is made for such cloud services. Cloud computing is having access to software and/or infrastructure facilities in cyber space. Users do not have to spend on upgrading software or hardware. It is cheap and many a self employed professional and SMEs or even banks are opting for cloud usage. Many high profile technology companies are providing cloud services.

Based largely on ownership of data and access, clouds can be private, public or hybrid. Further, based on what is provided to the cloud user, cloud models are classified as software as a service (SaaS), platform as a service (PaaS) or Infrastructure as a service (IaaS).

With the ambiguity that exists even in the realm of import of shrink-wrapped software, Zenobia Aunty shudders to think of the magnitude of tax litigation that may crop up in instances where cross border cloud services are used.

Going by the recent Karnataka High Court decision, would the tax authorities view that what was used under the cloud computing service agreement was a part of the software (copyright), which was hosted on the vendor’s cloud server and thus it was royalty subject to withholding in India? Or would they interpret that the payment was for use of scientific equipment - applications hosted in the cloud and thus were in the nature of Fees for Technical service (FTS)? Both payments towards royalty or fees for technical service would typically be subject to a tax withholding in India.
Further, in some treaties entered into by India, such as those with US, a ‘narrow approach’ with respect to taxation of FTS is followed and only if the technical service ‘makes available’ technical know-how, skill etc to the recipient of the services (in our case, the Indian user of the cloud service) is it regarded as FTS subject to withholding at source. However, interpretation of this term – make available - is not free from litigation either.

While technology may be making our lives easier, the ambiguities in tax laws do cast a grey cloud overhead.

Source of the photograph

Law Street in The Economic Times October 2011)

Dear Readers,

Diwali greetings. Journalists partake only a few public holidays, yesterday being a Diwali was a holiday and there is no paper today. But the online edition rolls on and this column appeared in the online edition of The Economic Times.
There is one thing I hate about Diwali the noise and the pollution cause by a massive display of fireworks. Spot hates it too and hides beneath the bed, and comes out on occasions to bark his head off, and adds to the noise. Noises aren't healthy not even in tax land or in the process of policy formulation.
There needs to be clarity on what exactly the governments want to do, more so, in a cash strapped economy. Click here to read more, or as usual scroll down.
Hope the coming year will be a good one for you.
Best regards,
Lubna



A cacophony of noises
• A higher tax rate across the board for the top slab would harm
• Distinction could be made between passive and non passive income
• PF issues for international workers must be sorted

Spot hates Diwali because of the noisy fireworks. Noises are disturbing. Thus, when PC (our former FM), mentioned that the rich must be prepared to pay higher taxes, it sparked off a debate.

In the US, Warren Buffett hastily clarified his statement about the wealthy having to pay more taxes. His clarification, picked up by news reports, states that he is advocating “a higher tax rate on people who make money with money only….. If they earn money by normal jobs, what I say would not hit them at all!” Meanwhile, Prez Obama, introduced the Buffett Rule, which creates a new tax on the wealthy, but as an ordinary tax rate. A huge difference from what Buffett actually meant.

In Germany, France and Italy a few of the richest people have stood up and said: Tax us more, we shall help the troubled economy. Can India just cherry-pick the sentiments prevailing in some of the developed countries?

PC was right in saying that his statement will not go down well. Psychologist Shigehiro Oishi, has recently looked into the relationship between the tax mechanism and the quality of life in 54 countries (Incidentally, even the Oecd has introduced a model for computing the quality of life). Using Gallup numbers from 2007, Oishi discovered a direct co-relation between tax progressiveness and a country’s happiness. Is it then logical to say, the more tax the rich pay, the happier that particular country? No. As Oishi explains, it is what the government actually does with the tax payer’s money which makes a country happy.

Zenobia Aunty understands the merits of a progressive system of taxation and understands the woes of the farmers and the need for tax exemption on agricultural income. However, she cannot comprehend why her salary earning, honest tax-paying family members should have to pay more taxes. At present those earning taxable income of above Rs 8 lakh pay tax at 30 per cent, plus a 3 per cent education cess. Perhaps the government may, at the most, increase the highest tax slab to Rs. 10 lakh. Yet, given the inflation trends a higher tax rate across this slab would be unfair.
The best option is to increase the tax base. But if this is impossible, then perhaps the government could consider carving out yet another slab of the very rich and imposing a surcharge on this slab, after having a healthy debate with such stakeholders. Or as Buffett had suggested, perhaps those who earn money with money should be asked to pay more. Currently, long term capital gains arising on shares/listed units of equity MFs are not subject to any tax at all. The Direct Tax Code (DTC) had proposed to continue this exemption. In fact, for short term capital gains, arising if the holding period is less than twelve months, the DTC had proposed that 50% of the short term capital gains would be allowed as a deduction, which would result in a lower tax impact, depending on the slab rate to which the individual belonged. Currently, short term capital gains are taxed in the individuals hand’s at 15 per cent.

A miniscule Securities Transaction Tax (STC) is levied on sale/ purchase transactions undertaken on recognized stock exchanges and on redemption of equity oriented mutual funds. Newspapers reported the possibility of scrapping of STC to boost the share market. True, imposition of tax on long term capital gains on sale of listed shares could dampen sentiments, but in a worst case scenario if there is a need for increasing tax revenue a distinction between passive and non passive income (such as salary income) is perhaps the best approach.

Mind you, Zenobia Aunty is not advocating these measures; she is merely saying that these steps would perhaps be better than imposing a higher tax rate on everyone across the current highest slab.

We cannot compare India with France, Germany or the Italy, where the majority pays taxes and there is also a well-set social security system. So just because a few Europeans have stood up and said we are willing to pay more, the same approach may be harmful to us.

Coming to the issue of social security, PF issues continue. A recent circular issued by the PF authorities seems to imply that an international worker can withdraw his PF money only after retirement or attaining the age of 58 years.

If an Indian employee goes overseas to work in a country with whom India has signed a social security agreement (such as Belgium, Germany, France, Switzerland, Luxembourg and Denmark), such a worker is designation as an international worker. On obtaining a certificate of coverage, he no longer has to pay social security tax in the other country. The whammy of course, being that he isn’t treated on par with other Indian employees when it comes to withdrawals from his PF account. This is certainly not in the best interest of India’s mobile workforce and needs to be resolved.

Source of the photograph

Law Street in The Economic Times (September 2011)

Dear Readers,
Circulars keep getting issued by various regulatory agencies, some of which just add to the confusion. A case in point is what components of salary should be included for calculating your PF? True, a bigger PF means a better security blanket for the future (provided there are no hurdles in withdrawing it), but for now, it means a lesser take home pay. Read on, by clicking here, to know more.
Meanwhile, try and have a nice day.
Best,
Lubna

PF: Perplexing fundamentals?
• Clarity in accounting for PF contributions is required
• Bonus does not form part of basic pay for computing PF
• Employees prefer a better take home pay and this must be kept in mind

One fine evening, during her recent trip to Bengaluru, Zenobia Aunty caught up with Gopal and his pals. “Provident fund (PF) issues,” are haunting us, Gopal stated after they had settled in a cosy corner of the local watering-hole. The mood among this group at the local pub was subdued. Not only were bonus payouts expected to be low owing to the depressing economy, but there was an underlying fear that a portion of their bonus would have to be taken into account for computing Provident Fund – the net result, a lower take home bonus.

“I was looking at paying off my home loan, with the bonus,” mourned Mohan. Gopal, on the other hand was thinking of a ski-vacation abroad. “Forget your bonus worries,” chipped in Shilpa. “Our monthly take home pay will be reduced as well, worry about that!” she added. The gloom deepened.

Zenobia Aunty, was still puzzled. What had changed in the PF spectrum that had anything to do with a lower take home pay-packet or a reduced bonus take home? After all, the rate of employer and employee contribution towards PF is 12 per cent of basic salary, dearness allowance and retaining allowance (if any). Further the motley trio were not ‘international workers’ – those who had been deputed abroad and had returned, which does lead to some more complexities. More on this in another column.
As mugs of beer continued to be downed, it seemed this trio was able to explain things better. Sometimes, beer does seem to clear the mind. It appeared that the PF officers were examining the records in some organizations to ensure that salary was not restructured in a way to reduce the PF contributions. This was a matter of concern, because who doesn’t want a better take home pay?

It all began with two recent judgements in favour of the PF department, which held certain allowances to be part of basic salary for computing the PF contributions. The judgement given by the Madras High Court included the following allowances to be part of basic salary for PF purposes, viz: conveyance, education, food concession, medical, special holiday, night shift and city compensatory allowances. That of the Madhya Pradesh High Court stated that conveyance/transportation allowance and special allowance fell within the ambit of basic pay.

Soon thereafter, the Employee Provident Fund Office began to issue internal circulars to the Regional PF Offices to follow these favourable rulings. The circulars also directed that the PF authorities have the power to examine and look into the employment contract, as well as the pay structure to determine whether the pay has been split into several headings (allowances) to help avoid PF contributions.
“Oh,oh, the crux of the problem is what constitutes basic wages,” exclaimed Zenobia Aunty, now understanding the magnitude of the problem. Her network is far and wide. A few phone calls to the experts, sorted out some issues.

There was good news for both Mohan and Gopal. Bonus cannot be included for the purpose of computing the PF contributions. Any payment by way of special incentive or work; payment based upon contingencies and uncertainties do not form part of basic salary. This has also been accepted earlier by the Supreme Court.

Both Mohan and Gopal obtained a bonus, which was a reward for hard work, given based on a performance rating. The better your performance rating, higher was the percentage of bonus payout. Further, the bonus payout did not depend on individual performance alone, but also on performance of the department and the team to which they belonged and the profits of their employer organisation.

Shilpa continued to sulk. She finished the entire bowl of chips, something she always did when worried. An extra hour on the treadmill is now called for, she sighed, even as she called for a refill.

Again, Zenobia Aunty, had good news to share, at least for Shilpa. Perhaps a position can be taken by the employer, based on Provisio to Paragraph 26A of the PF Scheme that the statutory limit under the EPF Act is restricted to 12 per cent of the monthly pay capped at Rs. 6,500 per month each, in respect of the employer and employee’s contributions.

Employer organizations, covered by the EPF Act, must ensure that the compensation or salary paid to an employee is true and correct and tallies across all records, be it pay-slips, salary register, books of accounts, TDS certificates etc and splitting up of the gross compensation into various allowances must not be carried out with the sole intent of reducing PF contribution (this would especially apply where the contribution is below the cap limits).

Meanwhile, Zenobia Aunty was also given to understand that a review petition has been filed before the Madhya Pradesh High Court and a writ appeal has been filed in the Madras High Court. Both should come up for hearing shortly and perhaps offer some clarity. Cheers to clarity!

Source of the image used.

Law Street in The Economic Times (August 2011)

Dear Readers,

Bonjour.

It appears that governments world over and trying to adopt ways and means to have corporate entities to cough up some extra dough, whether directly or indirectly. Recently, a bill has been passed in France, which requires corporate entities (well, most of them) to pay a bonus to employees when they declare dividends. This sure is tantamount to interference in business policy. Read on, for this new revolutionary bill!
As always, by clicking here, you can get to the online edition of The Economic Times, else scroll below.
Have a nice weekend.
Merci,

Lubna


Law Street/Lubna Kably (August 26)

Corporate caretaker

•France now requires companies to pay mandatory employee bonus on dividend distribution
•Ideally, governments should not interfere with company’s internal affairs
•This legislation is expected to push up purchasing power and boost the economy

Dilbert is one of Zenobia Aunt’s favourite comic strips. In fact, she reads this comic strip first, before turning over to the front page and of this newspaper.

Not so long ago, Scott Adams, creator of the Dilbert comic strip in his blog has mentioned that tax policy has two purposes. One is to collect money to enable the government machinery to function. The other is to promote public policy. For instance, he cites: mortgage deductions are meant to encourage home ownership. Or as Zenobia Aunty adds, back home, stiff taxes on tobacco are expected to deter tobacco chewing or smoking.
Scott Adams wonders, whether we could have a tax on stupidity and thereby reduce its prevalence over time. One big obstacle to taxing stupidity is identifying it. But he has quite a few suggestions which include a general knowledge test running thousands of questions long. And it would be entirely optional. If you choose to not take the test, you can simply pay a stupidity tax instead. If you take the test, and score 100%, you pay no stupidity taxes at all; else the tax paid would be dependent on your score. Unlimited chances would be available to improve your score.

He is curious on whether tax policy could make a huge difference in the effectiveness of society by directly taxing stupidity. Unfortunately, Scott Adams admits it is an impractical idea and no government would buy it. But perhaps he may, some day, on some island create his own kingdom, design this tax mechanism from scratch and introduce it. Zenobia Aunty would love to be a resident of this island, maybe she could help in preparing the questionnaire and thereby get an exemption from the tax.
Some tax laws can be stupid, to put it mildly. Other legislations are equally insane. Several months ago, there was a hue and cry, in Corporate India, when the government in India had proposed to make Corporate Social Responsibility (CSR) mandatory – in other words companies would have to contribute a certain percentage of their profits towards CSR. The reasons were many. Those opposing it felt that the main duty of corporate sector was to earn returns and dividends were a way of paying back to the shareholders. Since corporate entities paid tax, there was no need to contribute separately towards CSR, it was the government job to work for society’s welfare from the taxes collected. Fortunately for those opposing the move, such CSR contribution is not mandatory.

But, it seem that the French government has also adopted a similar stand, that corporate entities need to pay back!!!. To improve purchasing power of the hoi polloi and put some punch back in the economy, it has not eased the tax burden on individual tax payers but wants the corporate entities to pay a bonus to its employees, if they declare a higher bonus.
Oracle, as this columnist’s boss is often referred to, because of his in-depth insight into ever changing and complex global tax laws, persuaded Zenobia Aunty to cover this topic. Venting her ire, only against the draftsmen in India, was discriminatory, Oracle firmly stated. Zenobia Aunty meekly obeyed his orders, as does this columnist.
Last month, the French Parliament adopted a wide sweeping bill, which requires companies to pay a bonus to all the employees when the dividend per share distributed to the shareholders is higher than the average of the dividends per share distributed in the two previous fiscal years. These provisions apply to all companies having more than 50 employees. Those companies having a lesser number of employees can voluntarily opt for the proposed provisions. These rules apply to dividend distributions authorised as from the beginning of this calendar year and will be valid for a period of three years.

As far as the amount of the bonus to be paid is concerned, an agreement will have to be signed by the Company with employee representatives within three months starting from decision to distribute the dividends made by the ordinary general meeting of the shareholders. The agreement is subject to the modalities applicable to the signing of a profit-sharing agreement.

Failure to start the negotiations results in penalties and prosecution for the Company and its officials. The French Ministry has provided for some minor sops such as exemption a bonus up to EUR 1,200 per employee and per year, from certain social security contributions.

The moot issue is: Can the government really expect the corporate sector to step into its shoes. In the Indian scenario, the government wanted the society to benefit by ensuring that a certain sum was spent on social welfare (it is a different matter altogether that CSR activities were not defined). Now the French government, to boost the sagging economy has decided to burden companies that are earning profits and want to share it with the rightful segment – the shareholders! Market forces would automatically ensure that any company’s pay to its employees is at parity with that of its competitors.

But, as economies continue to stagnate and governments can ill afford to reduce taxes further, perhaps additional burdens, in myriad forms will fall on the corporate sector. Stay tuned…

Source of the photograph

Law Street in The Economic Times (29 July, 2011)

Dear Readers,

I am glad I have this blog. At times, The Economic Times online edition does not feature my column in the opinion section. It is rare, but this does happen on occasions. So it becomes a tad difficult to find the column online. The url which will take you to the column online is here.

Zenobia Aunty and indeed yours truly, often get into trouble for being plain outspoken. But, when it comes to rules, regulations, legislation, et al, while plan English is welcome as it aids proper interpretation, the latter is crucial. As of now, thanks to a recent Advance Ruling, Indian companies are quite perplexed. If they do not withhold tax at source on payments made to its foreign affiliates for employees seconded by them, the penal consequences for the Indian company would be high, including disallowance of this entire expenditure for tax purposes. Not a fine situation to be caught in.

Have a nice weekend.

Best regards,
Lubna

Seconding tax problems

• There needs to be clarity on TDS on employee secondment
• Conflicting judgements have caused confusion
• The CBDT could bring out guidelines in this regard

Loyal readers of Zenobia Aunty’s columns are well aware that her favourite books are Alice in Wonderland and Through the Looking Glass. On umpteen occasions, she has taken these books down from the shelves, in an attempt to draw an analogy with tax laws and better grasp the tax situation on hand.

So just the other day, this columnist, found her Aunt rocking herself back and forth and reciting a paragraph from Alice in Wonderland, as quoted here: ‘When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means what I choose it to mean, neither more nor less.’ ‘The question is,’ said Alice, ‘whether you can make words mean so many different things.’

‘The question is,’ said Humpty Dumpty, ‘which is to be master – that’s all.’

Yes, words are important. Just recently, the US Congress enacted the Plain Writing Act, which will ensure that government documents are better understood. Less jargon, more clear, lucid, simple speak! Back home, the draft Direct Tax Code, 2010, was an attempt to move in a similar direction. But will plain writing help make sense of tax laws, be it in India or US or any other country?

Zenobia Aunty agrees with Alice - words can mean so many different things. Let us take a recent ruling given by the Authority for Advance Rulings (AAR). The AAR held that reimbursement made by an Indian company to its US affiliate company, who had seconded its employees to the Indian company would be treated as ‘Fees for Included Services’ under the India-US tax treaty. Thus, such payment (reimbursement of salary costs) to the US affiliate would be subject to withholding tax in India.

The US affiliate company sent three of its personnel to India, one of whom was the Managing Director of the Indian Company. The role of the other two was to liaise between the Indian company and the US Parent and to supervise and provide directions to the Indian company on its overall business strategies. The Indian company was obliged to reimburse salary expenses of the seconded employees on a monthly basis to its US affiliate. Such payment was required to be made on a ‘net of tax’ basis.

In its application and before the AAR, the Indian company contended that, the Indian company was the ‘economic employer’ of the personnel that had been deputed. In other words, the seconded employees remained the employees of the US affiliate which alone had the right to terminate the services.

In its capacity as economic employer, it had paid taxes under section 192 of the Income tax Act, 1961 (The IT Act) as applicable to salary disbursements and thus there should be no further withholding tax in India when the payment was made to the US affiliate.

In this context, The AAR held that the nature of the two receipts, one in the hands of the US affiliate for rendering services and the other in the hands of the seconded employees by way of salaries, spring from different sources, are of different character and represent different species of Income.

By correlating the two payments, neither the nature nor substance of the transaction would change to give it the character of reimbursement. The name given to transaction does not decide the nature of the transaction. Therefore the amounts reimbursed by the Indian company represent income accruing to the US affiliate. As the services rendered by the seconded employees was managerial in nature, it would be covered under the provisions relating to ‘Fees for Included Services ‘under the India-US tax treaty and subject to withholding tax in India, as per this Article in the tax treaty.

Secondment of personnel to India affiliate companies is quite a common practice adopted by global MNCs. The seconded personnel typically continue to remain on the payroll of the foreign company, even as they continue to work under the control and direction of the Indian company during their tenure in India. While the foreign employer pays the salary, the Indian affiliate reimburses the same to the foreign company.

Tax Tribunals in similar cases have held that there was no tax liability in the hands of the foreign affiliate company that had seconded employees to India, in respect of reimbursement payments made by the Indian company, thus no tax was to be withheld in India. Yet this ruling denotes otherwise. Rulings given by AAR do have a persuasive value in the course of assessment proceedings in similar cases.

Even if simple English is used in tax laws, varying interpretations will continue to perplex tax payers. The moot question now is: To what extent should an Indian tax payer take into considering this ruling? If it does not withhold tax at source on payments made to its foreign affiliates for employees seconded by them, the penal consequences for the Indian company would be high, including disallowance of this entire expenditure for tax purposes. Not a fine situation to be caught in.

Source of the photograph

For Thursday evening (Friday eve) The story of Mushkil Gusha

Dear Readers,

Stories in several cultures, be it India, Iran, Morocco are passed on from generation to generation. Recently, I read the book In Arabian Nights (IN search of Morocco, through its stories and story tellers) by Tahir Shah and came across the story of Mushkil Gusha, the remover of difficulties.

It is said: "When your need is greater than your want,
Mushkil Gusha will appear and remove all difficulties"

I heard this story, when I was a child, from both my paternal and maternal grandmothers. Unfortunately, both my grandfathers expired when my mother and father were toddlers. But, I guess my grannies more than made up for it, by passing on several stories, including the story of Mushkil Gusha and yes, it came replete with an offering of candysugar, roasted gram (chick peas) and dried raisins, which were distributed on Friday eve. Thus, I was delighted to come across the story of Mushkil Gusha again.

This story has a few varied forms, such as change in name of the characters, but the essence is the same. Once you know the story, or rather some of it (as this story is supposed to never really end)you must retell it every Thursday after dusk.

I googled and found two variants of this story.

I am pasting one of the versions here:

THE TALE OF MUSHKIL GUSHA
Retold by Eric Twose

Once upon a time not so long ago, there lived a woodcutter whose name was Ahmed. The old man was a widower and he lived with his daughter, Samira, in a small hut in the forest.

He used to go every day to chop branches from the trees, cut the branches up, gather the sticks together and take them back home. Then, in the afternoon, he'd have a bite to eat and take the sticks to the nearby market town, where he'd sell them for firewood and buy some food for himself and for his daughter.

One evening, they'd just settled down to eat their meal when Samira said: 'Father, I sometimes wish that we could have different kinds of food to eat .'

The old man thought about this and so the following morning he got up much earlier than he usually would and he went deeper into the mountains where there were more trees.

Ahmed worked long and hard sawing wood and bundling it up, and he collected far more than he usually would. And when he'd done, the old man carried the heavy bundle back home on his shoulders and left it round the back of the hut, ready to take to market.

When he tried the door of their little hut, he found it locked and he knocked and knocked, calling 'Samira, Samira, please let me in, for I am tired and hungry and I must have something to eat and have a nap before taking the wood to market.'

But while he'd been away, having forgotten all about their conversation the night before, Samira had got up, made herself some breakfast, tidied the hut and gone out for a walk by the stream.

So the old man thought about this and decided that he might as well go back into the mountains and collect some more wood, so that the next day they'd have a double load of wood to take to market. And he worked for longer than he he usually would, sawing wood and bundling it up.

When he'd done, the old woodcutter carried the heavy bundle back home on his shoulders and left it round the back of the hut, ready to take the double bundle of wood to market first thing the next day.

When he returned, however, he was already much later than he would usually be, and Ahmed again found the door locked, and he knocked and knocked, calling 'Samira, Samira, please let me in, for I am tired and hungry and I must have something to eat and sleep if I am to be up early tomorrow morning for market.'

But while he'd been away, his daughter had returned, made herself something to eat and gone to bed, thinking that her father must have gone to market and arranged to stay the night there.

So, tired and hungry, the old woodcutter went to sleep by the piles of wood round he back of the hut. But he was so tired and hungry that he could not stay asleep.

Then Ahmed thought he heard a voice saying: 'Old man, what are you doing there?'

'I am telling myself my own story,' he replied and went on to tell everything that had happened to him since his daughter had first mentioned wanting different kinds of food to eat.

Then the voice told him to leave his wood. If you want little enough and need enough,' the voice said, 'you shall have delicious food.'

So the old man got up and followed the voice, but eventually as the light faded, he became hopelessly lost. And again, even more tired and hungry by now, he sat down and fell asleep. But he was so tired and hungry that he could not stay asleep.

Then he thought he heard a voice, just like the first, telling him to follow him. The voice told him to stand up, close his eyes and to raise his right leg, as if mounting a stair.

'But I do not se a stair,' he said.

'Nevertheless,' the voice insisted: 'If you wish me to help you, do as I say. Stand up, close your eyes and raise your right leg, as if mounting a stair.'

The old man did as he was told and as soon as he thought of it, he found himself standing up. He lifted his right leg and, sure enough, when he put his foot down, he could feel a step beneath him.

'Keep your eyes closed until I tell you to open them,' the voice commanded.

And not the old woodcutter could feel that the staircase was moving quickly and he could feel himself being lifted up with it.

Finally he reached the top of the staircase and the voice told him that it was alright to open his eyes now.

So the old man opened his eyes and when he did so, he was astonished to find himself in a place that looked like a desert, except that instead of sand, the place seemed to be made out of gleaming stones in all colours: red, green and blue.

'Now, gather up as many of these stones as you can,' the voice told him, and he filled his pockets and his shirt with them until he could carry no more.

'Now, close your eyes once more,' the voice said. 'And don't open them until you are at the bottom of the staircase.'

He did so, and again he felt something like a staircase, moving beneath him. And when he opened his eyes, he saw that he was back home, standing outside his own little hut.

He knocked at the door and Samira came out to greet him, and he told her what had happened to him while he'd been away. But his story seemed so far-fetched to her and she could make little sense of it.

They did not know what to do with the stones - they looke dlike ordinary stones to them - so they placed them in a corner of the room and left them there.

'Nevertheless, you may not know it,' he said, as they ate their meal and shared some dates that evening: 'but we have been helped by Mushkil Gusha. Mushkil Gusha is the remover of all difficulties, and we must always be grateful. Every Thursday evening we must give thanks or give a gift to the needy, in the name of Mushkil Gusha.'

Each day for a week, he collected wood and sold it easily for a god price, so he bought different kinds of food for himself and his daughter to eat.

Then one evening, there was a knock at the door and when he opened it, he found it was his neighbours. 'Our fire has gone out. Please give us some of those wonderful lights which you have in your window.'

'What lights?' the old woodcutter asked.

'Come outside,' said one of his neighbours, 'and see for yourself.'

And, sure enough, when he went outside and looked, Ahmed saw all-manner of wonderful lights streaming out of the window.

He went inside and checked, but found that the light coming from the stones was cold and he could not have kindled a fire from it, so he went outside and said: 'Neighbours, I am sorry, but I have no light to give you.'

He shut the door in the neighbours' faces, and they went away muttering. But they leave our story here.

Then the old man and his daughter Samira covered the stones up with all the scraps of cloth they could find, for fear that someone would come and steal them.

Next morning, when they uncovered the stones they found a heap od sparkling precious gems. And each day they took them to different towns and sold them, and with the money they received they built a fine mansion right opposite the king's palace.

One morning, the king's daughter got up and saw the mansion. 'Who has built it?' she demanded to know. 'How dare they build such a thing so close to the palace?' And she sent her servants to assertain the woodcutter's story as best they were able.

So the princess set out to confront the woodcutter and his daughter, but when the princess and Samira met they soon became fast friends and they used to go and play in the stream which the princess's father had built for her.

Then one day, as the princess was going to swim in the stream, she took off a valuable necklace her father had given her and hung it on the branch of a tree overlooking the stream. And when she came out, she forgot it.

When she got back home, the princess noticed that the necklace was missing and she thought a little and decided that the woodcutter's daughter must have taken it, so she ran to her father the king and told him. He had the woodcutter arrested and thrown into jail, had his land confiscated, and had the daughter sent to an orphanage.

After a time, according to the customs of the country, the old woodcutter was taken from the cells and put in the stocks in the town square with a sign around his neck which read: 'This is what happens to people who steal from kings.' And for a time the townspeople would jeer at him and throw rotten vegetables in his face. But after a time they forgot about him, as is the way of men. Sometimes a passer-by would toss him a little food; sometimes they would not and he would go hungry.

Then one Thursday evening, the old man suddenly realized that it was the eve of Mushkil Gusha, the remover of all difficulties, and that he'd forgotten to commemorate the occasion for so long.

No sooner had the thought entered his mind than a passing merchant tossed him a tiny copper coin.

'Kind sir,' said the woodcutter. 'This coin is of no use to me. But if your generosity would stretch to buying a handful of dates with the money and you would come and share them with me, I would be eternally grateful.'

And so the merchant bought some dates and shared them with the old man and Ahmed told him his whole story right from the time his daughter first asked for different kinds of food to eat, and how he'd been helped by Mushkil Gusha, the remover of all difficulties.

'You must be mad,' the merchant said, but he himself was beset by difficulties and when he returned home he found they had been remarkably removed, which made him think a great deal about Mushkil Gusha. But he leaves our story here.

The very next day, the princess went back to her favourite bathing place and as she bent down to dive in, she thought she saw something glistening in the bottom of the pool. At that moment, she happened to sneeze and as her head went back she noticed her necklace hanging in a branch where she'd left it so long ago, and that what she'd thought was a necklace in the stream was merely a reflection.

So she took the necklace and ran back to the palace to tell her father, the king, and he had the woodcutter released and his daughter brought back from the orphanage.

And they all lived happily ever after.

Another link to the story:
The Magic of Mushil Gusha told by Aaron Shepard

Idries Shah: CARAVAN OF DREAMS, The Octagon Press, London 1968
Source of the photograph: Beauty of Sun Photography

Law Street - Economic Times (June 2011) -CCCTB in the EU

Dear Readers,

We have seen the fall of the Berlin Wall, the emergence of the Euro, now what next? Perhaps we may see the CCCTB or CCTB in the years to come.

Currently, companies operating in the European Union may have one single currency to transact in, but they have to deal with 27 different tax provisions for calculating their taxable profits, and must file returns with the tax authorities in each EU country in which they operate. This is neither cost-effective nor tax-efficient.

Thus, on the drawing board is a proposal that will help them file just one tax return. The single consolidated tax return would be used to establish the tax base of the company, after which all EU countries in which the company is active would be entitled to tax a certain portion of that base, according to a specific formula based on three equally-weighted factors (assets, employees and sales). Each member country can levy its own tax rate against this base.

While Germany and France are fully supporting the CCCTB, other EU countries haven't jumped on this gravy train as yet.

You may read this column online in The Economic Times, by clicking here. Alternatively the article is pasted below. Happy Reading.

Best regards,
Lubna



CCCTB, what on earth?
• EU’s CCCTB move is expected to reduce tax costs

• Even Indian companies with EU operations can opt in

• Not all EU countries are keen to jump on the bandwagon

The sentence reads: CDB. DBSABZB or rather: See the Bee, the Bee is a busy bee. ‘CDB’, is in fact a famous children’s book, first written by William Steign in 1968 and its popularity remains unabated. Thus, when I came across the word, CCCTB, I immediately had this vision of an overeager kid excitedly pointing to a bee in the garden. But what stand for is EU’s: Common Consolidated Corporate Tax Base proposals, which are now up on the drawing board.

Under the proposed mechanism, a company or group of companies would have to comply with just one EU tax system for computing their taxable income, rather than following different rules in each EU country in which they operate and would have to file a single tax return for the whole of their activity in the EU.

The single consolidated tax return would be used to establish the tax base of the company, after which all EU countries in which the company is active would be entitled to tax a certain portion of that base, according to a specific formula based on three equally-weighted factors (assets, employees and sales).

The objective of the proposed approach is to create the possibility for such companies to pool profits and losses among their EU group companies, minimize tax compliance costs and mitigate transfer pricing complexities. Currently, companies operating in the EU may have one single currency to transact in, but they have to deal with 27 different tax provisions for calculating their taxable profits, and must file returns with the tax authorities in each EU country in which they operate. This isn’t cost effective nor tax efficient. Besides reduction in compliance costs, by allowing the consolidation of profits and losses at EU level, the CCCTB would enable the cross border activities of businesses to be fully taken into account and would avoid over taxation.

Information available in cyberspace indicates that the EU Commission views that the CCCTB will save corporate groups across the EU something like Euro 700 million in compliance cost savings each year. In addition, by allowing businesses to offset losses in one EU country against profits elsewhere in the EU for tax purposes (i.e. consolidation), CCCTB could result in additional savings for companies operating in the EU of around Euro 1.3 billion.

In fact, the CCCTB proposals are proposed to include not just the blue-blooded (if one may use this term), but also covers companies established under the laws of a third country, such as India, that have similar legal forms and are subject to corporate taxation in at least one member EU country. Thus, if an Indian company has branches or subsidiaries in the EU member country, it could opt for the CCCTB in relation to its EU business activities.

The point to note is that CCCTB is optional. However, once a group of companies opts to use the CCCTB, the member companies are no longer able to utilize individual member country tax incentives. While Germany and France have supported the CCCTB movement, it has not enjoyed universal support, with current opposition from Ireland, UK, Netherlands, Bulgaria, Sweden, Poland, Malta and Romania.

A UK tax expert tells Zenobia Aunty, that member countries will continue to have the right to decide on their own corporate tax rates, as CCCTB deals with the tax base and not the tax rate. However, a member country could choose to apply a different tax rate for the CCCTB if its own national base was extremely different and it wanted to maintain the same effective tax rate (i.e. the real level of tax paid once the rate, base and various deductibles are taken into account). For example, if the CCCTB base were broader than the national base, the member country may choose to set a lower rate for the CCCTB to maintain the same effective tax rate. Or member countries could align their national bases close enough to the CCCTB in order to avoid having different rates for the two.

However, there is growing competition among countries to attract investments, be a good jurisdiction for housing of corporate headquarters. Take UK’s recent tax developments. It wishes to have a low tax rate among the G20 so as to attract foreign companies.

The competition is stiffening to capture more activity in one’s country by offering various sops such as low tax rates, full territorial taxation and so on. Given this, it remains to be seen how the final picture on the CCCTB will emerge, a common base and no consolidation may be a possibility, or some countries could join in and kick start the movement. For now, all one can say is let us wait and C (see).

Source of the picture

Law Street - Economic Times (May) -Unearthing black money

Dear Readers,

Newspapers are filled with news on how essential it is for the government to unearth black money stashed away in low tax jurisdictions. Social activists are even going on hunger fasts to protest against the perceived failure of the government to tackle the black money menace.

While it appears that Mauritius has agreed to part with some information, perhaps taking a leaf from what the UK government has done in relation to Swiss accounts of UK citizens is needed. In other words, the interest income in relation to such bank accounts will be subject to a withholding tax which will be passed on to the UK treasury coffers. A quick way indeed.
Click here, for the online edition of The Economic Times, to read this column. Else, as always scroll below.
Have a nice weekend.
Best,
Lubna


A bird in hand, is worth two in the bush

• India could follow UK’s example of taxing Swiss bank interest
• This will speeden by the process of bringing back black money
• Tax treaties, till amended are sacrosanct

Zenobia Aunty is one perplexed lady. Things appear to be in a complete flux in tax-land. One stand is taken today and yet another the next day. These days, poor Aunty is scared to read the newspapers or tune in to the news.

Years ago, in the famous case of Azadi Bacho, the Supreme Court has made it quite clear that Mauritius resident will not pay capital gains tax in India, on sale of Indian shares. Further, the India-Mauritius tax treaty does not even have a limitation of benefit clause, as was pointed out by the Apex Court, in this judgement.

Yet a recent news item says, that E Trade (Mauritius) which had already obtained a favourable ruling from the Authority for Advance Rulings (AAR) will have to face some sleepless nights. News reports cite that the Supreme Court has sent a notice to E Trade (Mauritius) seeking its response to the special leave petition filed by the tax department challenging this ruling given by the AAR. She wonders whether tax treaties have any sanctity at all.

While Zenobia Aunty is vehement that tax treaties are sacrosanct and bring about certainty and must be adhered to till amended, she is rooting for the efforts to bring back ‘black money’ into India.

In 2009, the Income tax Act, 1961, was amended to enable the government to enter into agreements with specified ‘non-sovereign jurisdictions’ (tax havens). Since then, India has entered into a number of Exchange of Information Agreements with various tax havens; the first such agreement was with Bermuda.

As regards countries with which India already has a tax treaty, negotiation is on-going in many instances, to bring about amendments to ensure exchange of information, if such a clause does not exist in the tax treaty. For instance, a revised treaty containing an Exchange of Information clause was signed with Switzerland.

These are steps in the right direction and such efforts need to be applauded. But, Zenobia Aunty, being an impatient lady and a cranky one at that (she blames her crankiness to a severe allergic cold), is asking: Where is the moolah?

According to her, perhaps, India needs to take a second look at the step adopted by the United Kingdom (UK). Last October, the UK and Swiss governments signed a joint declaration to work towards taxing UK owned Swiss bank accounts. Recent news reports say, the deal is almost concluded and will be announced shortly.

Swiss banks will now be obliged to tax interest payments made to UK bank account holders. Switzerland will impose a 50% withholding tax (earlier this percentage was believed to range between 20 to 30%) on income from Swiss bank accounts. This would be collected by Swiss banks, forwarded to the Swiss tax authority and then remitted anonymously to UK’s Treasury authorities. While this withholding tax will apply from the start date, it is reported that investors will have to pay a separate one-off levy in recognition of past unpaid taxes. We need to wait and see what the final fine print will be.

As part of the agreement, Swiss banks will require all British clients to supply evidence that their bank accounts comply with the UK’s tax system.
The money collected in withholding taxes will be collectively handed over to the UK Treasury and will not include any details of who has paid them. The deal therefore allows the UK to collect tax on Swiss bank accounts and at the same time allows Switzerland to retain its banking secrecy.

The UK Treasury estimates that British tax residents have 125 billion British Pounds hidden in Swiss banks. The interest earnings are not being declared and therefore not being taxed by the UK tax authorities. This deal with Switzerland will therefore be a lucrative victory for the UK Treasury. It has been estimated that the UK Treasury will earn between 3-6 billion British Pounds over the next few years as a result of this agreement.

Maybe India needs to think along these lines? It is true that under such an agreement, India will never know the names of those who stashed their money overseas. But the end result is that India will get its share of revenue, which it would have never captured or got into its kitty after ages. After all, a bird in hand is worth two in the bush.

India must be perceived as a country that is not against foreign investments or cross border transactions – unfortunately with the mixed signals being thrown out foreign investors are perplexed. Simultaneously, India must also be perceived as a country that is willing to take action to ensure that it gets its due share of money that is illegally stashed in secret bank accounts overseas.

Since this is the summer season and many are on vacation, Zenobia Aunty quotes one of her favourite travel authors. Paul Theroux said: Tourists don’t know where they’ve been, travelers don’t know where they are going. But, the tax administration and judiciary need to know the right path to walk upon, to ensure results that are best for India in the long term.