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.

Law Street - Economic Times (April 2011) -Overseas investors need certainty in tax laws

Dear Readers,
Zenobia Aunty's neice has shifted to a new office premise, which is at present very dusty and crates of files are being unpacked --- hence she is down with a terrible allergic cold. Please do not mind if she goes on a sneezing spree while typing this. So without much further ado, for now she is just linking the column to the online version of The Economic Times.
Zenobia Aunty has been meeting lots of overseas visitors and this column covers what they are saying: India needs certainty in tax laws to attract serious investments.
Have a great weekend.
PS: She managed to copy and paste the column below.
Best,
Lubna


Ho-Hum, the comfort factor is missing

• Investors require certainty in tax policies and administration
• Introduction of safe harbours would help
• The process of drafting APAs must kick-start without delay

Zenobia Aunty is a staunch advocate of clean governance. Yet, in the backdrop of the stir relating to the Lok Pal Bill, she says: “The change begins with us. Only if each one of us takes a pledge not to participate in corruption – by vowing not to give a bribe, even if it is the easy way out, will we see a change”.

It is true the change begins with us. But legislations, if properly drafted, after a dialogue with all sections of stakeholders, do bring about some certainty. Punitive legislations can also effectively act as a deterrent. Yet legislations without a change in the mind set or fair administration are of no use.

Zenobia Aunty has lately been hob-knobbing with a lot of overseas visitors, who are looking at cross-border trade opportunities or for setting up India operations. Zenobia Aunty takes these visitors through various regulatory changes which have made us a much more investor friendly country. Take for instance, the recent step deleting the FIPB approval requirements for foreign investments, even in those cases where joint ventures and technical collaborations exist in the same field.

Yet, the expressions on the faces of these visitors reflect that they are thinking: “Ho-Hum”, even as they are too polite to voice their opinion vocally. Yes, there is a lot of interest in our country, but at times such interest does not devolve into action. Investment figures are clearly reflecting this. FDI inflows during the ten month period ended January 2011, were INR 77, 902 crore showing a decline of 29% over the previous corresponding figure of INR 109,668 crore.

On digging deeper, Zenobia Aunty finds that uncertainty in tax policies as well as in the administration of such policies is causing a lot of anxiety. While cross border M&A deals have caused a lot of apprehension owing to heavy tax demands on a few buyers, today there is growing uncertainty in other areas as well.
Today, the scope of the transfer pricing officers stands widened. They have the powers of survey to conduct on-spot enquiry and verification. There has been a mention of introduction of ‘safe harbour’ provisions in the Finance Bill, 2011-12, but guidelines are yet to be issued. The dispute resolution mechanism, which was introduced sometime ago, hasn’t been able to alleviate the tax payers’ woes fully.
What is needed is certainty. We still haven’t been able to put in place an advance pricing mechanism (APA), even as it has been given lip service for quite some time. An APA is an arrangement between the tax authorities and a tax payer that determines in advance of intra-group transactions, an appropriate transfer pricing methodology for a fixed period of time. This finds mention in the DTC, but one remains uncertain of whether we will have an APA mechanism in place even on introduction of the DTC.

India is entering into exchange of information pacts with a host of tax havens (with whom India does not have tax treaties), such as Cayman, British Virgin Islands etc. This is a good step. Yet, new provisions on the transfer pricing (TP) front provide that: If a tax payer enters into a transaction, where one of the parties to the transaction is located in a notified jurisdiction (one which does not effectively exchange information with India), all parties to that transaction shall be deemed to be ‘related parties’ covered by Indian transfer pricing regulations. While the intent of this anti-avoidance provision maybe justified, it will create complexities in doing business with India.

The Supreme Court, has directed the Central Board of Direct Taxes (CBDT) to issue directions to tax authorities including transfer pricing officers to take the opinion of technical experts and bring on record technical evidence in cases involving complex issues and substantial tax revenues. The CBDT has accordingly issued instructions. The instructions provide that the evidence would be made available to the concerned tax payer whose case is being scrutinized and a reasonable opportunity would be given to the tax payer before finalization of its assessment proceedings. One hopes, that a reasonable opportunity is indeed given and it is also open to the tax payer to submit the reports of its own technical experts, if need be. There is a fear that if these instructions are not judicially applied, it will not ease the situation but result in prolonged litigation.

Safe harbours (wherein transactions meeting the criteria are not subject to scrutiny), finalization of advance pricing agreement procedures to ensure that there is no delay come April 1, issuance of revenue rulings on important legal issues having wide ramifications, judicious application of provisions and instructions will provide a comfort factor to investors. Certainty in tax policies and judicious administration is required to help us emerge victorious in the global market arena.

Law Street - Economic Times (March 2011) - Green cars?

Dear Readers,

I have been at the receiving end of many emails to switch off power for an hour tomorrow and help save planet Earth -- this one hour of darkness is called Earth Hour. Is one hour really enough?
Aren't long term solutions needed, such as not driving large fuel guzzling cars (even if driving a car is unavoidable), switching off lights/appliances that are not in use, trying to reduce carbon footprint?
Thus, the Finance Bill, 2011, seems have their heart in the right place (if we treat the proposals of the Finance Bill, as a living thing capable of emotions). Yet, perhaps much more is really required to promote hybrid cars in India. Perhaps one needs to take a leaf from the experiences in US, Japan and other countries. Tax sops to the end user of hybrid cars and higher gasoline bills, would act as a catalyst, well perhaps to an extent, for the audience the Government wishes to convert into green car users. For much more, click here for the online edition of The Economic Times. Or scroll below.
Try not to be cynical and do switch off your lights for an hour or more tomorrow. After all, at times symbolism helps spread awareness.
Best regards,
Lubna


And all the king’s horses…

• Green sops to consumers are the key
• Clarifications on CKD imports is required
• A carrot-stick approach works best

In a quaint conversation between Alice, of the Alice in Wonderland fame and Humpty-Dumpty, the latter keeps reiterating a promise made to him by no other than the King, to put him together again, if he fell off the wall. But, we know the gory end result.

There are many such promises made in the Finance Bill, 2011, which perhaps are made with the right intent, but at this juncture one is skeptical of the results.

For instance, our Finance Minister (FM) in his budget speech has remarked:
“The Indian automobile market is the second fastest growing in the world and has shown nearly 30 per cent growth this year. World over, substantial investments are being made in the field of hybrid and electric mobility. To provide green and clean transportation for the masses, National Mission for Hybrid and Electric Vehicles will be launched in collaboration with all stakeholders.” Alice would probably ask quite a few questions, such as: How? When?

Hybrid and electric mobility requires a lot more to be done in India, rather than just R&D in this sector – such as proper roads, but that is another story. In India, Hybrid or electric cars will have limited usage, by a limited number of people, on some limited routes. Yet, this announcement will perhaps (if one is as optimistic as Humpty Dumpty) be a beginning.

Some countries are not only pumping money into R&D efforts to promote the green auto sector but are providing tax credits to the end user. In the United States, tax credit available to hybrid diesel-electric cars, under the Energy Policy Act, 2005, which ended in December last year. These had granted up to USD 3,400 as a tax credit for the most efficient hybrid cars and USD 4,000 for a compressed natural gas vehicle.

However, there was a catch. This policy called for a phase-out of the tax credit when any specific automaker sold more than 60,000 hybrid or clean-tech vehicles. News reports indicate that certain Toyota and Lexus hybrids became ineligible for tax credits much earlier in September 2007.

Now the focus in the United States is on electric drive vehicles. Indeed federal and state legislations offer many ‘greenies’ to the end user. The tax credit can be as much as USD 7,500 plus a UDS 2,000 credit for charging equipment installation.
In 2009, Japan, in its tax reform bill, waived an automobile weight tax for people buying hybrid cars and electric vehicles. News reports point out that: Normally, people purchasing new cars pay the automobile acquisition tax, which is equivalent to roughly 5% of the car’s price, and three year’s worth of the weight tax. This means a person buying a Yen 2 million car that weighs 1.3 tons has to pay approximately Yen 146,700 in taxes. If the car is a hybrid or an electric vehicle, the taxes will be waived completely. Other types of environmentally friendly cars also receive 50-75% tax reductions depending on their fuel economies and exhaust emissions. In addition, Japan also imposed a higher levy on gasoline. By adopting a carrot and stick approach, many hybrid or electric car models, such as Toyota’s Prius became a runaway success in Japan.

As Zenobia Aunty’s tiny car (not an expensive hybrid, but not a petrol guzzling vehicle either) shudders as it passes a huge pot-hole, she grimaces. But, she is kind enough to let us know that a few concrete announcements have also been made. Full exemption from basic customs duty and a concessional rate of central excise duty has been extended to batteries imported by manufacturers of electrical vehicles. The government has announced excise duty of 10 % on vehicles based on fuel cell technology. Exemptions have also been granted from basic custom duty and special CVD, to critical parts/assemblies needed for hybrid vehicles. The government has also proposed a reduction in excise duty, on kits used for the conversion of fossil fuel vehicles into hybrid vehicles.

Indirect-tax experts point to a slight snag in the above and say certain clarifications are required. In India, car manufacturers tend to import Completely Knocked Down (CKD) kits and carry out assembling in India. As per a recent notification, a CKD unit means a unit having all necessary components, parts or sub assemblies for assembling a complete vehicle but does not include a kit containing a pre-assembled engine, gear box or transmission mechanism; nor one that includes a chassis or a body assembly for a vehicle. The fear is that these kits may continue to be subject to higher basic custom duties, despite the intent to promote import of assemblies needed for hybrid vehicles.

The Mumbai heat, the pollution and the long drive is getting to Zenobia Aunty. So you are sure, she will keep a watch out on how National Mission for Hybrid and Electric Vehicles will pan out.

Source of the photograph

Law Street - Economic Times (March 2011) - Post budget column on LO

Dear Readers,
Zenobia Aunty is a bit perturbed about the duplication in work load that business entities are subjected to. Take for example, Liaison offices in India. They are currently filing activity statements with India's apex bank - The Reserve Bank of India (RBI) .

The Finance Bill, 2011-12 has announced the intent to introduce a new form that will be filed with the tax authorities. It is true that India should not lose its slice of the tax pie, as while legally Liaison offices are not permitted to carry out business activities in India, it is vital to examine whether this is really so. If business activities are carried out in India, the profits attributed to the Permanent Establishment (PE) in India (in this case the Liaison Office) can be subject to tax in India.

But, some better co-ordination with the RBI would have helped matters. Further, it is vital to avoid a spate of litigation in this arena. All Liaison Office's should not be subjected to the same brush stroke and treating as a PE of their foreign enterprise.

Interesting times lie ahead and we need to wait for the developments.

For reading this column on the epaper of The Economic Times, click here. Or you may scroll below as the column is also pasted below.
You may also look up the budget booklet of Ernst & Young, on its website, by clicking here.
Disclosure: This blogger is an employee at Ernst & Young, India. The above booklet is available on the internet for public use.
Hope everyone is having a nice weekend.
Best regards,
Lubna


LO and behold!
• Liaison Offices currently file annual activity certificates with authorized banks
• Finance Bill’s proposal of filing of annual information is yet another procedure
• Such additional procedure must not lead to additional hassles

This columnist was seated in her favourite restaurant enjoying every little delectable morsel of lemon cheesecake. Everyone seemed to be in a cheerful mood, even the otherwise surly man at the cash counter was smiling. But, peace and quiet was soon shattered! In stomped Zenobia Aunty, note-book in hand and pounced on her once-favourite niece, for having neglected to take dictation last month, which resulted in a column missed.

Let us say: Hell, hath no fury, like an Aunty scorned. The lemon cheese cake suddenly seemed unappetizing. Perhaps this columnist redeemed herself a bit by letting Spot gobble the uneaten slice. “Right ho, then,” remarked Zenobia Aunty, thrusting note pad and pen at her niece and commencing her dictation post haste.

“So Pranab-da (as India's Finance Minister) wants to eat his slice of the cheese cake and perhaps much more,” began Zenobia Aunty. “It is one thing to put down things on paper, another thing to ensure that these are implemented in the right spirit,” she went on. Zenobia Aunt was referring to the information disclosure required from Liaison Offices in India.

The recently tabled Finance Bill has made it mandatory for filing of annual information within sixty days from the end of the financial year. This proposal will take effect a few months down the line from June 1, this year.

In the initial stages, where India is being explored as a potential market, foreign enterprises prefer to set up a LO. Later, once they know for certain they want to carry on business operations in India, they may set up a subsidiary in India. As LO’s cannot carry out an income generating business activity in India and fund their expenses through remittances from overseas, they typically do not file a tax return.
A debate that often arises is whether a LO can constitute a permanent establishment (PE) of its foreign parent company in India. Only if the answer is positive, can profits be attributed to the PE and consequently, the foreign enterprise can be subject to tax in India.

Under most of India’s tax treaties, a fixed place through which a business of a foreign enterprise is wholly or partly carried would result in a PE of that enterprise in India. This could typically be the case where a foreign enterprise sets up a branch office for carrying on commercial or core business activities. However, having regard to the limited operational profile which a LO is subject under the exchange control regulations and also on account of the fact that most tax treaties exclude from the definition of PE a fixed place whose purpose restricted to that of purely preparatory of auxiliary for the enterprise, a question often arises as to whether a LO can create a PE for the foreign enterprise and if so, under what circumstances.

Over the last few years, the above question has come up on several occasions before the judiciary. As acknowledged by the OECD Commentary, it is often difficult to distinguish between the activities which have a “preparatory or auxiliary” character and those which do not. Thus each case needs to be examined on its own merits.
At present, as prescribed by the Reserve Bank of India (RBI), LO’s have to file an Annual Activity Certificate (AACs) obtained from the Auditors, as at end of March 31, along with the audited Balance Sheet on or before September 30 of that year, stating that the LO has undertaken only those activities permitted by the RBI. This has to be filed with an authorized bank, which in turn intimates the RBI in case of any impermissible activities have been carried out. In case the annual accounts of the LO are finalized with reference to a date other than March 31, the AAC along with the audited Balance Sheet may be submitted within six months from the due date of the Balance Sheet.

Thus, the annual filing of information, albeit in a form prescribed by the MoF appears to be just another procedural addition for the LO’s. Perhaps, this new form (not yet prescribed) will better enable the tax authorities to understand the nature of activities carried out by a foreign enterprise in India through its LO and also whether or not any revenue has been generated in India, the source of funding of Indian expenses and what have you. This may perhaps equip the tax department to decipher whether such activities in India are business activities that can be subjected to Indian taxes.

It is vital that India does not lose its justified share of tax revenues, however, LO’s must not be subjected to any additional uncalled for hassles. Else, like many unresolved issues chocking up our tribunals and courts, litigation on this front will be a never ending dilemma, forcing many a foreign enterprise to turn away from its India dreams, in turn denting a largely FDI friendly image of the Indian economy. After all, an LO set up is the ‘first taste of India’, sums up Zenobia Aunty, biting into a chocolate mud pie.

Photograph: This photograph is of the Gateway of India, shot several months ago.

Law Street - Economic Times (Jan 2011) -At what cost?

Dear Readers,

The budget is around the corner. What will it bring for us? Zenobia Aunty is fretting about it. Click here, to read her views in the online edition of The Economic Times.
As always, you may also scroll below to read the column.
Hope you are having a pleasant Sunday.
Best regards,
Lubna


At what cost, this service tax?

The service tax net must be expanded after weighing its impact

The transition towards GST must be smooth

Issues relating to point of taxation must be mitigated

It is not easy to silence Zenobia Aunty, but these days, you don’t hear her chattering away. Even her one sided conversations with Spot, are a rarity.
You see, the budget is around the corner and Zenobia Aunty, for once, is stumped whether this budget will offer any respite to her, or to corporate India. On the direct tax front, Pranabda has already stated: Wait for the direct tax code! GST also seems far away. So what could be in store?

Maybe some minor tinkering in tax slabs for the individual and perhaps an abolition of surcharge for Corporate India? However, what is perhaps making Zenobia Aunty a bit gloomy is her hunch that service tax rate of 10% may be hiked this year. Under the proposed GST regime, to begin with, services were proposed to be taxed at 16%, essential goods at 12% and other goods at 20%. So perhaps, the service tax rate could be increased this year.

In fact, Zenobia Aunty was quite surprised to learn that more than hundred services are currently under the service tax net. Perhaps we will see an expansion of the ambit of service tax in respect of services already taxes, such as in the arena of health or education. Or perhaps many more services will come in the service tax net.
It is true that as indirect taxes are a stable source of revenue as compared to direct taxes, from which rural India is largely exempt. Yet, any expansion in the service tax ambit or even an increase in tax rate must be undertaken with abundant caution.

For instance, last year, service tax was imposed on health check-ups undertaken by hospitals or medical establishments for employees of business entities, where the services were provided under health schemes offered by insurance companies. The tax on such services was payable only if the payment for such health checkups was made directly by the business entity or the insurance company (Cashless option) to the concerned hospital or medical establishment.

However, taxing services based on the manner of payment, i.e.: when the payment is made directly by the business entity, led to some grey areas. Business establishments which were not entitled to credit of service tax paid by them found it to be an additional burden and it resulted in shrinking health benefits for employees. Second, it really did not help the government much if input tax credit was available to these business establishments.

Thus the effect of each levy, must be carefully weighed before bringing it within the tax ambit. One wonders, whether our politicians should be subject to service tax levy. But wait a minute, going by their current behavior; they don’t seem to be providing any service. Maybe they should pay entertainment tax. As things stand today, unfortunately, entertainment is not entirely proposed to be subsumed in the GST regime, as and when it happens. But that is another story.

Coming back to the realm of service tax, perhaps we may just see the introduction of the Point of Taxation Rules. Currently a service provider is required to deposit service tax with the government on payment basis. The liability to deposit service tax arises only upon the ‘receipt of the payment’ (as advance or otherwise) from the service recipient, irrespective of the issuance of the invoice, debit note etc.
Under the proposed rules, the liability to deposit service tax would trigger on ‘issue of invoice’ or ‘receipt of the payment’, whichever occurs earlier. Thus, once the Rules are enacted the providers of taxable services, such as telecom companies, et all, will be required to pay the applicable service tax immediately on issue of invoice or bill, even though they have not received the payment from their clients/customers.

Payment liability under the proposed GST would arise on accrual basis. Thus, it is true that the introduction of taxation rules would take us one step close to GST, but it could entail more working capital requirements for service providers as they may not be allowed to wait for the actual realization of money from their customers to discharge the service tax liability. Further, the service providers’ eligibility to claim the input tax credit on service tax payable to their vendors would continue on the ‘payment-basis’ even after introduction of the Rules. Cash flow issues for service providers could arise and would need to be handled.

Yes, a transition always has its pain points. Thus, one can expect that a transition to a more efficient and effective regime such as GST would hurt in the interim. However, measures must be taken to ensure that the ‘damage’ to you and me is kept to the minimal.

Source of photograph

Law Street - Economic Times (Dec 2010) -Rounding up 2010

Dear Readers,

Zenobia Aunty has completed a decade, writing her columns in The Economic Times and has immensely enjoyed interacting with you. In the December 2010 column, she asks whether things do change in tax land? Old problems do continue, even as new challenges arise. But, here is looking forward to 2011.

Do click on the online edition of the newspaper or else scroll below.

Happy New Year.
Warm regards,
Lubna

Ring out the old!
• Greater clarity on royalty payments is required
• Clearer guidelines are required for determining permanent establishment
• Cloud computing will create more tax challenges

Happy 2011, dear Readers. As Zenobia Aunty begins to type this column, she realizes that she has completed a decade of interacting with her loyal readers. She raises her cup of tulsi tea to toast them. This is a time for reflection. While a decade may have passed since this column first rolled out, there are so many issues in tax land that remains unresolved.

For instance, litigation in the tax arena as regards the classification of payments on import of shrink wrapped software continues. At the judicial level, the tax orders are largely in favour of the foreign recipient as the judiciary seeks to distinguish between a copyrighted article and exploitation of a copyright. Software licensing to the Indian payer is treated as a transaction of a copyrighted article and thus not a royalty payment.

However, at the lower levels, the going is tough for the foreign recipient or even the Indian payer. Faced with the prospect of being treated in default, the Indian payer seeks to withhold tax at source, even when it is technically not subject to tax under the tax treaty. To compound the problem, if the foreign recipient does not have a Permanent Account Number (PAN), tax has to be withheld at the higher rate of 20%. It is also likely that the home country of the foreign recipient may not allow a foreign tax credit on the ground that the tax was wrongfully withheld in India.
Recently, professionals were a bit taken aback with a ruling given by the Delhi Income tax Tribunal, in the widely published case of Microsoft. While holding that the payments made by the Indian payer would be subject to withholding tax as the payment for license of the software was royalty, the Tribunal also went ahead to observe that reliance cannot be placed on the OECD commentary in interpreting a tax treaty and that a later provision in domestic laws would override tax treaty provisions. Thankfully, the Mumbai Income tax Tribunal followed suit with a few favourable decisions, upholding the distinction between a copyright and a copyrighted article. Yet uncertainty continues to loom large.

Let us take another instance. Indian companies are often sub-contracted work by their foreign parent and other overseas group entities. The Delhi Income tax Tribunal in another instance has held that the relationship of the US entities with its Indian subsidiary to which it had subcontracted or assigned software development or call centre services resulted in a permanent establishment in India.

Moreso, since the Indian subsidiary had not been remunerated on an arm’s length basis, the Delhi Income tax Tribunal largely upheld the approach adopted by the tax department of attributing profits to such permanent establishment of the US entities based on a proportion of Indian assets to global assets.

Looks like foreign entities wanting to do business with India, need to pay more detailed attention to these ongoing issues. While it may be time to ring out the old, in tax land, the existing issues never seem to die.

But one must also look forward at emerging business scenarios, for instance e-commerce or the even more nascent cloud computing. A prominent feature of business activities conducted via the internet is that it is impossible to pin-point where that activity is taking place. The physical location of the business activity has traditionally been the crucial factor in determining where the permanent establishment is located and thus in which country the profits can get taxed.

In the context of a computer server, the OECD in its commentary has made several observations. If an enterprise which carries on a business through a website has the server (in another country) at its own disposal – it owns or leases and operates the server, it could result in a permanent establishment exposure in such other country. In most cases, it is likely, especially given the lack of usage of personnel manning the server that the all substantial assets and risks would be at the head office level and negligible profits alone could be attributed to the server created permanent establishment. But yes, attribution of profits would be a tricky matter.
If this were not enough, cloud computing will blur the boundaries further. However, it is likely that a cloud computing solution may help reduce the tax exposure arising through permanent establishment creation, as in essence it would mean that a foreign entity is merely using the services of the cloud computing provider and the cloud computing provider is not its dependent agent so as to constitute a permanent establishment.

As Zenobia Aunty looks back on the existing tax issues and foresees some new tax issues emerging she exclaims: There is never a dull moment in tax land.

Law Street - Economic Times (Nov 2010) -GAAR

Dear Readers,
How do I describe GAAR? My greatest fear is that commercial business transactions backed by proper substance, may also fall foul of the GAAR provisions owing to ambiguity and wide sweeping powers. For views from Zenobia Aunty read further. Please click here.
As always the column is also cut and pasted below. Have a nice weekend.
Best regards,
Lubna


The sting in the GAAR tale

• Specific anti avoidance rules are preferable
• If GAAR is a must, grandfathering clause is vital
• Times limits must be imposed for invoking GAAR

When was the last time you received a hand-written letter? Recently, the post man knocked at our door and handed Zenobia Aunty a hand-written letter. Zenobia Aunty hastened to open the envelope. But, it was no gushing fan-mail. Instead, it was a letter from an eminent advocate and her reader, criticizing her for calling attention only to the Controlled Foreign Corporation Rules in the Direct Tax Code (DTC), 2010, and not the “draconian” General Anti-Avoidance Rules (GAAR).

Well, touched by this advocate’s zeal to spare some time and pen a letter, a long spell of research and dictation to her long suffering niece (yes, this columnist) began. The advocated lamented how scams had taken over our country. Scams he explained often arise because of wide discretionary powers and their intended or unintended misuse. Finally, he came back to tax laws, stating that wide discretionary powers even in tax land can resulted in unwanted scenarios.

If the powers given are wide and there are no specific guidelines in place, often even a hardworking honest tax official also finds himself standing at the cross roads, not knowing which way to turn. He stands at the cross roads knowing any action will lead him into the non enviable situation of: Damned if you do, and damned if you don’t!”

The letter was referring to the GAAR proposals. GAAR as contained in the DTC gives wide discretionary powers to a Tax Commissioner to invoke these provisions and to declare any transaction as an “impermissible tax avoidance arrangement”. It is possible that tax authorities could look not at the transaction in its entirety but only at certain aspects of the entire transaction and scream: Foul! As things stand at present, even transactions or arrangements approved by the Courts can be subjected to the wide sweeping powers of the Commissioner.

Zenobia Aunty is all in favour of plugging tax abuse. But at the same time, she does not favour a climate of uncertainty. Specific anti-avoidance rules, such as thin-capitalisation rules, which kick in to prevent misuse of related party debt, are a better option as they deter tax abuse without creating a climate of uncertainty, she explains.

At present, the DTC provides for only the following safeguards in invoking GAAR: (i) The Central Board of Direct Taxes (CBDT) will issue guidelines to govern when GAAR should/could be invoked (ii) A safe harbor, possibly a monetary one, may be included only beyond which the GAAR provisions would be invoked and (iii) Tax payers can approach the Dispute Resolution Panel, if GAAR provisions are sought to be applied to the tax payer.

Are these safeguards adequate? Zenobia Aunty could not help but chanting this ditty (with due apologies to William Shakespeare) under her breath as she went about doing more research on this subject: For a charm of powerful trouble; like a hell broth boil and bubble, GAAR doth bring toil and trouble, Fire burn and DTC caldron bubble.
True certain safeguards have been mentioned. However, it is essential that the proposed guidelines providing for the circumstances in which GAAR could be invoked are objective and remove all traces of uncertainty. The GAAR provisions should not interfere with legitimate and commercial transactions. Further, a monetary threshold for invoking GAAR should be set and this must be reasonable.

It would be ideal if GAAR is dropped and specific anti-avoidance measures are introduced. However, if the powers that be, wish to continue on the path of GAAR certain additional provisions must be built in.

While the DTC prescribes that tax payers can approach the Dispute Resolution Panel if GAAR is sought to be applied, prevention is better than cure. Thus creation of an authority which would give a clean chit to a proposed transaction – on the lines of the Authority for Advance Rulings would create a sense of comfort among the investors, especially the foreign investors. The only fair way to administer a GAAR mechanism would be to introduce a clearing service where the tax authorities would review a proposed transaction or a transaction and give their opinion on the tax position.

The DTC should provide grandfathering provisions under GAAR and ensure transactions entered into only during after the DTC has come into effect can be subject to GAAR. Further, there should be a time limit within which tax authorities can invoke GAAR in respect of any transaction. The Damocles sword cannot hang over the heads of the tax payers in perpetuity. The onus of proof that there has been tax avoidance should lie on the revenue and not the tax payer.

Such additional precautions are necessary to ensure that GAAR does not become a weapon to meet tax revenue targets. Zenobia Aunty hopes that the eminent advocate and indeed her other readers are satisfied that she had done some justice to the complex proposed GAAR mechanism.

Law Street - Economic Times (Oct 2010) -CSR issues

Dear Readers,

Wishing you a happy Diwali. Zenobia Aunty and I hope that you will also be spreading the light by donating whether in cash or in kind. For the October column of Law Street: Charity begins at India Inc, please click here for the online edition of The Economic Times.

Else as always, scroll below.

Best regards,
Lubna

CHARITY BEGINS AT INDIA INC

Most non-profits which Zenobia Aunty is associated with would call her a good soul. She, in turn, admires a host of companies (editorial etiquette will prevent her from naming these companies) who voluntarily give back to society. In one of her earlier columns, she had advocated the need for uniform reporting guidelines for CSR activities, perhaps a CSR index. This would ensure that market forces could take into cognisance the contributions of such companies and would directly or indirectly boost their market value and profits.

However, the concept of a ‘mandatory CSR regime’ has taken her a bit aback and she decided to seek views from a cross section of her friends. The Standing Committee has approved of a provision contained in the Companies Bill, 2009, that mandates every company having a net worth of more than . 500 crore or turnover higher than Rs 1,000 crore; or a net profit of Rs 5 crore or more during a year to formulate a CSR policy to ensure that every year at least 2% of its average net profits during the three immediately preceding financial years is spent on CSR activities as may be approved and specified by the company.

In addition, directors are required to make suitable disclosures in the annual reports. In case any such company does not have adequate profits or is not in a position to spend prescribed amount on CSR activities, the directors are required to provide an explanation.

The intention seems laudable, but is it the right approach? After all, corporate entities do pay taxes. Zenobia Aunty’s friend, Ravichandar, a Bangalore-based consultant, doesn’t think it is a good idea. He explains: “It just reaffirms that the compact between business and government is broken. The role of the corporate sector is to create jobs, generate income and pay taxes. The government was required to take care of law and order, security and social infrastructure provisioning . This machinery has failed and now there are plans to mandate CSR on business. My concern is that ‘fudge’ will be the order of the day on conforming to specified CSR percentage requirements that are to be met. A more sustainable solution will evolve only when business entities realise that getting engaged on social issues is good for business success, this trend is slowly emerging.”

Dave Mason, a businessman from the US, seems to agree. He says: “The devil is in the details and what constitutes a CSR activity is a pretty big detail to have not defined prior to any passage of the Bill. I don't believe I could support such a measure without knowing ‘the what’ and ‘where’ of the money flow.” In case you are wondering, there is no defined mandatory regulation requiring companies to engage in CSR in the US.

Others point out that a few businessmen use the corporate vehicle to fund the so-called CSR activities for their own personal gratification or glory, whereas they should actually be using their own personal money for this purpose.

Zenobia Aunty agrees that there is scope for ‘fudging’ results. Further, what constitutes CSR is in itself quite subjective. Could a landscaping of a workplace campus be CSR? After all, they are ‘making the environment greener’ !

The line between a business activity and a CSR activity could be blurred. At times, CSR can be truly linked to business needs and yet be a worthy cause, such as providing free education to the children of their shop floor workers by setting up a good school near the factory complex which, in turn, could lower attrition or deter strikes.

Yet at other times, CSR activities could be totally delinked to business objectives such as donating to known organisations including government funds especially during natural calamities. There could even be a hybrid model wherein goods or services of the company are used for CSR activities, such as a pharma company donating drugs to a government-aided hospital.

Another issue would arise, some CSR activities could be a business expenditure and deductible, others may benefit from a tax deduction (such as cash donations to recognised organisations), but there may be others which would not get any benefit at all.

However, a few are more optimistic. Dilip sir, a former army personnel and now a management professor, says: “We do have examples of corporate leaders who believe that a ‘profits only’ approach is much too short-sighted . Profit is important for survival and growth but must not the only reason for existence. It is in such companies that CSR emanates as a natural byproduct. The government making it mandatory to earmark at least 2% average net profit during the previous three years will help increase awareness and is a positive step.”

Zenobia Aunty sums it up by saying: “It is better than a CSR cess, for instance as regards education cess, it is impossible for us to know where the money went. At least the power will now be with the shareholders to ensure that the money is put to its rightful use.” The need of the hour is: mature shareholders. Are we ready for that?


Source of the Photograph.

Law Street - Economic Times (Sept 2010) -DTC - Change for the better

Dear Readers,

The cup can be half full or half empty, depending on how one sees it. As a lot had been written and published about the "harsh" provisions in the DTC and moreso, since "Zenobia Aunty" was in a good mood she decided to see the DTC in a good light. As always, you can read it online on The Economic Times' website. It is also cut and pasted below.
Have a nice weekend.
Best regards,
Lubna


Change for the better
• Cascading impact of DDT is resolved for domestic multi-tiered groups
• Dispute resolution expanded to cover GAAR cases
• Advance pricing mechanisms introduced for international transactions

Zenobia Aunty recently read an amazing book, “Leaving Microsoft to change the world”. Written by John Wood, founder of the global NGO, “Room To Read” which facilitates education for girls in developing countries including India, it shows that change for the better is always possible, if one is committed to the cause.

Our new tax law was supposed to be a change for the better – in essence it sought to achieve stability, simplicity, minimize litigation and also prevent abuse of tax laws. Thus, at first glance, Zenobia Aunty was taken aback to see that the Direct Tax Code, 2010 (DTC) ran into something like 400 pages.

Some of her friends have outright pooh-poohed the DTC mainly because the radical low rates of tax spoken about in the 2009 draft could not be introduced. However, basking in the aftermath of having contributed her mite towards girl’s education and being in a very generous mood, Zenobia Aunty decided to concentrate on what was good in the DTC.

For long, India Inc has been complaining about the double whammy when it comes to dividend distribution tax (DDT). The Finance Act, 2008, alleviated this grievance partly by providing that the domestic holding company will not have to pay DDT on dividends paid to its shareholders to the extent it received dividends from its subsidiary company on which DDT has been paid by such subsidiary. However, this reduction benefit was available only up to one level. Once the DTC comes into force, this restrictive provision will be abolished enabling multi-tiered domestic companies to get the reduction benefit up to the last level of the corporate chain.

It is true that the wide provisions of the General Anti-Avoidance Rules (GAAR) continue to exist, the CBDT has been empowered to lay down the conditions for application of GAAR and Zenobia Aunty hopes powers will be judiciously exercised. That said the DTC provides that taxpayers in whose case GAAR is invoked can approach the Dispute Resolution Panel (DRP).

An assessing officer, who has received a direction from the tax commissioner for applying GAAR in relation to a particular case, is required to prepare a draft assessment order and serve it on this tax payer. The tax payer can then directly approach the Dispute Resolution Panel (DRP) against this order for resolution of the matter. Zenobia Aunty points out: “Currently, DRP is a mechanism used in the arena of transfer pricing, hopefully the mechanism when extended to GAAR cases will be equally effective and mitigate long winded protracted litigation.”

The mechanism of advance pricing agreements has at last been introduced. The arm’s length price for international transactions can be decided upfront for a maximum of up to five years and this will go a long way in mitigating transfer pricing litigation. Even as SEZ developers and units will now fall under MAT levy, the profit linked exemptions have been suitably grandfathered. R&D expenditure (other than land and building) will carry a weighted deduction of 200% against the existing 150% and more so will be expanded to the non-manufacturing sector also. The practical realities facing the Not for Profit (NPO) segment have also been factored in. Further, donors will continue to get a tax benefit for their deduction to approved and registered NPOs

True there are certain uncalled for changes. Instead of the wide sweeping GAAR provisions, the government could have introduced specific anti avoidance provisions. The government has sought to bring into the tax ambit cross border acquisitions, if: the target foreign company holds directly/indirectly assets in India that are valued at more than 50 per cent of the fair market value of all assets held by such company, at any time, within the twelve months prior to such transfer. Perhaps an extra territorial move? Controlled foreign corporation rules have been defined and exemptions carved out, but sadly underlying tax credit norms are not introduced. While profit linked incentives for SEZs are grandfathered, they find themselves in the MAT net.

Coming to individuals, there has been some minor tinkering in tax slabs, but not much. The silver linings are many. The existing EEE mechanism continues and various perquisites such as HRA continue to enjoy tax benefits.

Zenobia Aunty has always lamented about two things, both of which have been favourably resolved. Medical reimbursement is now exempt up to Rs. 50,000 in a year (as compared to the measly Rs. 15,000 under current tax provisions). Further, the DTC provides that there will be no provision for presumptive rent where properties have not been let out during the financial year. Currently presumptive rent provisions apply and tax is payable on notional income.

Zenobia Aunty signs off on the note that: The FM cannot please everyone, but some of the changes are for the better. Hopefully, the jarring changes will also be streamlined.

Photograph: This photograph was taken at the Lalbaugh Flower Show in Bangalore, India.

Law Street - Economic Times (Aug 2010) -New Tax Code on the anvil

Dear Readers,
Even as this column had been sent for publication, on Thus, August 26, 2010, the Cabinet Committee gave its nod to the New Tax Code Bill. It will now be placed before the Parliament this month. Then it will be placed before a committee and hopefull it will be finally passed in the Winter Session.
Through media reports, we know of a few snippets, such as:
1) Corporate tax rate continues at 30% (Perhaps there will be no surcharge and cess, if so then it will be better than the prevailing rate which works out to close to 34%)
2) MAT is now pegged at 20% (Currently it is 18% on adjusted book profits)
3) There is minor tinkering in slab rates for individuals
4) EEE regime largely continues
Well, we need to see the fine print once the Tax Code Bill is made available to the public.
I do hope this Bill offers clarity. The August column points out at the need for simplification and clarity.
You can view it online by clicking here.
Alternatively, as always, the column is also cut and pasted below.
Have a nice weekend.
Best regards,
Lubna





Monsoon musings
• Both BPT and MAT clarity must be provided in new tax laws
• A urban cost of living adjustment could be considered in tax rates
• Tax must be attuned to real needs of the tax payers

It has been raining cats and dogs here in Mumbai. It is perhaps, just the right season for Zenobia Aunty to sit on her favourite chair and surf the internet for tax news or to connect with all her friends across the globe to chat on latest happenings in the tax arena.

Yes, it is pouring tax news. Let us start with home base, India. Soon after the revised discussion paper on the Direct Tax Code (DTC) was issued, came the report of the Takeover Regulations Advisory Commentary followed by announcements on the GST front and then suddenly some States had second thoughts about the constitutional amendment for introducing a GST regime. It has sure has been one busy season and never a dull moment.

It beats me why it always pours over the weekends. Or perhaps on weekdays, unless we are scurrying for meetings, one doesn’t have time to look out of the window, even if it offers a sea view. A spate of grey days makes one appreciate the sunbeams.
Likewise, two recent rulings relating to applicability of MAT on foreign companies have gladdened many. The Authority of Advance (AAR) Rulings in two cases has ruled that a foreign company that has not established a place of business or permanent establishment in India would not be subject to the MAT regime. Unfortunately, the Income tax Act itself does not provide any specific clause stating that a foreign company is exempt from MAT. While AAR rulings are binding only that particular transaction in relation to which the ruling was sought, they do have a persuasive effect in assessments dealing with a similar issue. Thus, these rulings are much welcome.

These favourable rulings, prompt Zenobia Aunty to raise questions as regards the Branch Profit Tax (BPT) provisions contained in the DTC. While sipping a strong cup of masala tea she says: “It should be clarified by the government that the levy of BPT is restricted to a foreign company that has a fixed place of business in India by virtue of a branch office or project office. Further the BPT should only be levied on actual remittance of profits. In the context of MAT if tax laws itself had provided for such clarity foreign companies would not have faced ambiguity, at least now, in the context of BPT and MAT clarity must be ensured in the new Income tax Act.”

While I was in Bengaluru I really thought it was no longer a garden-city but a Mall city. When we left Mumbai, eight years ago, perhaps there were only one or two Malls. Now, while on a drive from South to suburban Mall all you see are signs screaming: SALE!!! Malls have, overrun Mumbai as well.

Kay Bell, a famous tax blogger from the US points out that in August, States in the US are having what is typically referred to as back-to-school sales tax holidays. These last for two-ten days and during this period shoppers don’t have to pay state sales taxes and sometimes they also avoid local levies, on selected items.
Zenobia Aunty quotes from her blog: The most popular tax exempt products are clothing and footwear where the bill is below a certain limit. Some US States also exempt school supplies, with a few including computers and PC peripherals in the no-tax category. Wish we had something similar back home, but well, perhaps we shall settle for the monsoon discounts offered by Malls, over this weekend.

Mumbai is an expensive city, so are various others cities across the globe, such as New York. This bit of news, gladdened Zenobia Aunty’s heart: Six Congressmen from New York are pushing a tax cut for people who live in high-income areas. The idea is to index everyone's income tax brackets to the cost of living, giving a big tax break to everyone who lives in the nation's most expensive areas. It other words, what they are pressing for is regional cost-of-living adjustments for tax rates.

I agree, for example: a salary of Rs 20 lakh in Mumbai does not go as far as a similar salary in say Bengaluru or Hyderabad. Rentals or property prices are just too steep in amachi Mumbai. After all if agricultural income can be tax exempt because understandably farmers do face a lot of hardship, shouldn’t the hardship faced by those in expensive Indian cities also be considered? Perhaps cities can be classified as Class A, B and C and a cost of living adjustment built into the tax rate? Or is this just wishful thinking?

It is pouring again, there go my plans of strolling along Colaba Causeway. Maybe I shall go join Zenobia Aunty in her quest for tax news in cyberspace.

Photograph: This photograph was taken at Lalbaugh Garden, Bangalore, Karnataka

Law Street - Economic Times (July 2010) -CFC Rules, Keep it simple

Dear Readers,
It appears that India is gearing up to introduce CFC Regime. However, introduction of these without measures such as underlying tax credit, participation exemption or even parent-subsidiary directives will not augur well for Indian companies having overseas subsidiaries. Practical safe harbours must be introduced and an underlying tax credit mechanism assured to Indian companies prior to introduction of the CFC Regime.

You can read this in the online edition of The Economic Times.

This photograph was taken in July 2010 off the Worli Sea Face. If CFC is implemented in a hurry without much thought, the dreams of Indian companies planning overseas expansions will be "ON THE ROCKS"

Alternatively scroll down below.
Best regards,
Lubna



CFC Rules: Keep it simple!

Alternative measures would do away with the need for CFC rules

If introduced, exemptions must be carved in CFC rules

Underlying tax credit must be introduced

Thick heavy clouds hung over a stormy Arabian Sea. Flashes of lighting streaked across the sky. The scene could be regarded either as spectacular or gloomy, depending on how one chose to see it. Much like the revised discussion paper (RDP) on the proposed direct tax code - one could say that the Central Board of Direct Taxes (CBDT) had ironed out many difficulties or one could say it had only added to the problems of the corporate tax payer.

Zenobia Aunty, down with a few niggling ailments, was not her cheerful self and preferred to see the glass half empty, so to speak. A paragraph tucked away in the RDP proposing the Ministry of Finance intent to introduce Controlled Foreign Corporation (CFC) provisions in India, caught her eye.

This proposal is viewed as an anti-avoidance measure and provides that passive income earned by a foreign company which is directly or indirectly controlled by an Indian resident, shall be subject to CFC provisions. In other words, even where such passive income is not distributed to the Indian shareholders it shall be treated as having been distributed and shall be subject to tax in India in the hands of the Indian shareholders as dividend income.

Mind you, dividend received in India is taxed at the full corporate rate (currently 30%) plus applicable surcharge and cess. It is only dividend that is declared by an Indian company, on which dividend distribution tax has been paid, that is exempt from Indian income tax in the hands of its shareholders be they Indian or foreign shareholders.

“Why introduce something which was not there in the draft direct tax code?” muttered Zenobia Aunty. “Why can’t they go to the root of the problem?” she added and stomped her foot in anger taking a slumbering Spot by surprise.

Dear readers, please bear with her while she repeats herself: If only, India would exempt dividend repatriated from overseas there would be no need for Indian companies making overseas forays to set up intermediary holding companies to park overseas profits and no need for introduction of complicated CFC provisions. True, the Indian corporate tax rate has steadily declined, but if one compares it with the tax rates in some developed regimes, such as neighbouring Singapore which is now 17% we still have a long way to go. Thus bringing back dividends into India and subjecting such income to 30% doesn’t make economical sense, it seems more feasible to keep it overseas and use it for further overseas growth. The best solution, to attract dividend repatriation, is either a full exemption to foreign dividends repatriated to India or if this is not possible, a reduced rate of tax.

“Further, how could the intention of introducing CFC provisions be announced without a parallel intent to introduce underlying tax credit rules? In the absence of underlying tax credit rules, the Indian multinational will be subject to multiple taxation of the same income” exclaims, Zenobia Aunty. An underlying tax credit is a credit for any tax on the underlying profits, out of which the dividend is paid.
Perhaps it was the Vijay Mathur Committee, which in its report in January 2003, first made mention of the need for introduction of CFC provisions. However, the very same report also spoke of the need to introduce underlying tax credit. This report provided illustrations of various exemptions from the CFC regime (in other words instances where the undistributed profits would not be taxed in the hands of the Indian shareholder as dividend income in India). The exemptions covered: a CFC that would distribute a certain percentage of income in a year; was engaged in genuine business activities; was not established for the purpose of avoiding domestic tax; was listed on a stock exchange; or even a de-minimis exemption if the total income of the CFCs did not exceed a particular threshold amount.

In addition, the Vijay Mathur Committee accepted that since CFC regime attributes income to the shareholders before actual distribution of income, relief provisions are ordinarily built in to prevent double taxation of CFCs income which is subsequently distributed. It provided illustrations for inclusion of relief provisions such as: relief on account of foreign taxes paid; relief on account of dividend paid out of the previous attributed income; relief in respect of losses incurred and relief from double taxation on subsequent capital gains arising from disposition of shares arising out of CFC by the shareholder, where the shareholders have been previously taxed on the undistributed income of the CFC.

It would have been simpler to encourage repatriation of foreign dividend into India, but now that the intent to introduce CFC is made clear, care must be taken to ensure it does not sound the death knell for Indian companies. Perhaps, some sensible measures will cheer up Zenobia Aunty.

Law Street - Economic Times (June 2010) -Towards a greener world

Dear Readers,

We celebrated environment week, this month. But, are we ready to turn towards the more expensive green products? Appears not! It is time the government subsidized the purchas of these products through tax credits, as have several other countries. Looking forward to a greener world. Read this column online in The Economic Times, by clicking here.

As always, the column is also cut and pasted below.

Have a nice weekend.

Best,
Lubna


Towards a greener cleaner world
• Tax sops must be at the consumer level
• Tax carrots rather than sticks will work
• Monetary sops will be an added advantage
We celebrated Environment Week this month. Various organizations as part of their Corporate Social Responsibility (CSR) initiatives got their act together, conducted workshops to sensitize their employees, planted trees, et al. A few friends participated in “cycle to work” initiatives which were understandably short lived.
Short spurts of efforts, while they do contribute in a way, are not adequate to save the planet. We need long term efforts which provide lasting results and it is here that the government can really help. Zenobia Aunty has been reading a lot about green investments. She says: “A recent international survey undertaken by Regus states that: Governments worldwide must introduce new tax breaks to increase the uptake of green investment.”

Eco-friendly measures seem attractive on paper, but they do entail a higher cost, at least initially. No wonder then that 46% of companies surveyed have declared that they will only invest in low-carbon equipment if the running costs are the same or lower than those of conventional equipment. A mere 40% have invested in low-carbon equipment and only 38% have a company policy to do so.

Governments world over have down the years, devised various forms of green taxes to save the environment. Such taxes have been as varied as a ‘plastic tax’ on use of plastic bags in Ireland, to a ‘flight tax’ in the UK which airlines had to cough up if they did not fly at full capacity.

While Zenobia Aunty was in Bangalore (Bengaluru) there were talks of permitting cars with odd numbered license plates to drive on one day and those with even numbers on another day. Would this have helped in reducing carbon emission? “Not really, with an inefficient public transport mechanism, families were really thinking of buying yet another car, as car pooling was not always an option,” explains Zenobia Aunty.
If spreading the tax net wide, pays dividends, so does spreading of tax sops. Perhaps, it would make better sense to provide sops for green investments at the consumer level. It would help spread the movement make the world greener.
United States for instance, with its green tax sops covers the consumers. Tax credits as distinct from tax deductions are available for purchase of hybrid cars or battery, electrical or alternate fuel vehicles; heating and air conditioning systems that are ‘energy star rated’; renewable energy systems; solar and wind energy systems and even something as simple as insulation such as new doors, windows or roofing that meet set criteria and help save on electricity bills.

How is a tax credit different from a tax deduction? A tax credit is a ‘rupee-for-rupee’ reduction in your total tax bill. For instance, your tax bill works out to Rs. 2.50 lakh. Let us assume that a tax provision states that for each solar panel that you install in your house you get a deduction of 20% of the purchase price subject to a cap of Rs. 50,000 per solar panel. Assuming you purchase three solar panels and can claim Rs. 1.5 lakh through such purchase. Your tax bill will then be just Rs. One lakh.

On the other hand, a tax deduction is expenditure or a prescribed amount (such as depreciation) which is allowed as a deduction from your total income to arrive at the net taxable income, which is then subject to tax at the applicable rate. While both reduce your tax bill, in pure monetary terms a tax credit is more beneficial.
It is the consumer who can propel a demand for environmental friendly products. With prices for such products being higher, tax sops alone can provide the much needed spending boost in the right direction.

In India we have seen a few sporadic attempts such as wind farms being eligible for 100 per cent depreciation or higher depreciation rates for pollution control equipment. However, till date attempts have not been made to start at the consumer level.

Imagine the potential that we have to use solar energy, especially in the rural areas of India, which are prone to power cuts, or for that matter, even small scale industries in urban areas. To boost demand for use of solar energy, start at the consumer level, enabling him to get a tax credit. This would mean that the manufacturer of solar panels does not have to face hardships to convert people towards a more friendly power source and can make fair profits. After all, even a green manufacturer needs to survive. Moreover, provision of softer loans for purchase of green products by households, farmers, small scale enterprises and certain other segments would be an added advantage.

It is true that the government is considering abolition of tax holidays, however, tax credits to the individual for purchase of green products, is something which needs to be seriously contemplated. Drat, the power just went off, now where is that candle?

Source of the photograph.

Law Street - Economic Times (May 2010) - PANs Prickly Pains

Dear Readers,
Sometimes laws can be shortsighted. Take the instance of everyone being required to have a PAN or else suffer a higher withholding, on payments due to them. This includes senior citizens, who perhaps are not tax payers, or even foreign entities doing a one off transaction with India. To hear Zenobia Aunty, rave and rant, click here. Else as always, if the link doesn't work, it is cut and pasted below.
Have a nice weekend.
Best regards,
Lubna

PANs prickly pains

Sweeping all encompassing amendments cause problems
Exceptions must be carved out in tax laws
Practical regulations are required

These days, owing to the heat and humidity, Zenobia Aunty spends her evenings, sitting on the bench outside her colony, people watching and catching the breeze. In fact, she is soon joined by some friends, all of who sit quietly, at peace with each other and the world as they observe other people go about their tasks. I am sure one day; this group will surprise us with a book on human psychology or something equally profound.

Thus, this little group of senior citizens was taken aback, when Jingoo Uncle was spotting angrily waving his walking stick at all and sundry and muttering at random. He sure spoiled their peace and quiet.

However, one can empathize with Jingoo Uncle. The main reason for his anguish was that he had sold an antique table and tax had been withheld by the buyer at 20%, just because Jingoo Uncle, a retired person, did not have a PAN card.

Let us not even get into the argument of whether tax ought to have been withheld on such transaction or not. For now, let us solely concentrate on this new amendment, which came into effect from April 1, this year and requires tax to be withheld at 20% or the rate in force, whichever is higher, if PAN is not furnished by the payee (recipient of the income).

Perhaps the tax authorities can argue that Jingoo Uncle’s case is a rare exception. Jingoo Uncle retired at least two decades ago and is well looked after by his children. He is no longer a tax payer and does not have a PAN card, or rather does not remember whether he once had a PAN card and where it is. So couldn’t he be exempt from this new provision?

If you think the situation cannot get any more absurd, there is more to come. India is today a global player. Foreign entities carry out business with Indian parties even if they are not physically present in India. Let us take another illustration.
EasyDesign PLC has supplied an industrial design to another company in India. Such payment is in the nature of fees for technical services and under the relevant tax treaty, tax is to be withheld only at 10%.

EasyDesign PLC has never carried out any operations in India, this is its first transaction with an Indian buyer and everything seems to be smooth sailing, till such time that the Indian party insists on withholding tax at 20%.

An argument ensues. EasyDesign PLC is thunderstruck by the absurdity of Indian tax laws that require it to obtain a PAN to ensure that tax is withheld at the correct rate of 10 per cent and not 20 per cent. Moreso, if tax is incorrectly withheld in India, it would result in complexities in its assessments in its home country. The Indian buyer, on the other hand, wants to protect itself from any legal hassles.
Tax laws which are not practical have dented a good business relationship. Based on these designs, the Indian company would have been able to sell its final products to EasyDesign’s contacts overseas. It is true that withholding taxes ensure that the tax authorities get their share of the tax pie immediately and effortlessly. However, this rigid rule has complicated business matters.

Exceptions must be carved out to make laws practical. As regards obtaining a PAN number, certain categories must be exempt, such as senior citizens or foreign entities that do not have a fixed place of business in India. If there is a commercial branch in India, it is perfectly fine to expect the foreign entity to apply for and obtain a PAN and indeed to file its tax return and comply with other relevant tax obligations.

In the realm of withholding taxes, the larger issue still remains, of whether tax ought to be withheld at source in India irrespective of whether or not the payment made to the non resident is chargeable to tax in India.

It was the decision of the Karnataka High Court in the case of Samsung Electronics, which sparked off this debate. However, lately a decision by the Delhi High Court in the case of Van Oord ACZ, followed by that of the special bench of the Chennai Tribunal in the case of Prasad Productions have rightly concluded that an Indian payer need not withhold taxes on making payments if such payments are not liable to tax in the hands of the recipient. Yet, this has certainly dealt a blow to those in Karnataka and left others confused. Perhaps in the coming days, a decision by India’s apex court – The Supreme Court of India, will resolve this matter.

It is fair to expect any country to protect its share of the tax pie, however, as Zenobia Aunty always says: One must never miss the woods for the trees.

Courtesy: Image.

Law Street - Economic Times (April 2010) - Overseas acquisitions

Dear Readers,

The days are getting warmer, the sun beats down mercilessly, this prompts Zenobia Aunty to stay indoors, even as she dreams of a visit to Iceland (volcanic eruptions, notwithstanding). But it seems that India Inc is truly leaving its footprints behind on foreign soil. Tax laws, if amended with this growing need in mind, could really put India Inc on the global map. To read more, click here.

In case, you can't access the above link, or the summer heat is making you lazy, the article is also pasted below. Have a nice weekend.

Best regards,
Lubna

Source of the photograph

Globetrotting anew
Overseas M&As must be encouraged
Reforms for overseas M&As must be progressive
Singapore has introduced a M&A write-off
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Travel writer, Pico Iyer is known to have said: “…Travel for me is an act of discovery and of responsibility as well a grand adventure and a constant liberation.” India Inc which is once again confidently striding overseas and engaging not only in setting up shop overseas but boldly acquiring companies overseas would no doubt agree.

After all, in a flat world and one which is only getting flatter, inorganic growth, especially cross-border growth is essential to emerge as a leader or at least find a firm footing on the global map. We do have astute business leaders who are willing to embark on the overseas expansion road trip, keeping in view their stakeholder’s interests. However, the much desired change in regulations to spur outbound growth remains largely elusive.

Indian Companies are expanding their operations worldwide – either through acquisitions or by setting-up new companies. A corresponding trend that has emerged is that more and more Indian companies use their overseas subsidiaries to hold offshore investments. One of the principal reasons in doing so is that repatriating funds to India is extremely inefficient from a taxation point of view – foreign dividends when received by the Indian investor company in India are taxed at the normal corporate rate (current of 30%) plus applicable surcharge and cess.

In addition there is economic double taxation, because Indian companies are taxed on dividends received from its overseas subsidiaries without receiving any credit for foreign taxes that were paid by the dividend paying subsidiary (only a few tax treaties entered into by India, such as those with Mauritius and Singapore provide for underlying tax credit). Developed tax regimes avoid this issue through either providing a tax credit for foreign taxes or by totally exempting the dividend from tax in the recipient jurisdiction. For instance, UK and Japan last year, introduced legislative changes whereby dividend income received from an overseas subsidiary is not taxed.

In fact, globally there are constant developments in the realm of taxation, to encourage outbound growth. Zenobia Aunt’s Singapore attorney friend provided some interesting details. He dropped in last weekend to meet Zenobia Aunty who is currently recuperating and is housebound.
While he was sipping a cup of Darjeeling tea, he happened to look at this paper and the headlines relating to an overseas acquisition. This sparked off a debate on whether India was really friendly to its overseas investors (domestic companies investing overseas). Our friend, the Singapore attorney, felt India still had a lot to do to catch up.

Jet lagged, he wasn’t at this diplomatic best. “The Bandra-Worli sea-link, isn’t enough”, he quipped. This invited glares from all of us and a growl from Spot. Zenobia Aunty was more realistic. While she acknowledges the liberalisation reforms carried out, she still thinks that there is a lot more we can do, or rather must do.
Singapore recently announced its budget proposals which contain some interesting features. A merger and acquisition (M&A) allowance will be available in respect of transactions that qualify during the five year period commencing from April 1, 2010. The quantum of the M&A allowance is 5 per cent of the value of the acquisition
subject to a cap of Singapore dollars 5 million. This M&A allowance is to be written off by the Singapore company equally over a five year period. Further stamp duties on transfer of unlisted shares in respect of such qualified M&As will also be remitted subject to the stipulated caps.

The Singapore government has recognised that M&As are a necessary tool for strategic growth and globalisation. The M&A allowance, in the form of a tax write-off helps defray a portion of the costs of acquisitions. It is simple, because it does not distinguish between interest costs and other costs and hence is neutral between debt and equity financing in the M&A deal.

Zenobia Aunty is quick to point out that the RBI has over the years liberalised the provisions relating to outbound investments. The overall limit for outbound investments by Indian companies now stands at 400 per cent of its net-worth. However, our tax laws have not been as progressive.

While anti-avoidance provisions are sure to be introduced when the Direct Tax Code (DTC) comes into play, progressive tax laws must not be ignored. Perhaps a cue can be taken from Singapore, and also from Japan and UK, which have now exempt foreign dividends repatriated back to the home country. And if we could introduce an M&A write-off, nothing like it.

Recent statistics released by ‘Business Monitor International’ show that the outbound foreign direct investment as a percentage of GDP in developed countries is 33 per cent. In the BRIC countries it is as follows: Russia (20 per cent); Brazil (10 per cent), China (3 per cent) and India (2.6 per cent). For India to catch up, supportive domestic legislations, especially on the tax front hold the key.