INTERNATIONAL TAXATION

What is International Taxation?
 International taxation is the study or determination of tax on a person or business subject to the tax laws of different countries, or the international aspects of an individual country’s tax laws as the case may be.

What is International transactions?
An international transaction is a cross-border trade agreement or a credit operation that requires settlement in a foreign currency. In the chronology of a typical international transaction involving the exchange of goods or services, the settlement date is the last stage.

NR Professionals (NRP) international tax team plays an integral role in the firm’s cross-border practice. NRP is particularly recognized for its innovative approach to tax structuring. Our tax lawyers have extensive experience and we are known for our strategic & creative tax planning and structuring advice, particularly in relation to cross-border transactions.

Our professionals are drawn from a wide range of histories. Market expertise, service line expertise, international exposure and advanced training outfits them to collaborate with our clients and be their experts in a wide spectrum of their service procedures.

Our in-depth understanding of sector verticals such as investment funds, e-commerce, business process outsourcing, media and entertainment, banking and insurance, infrastructure, real-estate and hospitality, bio technology and life sciences allow us to anticipate as well as target tax issues beforehand.

Our emphasis on study as well as constant understanding has actually stood us in great stead, with our people being recognized and felicitated for our idea management.

“NR Professional’s strong research study emphasis implies that it has the ability to supply ingenious solutions to complex tax obligation issues. NR Professional is a doyen in the global tax obligation arena and also wins distinctions for being just one of the best minds in the marketplace.

1. Expatriate Taxation

What is Expatriate?

Expatriates are people who check out other nation for temporary period for working in the Indian entity. Much of the multinational enterprises having existence around the world might send out some of its workers to nations where it has visibility in order to assist the neighborhood firm in their service tasks. This phenomenon under is also understood to as international mobility in the context of employment.

What is Expatriate Taxation?

There is no specific definition as per the Income Tax Act, 1961, so we rely on the general meaning of the word. A person living in a country other than his or her country of citizenship, often temporarily and for work reasons.

How Residential Status of Expatriate is decided?

For an expat, the residential status is to be determined as per two views, that is, the Income Tax Act and the DTAA. There are certain instances where the expat may be a resident of both countries as per the relevant taxation laws. This gives rise to the ‘Tie Breaker Rule’. The factors to be considered for this are as follows:-

1. Factors Description

   (i) Permanent home:  The country in which he/she has a permanent home available to him/her

   (ii) Centre of vital interest:  The country with which his/her personal and economic relations are closer

   (iii) Habitual abode:  The country in which he/she has a habitual abode

   (iv) Nationality:  Country of which he/ she is a national

   (v) Competent authorities:  As determined by mutual agreement between both the countries competent authorities

What is Tie Breaker Rule?

Tie-breaker rules, as the name suggests, serve to determine which of two countries should tax an individual as his/her country of residence, in case there is a “tie” on the matter between two countries. … Hence, double taxation of the same income is avoided.

Revenue of the expats might be taxed in the country to which they are temporarily working. India has specific tax stipulations which might use to the expats seeing India. In order to determine their taxability in India, the residential status of such expats will become relevant. Residential status as per the Income-tax Act, 1961 (‘the Act’) will depend upon the period of stay of such expat in India. Solutions, which may be provided by NR Professionals in Expatriate Taxation matters, include:

SCOPE OF SERVICES:

• Obtaining Tax Registrations

• Determine Residential Status

• Issuance of technical opinions on questions of law;

• Monthly withholding tax calculation

• Annual Income tax return preparation and

• Representation before the revenue authorities including appellate level and tax tribunal and allied assistance on litigation management including strategic advisory

• evaluating the applicability of the double taxation avoidance agreement with the relevant country, in relation to relevant streams of income;

2. NON-RESIDENT INDIANS (NRI) TAXATION

Who is Non-Resident?

A non-resident is an individual who mainly resides in one region or jurisdiction but has interests in another region. In the region where they do not mainly reside, they will be classified by government authorities as a non-resident.

Indian citizens or people of Indian birth residing outside India could be termed as Non-Resident Indian. The era of globalization has led to large employee movements across the globe. Employees are being sent to work in other countries

Which increases the tax complications for such employees in both the countries. Non-Resident Indians (NRI) are citizens of India or Persons of Indian origin(PIO) who become non-residents in India on account of their duration of stay outside India.

In order to analyze the tax impact of NRIs in India, it would be relevant to determine the tax laws both, under the Act as well as the double taxation avoidance agreement. The foreign tax credits available to such NRIs shall also have to be evaluated.

SCOPE OF SERVICES:

• Assist in obtaining tax registration?

• Determination of Residential Status

• property and investment transactions

• issuance of technical opinions on questions of law;

• pre and post NRI status

• Preparing and filing Annual Income tax returns and transaction based challans for tax payments if any

• Representation before the revenue authorities including appellate level and tax tribunal and allied assistance on litigation management including strategic advisory;

• Evaluating the applicability of the double taxation avoidance agreement with the relevant country, in relation to relevant streams of income;

• Assistance in claim of foreign tax credits, based on relevance;

• Issuance of remittance certificates under Form 15CA/ Form 15CB and other compliance certificates if any.

3. USA AMNESTY SCHEME

NR Professionals offer professional services regarding Streamlined Domestic Offshore Procedure (SDOP) and Streamlined Foreign Offshore Procedures (SFOP) by way of Computation of penalty as applicable ; preparations of Indian income in US$ terms for revising Fed Tax returns for previous 3 years ; annexures of Foreign Bank Account Reporting (FBAR) for previous 6 years ; annexures of Foreign Assets Tax Compliance Act (FATCA) for previous 3 years and address queries of US CPA and lawyer if any.

Under US tax laws US Citizens ; Green Card Holders , H1 visa holder residing in USA or abroad ; an individual who has stayed in USA for 183 days or more and a US Tax Resident is required to declare overseas income and financial assets . Brief details and penalties for failure are mentioned herein :

1. GLOBAL INCOME TAXED IN USA and worldwide income is to be reported in US tax return subject to tax credit for taxes paid abroad .

• • Penalty for failure attracts additional taxes , interest , fines & in extreme cases even imprisonment.
  • IRS weblink : http://www.irs.gov/Businesses/Income-from-Abroad-is-Taxable

2. FILE REPORT OF FOREIGN BANK AND FINANCIAL ACCOUNTS (FBAR) if overseas institutional financial accounts wherein one has signing authority exceeds US$ 10,000 any time during the year.

• • Penalty for failure to report is $10,000 per violation. However penalty for willful violation is minimum $ 100,000 or 50% of account balance, whichever is higher.
  • IRS weblink :http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Report-of-Foreign-Bank-and-Financial-Accounts-FBAR

3. FILE REPORT OF FOREIGN ACCOUNT TAX COMPLIANCE ACT (FATCA) if all financial accounts including Personal Loans, Partnership Investments, etc. exceed US$ 100,000 as on 31st December or US $ 150,000 during the year in case of married joint returns in Form 8938 along with Form 1040 .

• • Failure to file Form 8938 by due date or filing an incomplete form attracts penalty of $10,000.
  • IRS weblink: http://www.irs.gov/Businesses/Corporations/Summary-of-FATCA-Reporting-for-U.S.-Taxpayers

4. GIFT RECEIVED REQUIRES REPORTING in Form 3520 if the amount of gift received exceeds US$ 100,000.

• • Failure is subject to penalty up to 5% of the amount of the foreign gift for each month for which failure continues and can raise up to 35% if unreported gifts are received from Overseas Trust upon distribution.
  • IRS weblink : http://www.irs.gov/instructions/i3520/

5. INHERITANCE RECEIVED REQUIRES REPORTING in Form 3520 if the amount of inherited assets exceeds US$ 100,000.

• • Failure is subject to penalty up to 5% of the amount of the foreign gift for each month for which failure continues and can raise up to 35% if unreported inherited assets received from Overseas Trust upon distribution.
  • IRS weblink : http://www.irs.gov/instructions/i3520/

6. GIFT GIVEN REQUIRES REPORTING in Form 709 if gift to each donee exceeds US$ 14000. Lifetime gift and estate exclusion is $5,340,000 for year 2014.

• • Penalty for Non Payment of gift tax can range from 5% to 25% of the amount of gift.
  • IRS weblink : www.irs.gov/pub/irs-pdf/i709.pdf

7. PASSIVE FOREIGN INVESTMENT COMPANY (PFIC) rules apply to gain of Overseas Mutual Funds.

• • PFIC rules require computation and payment of tax on notional income i.e. Net Asset Value (NAV) as at the end of the year.
  • IRS weblink : http://www.irs.gov/instructions/i8621/ch01.html

8. IRS has also specified other Forms such as Form 5471 for reporting of investments in Foreign Corporation (Investment by each individual more than 10%) & Form 8865 for investments in Foreign Partnership Firm (Investment by each individual more than 10%) etc.

• • Failure attracts various penalties.

IMMUNITY FROM FAILURE TO COMPLY ANY OF THESE CAN BE AVAILED UNDER STREAMLINED FILING COMPLIANCE PROCEDURE(SFCP) – ONE EACH FOR FOR US TAXPAYERS RESIDING IN THE UNITED STATES AS “STREAMLINED DOMESTIC OFFSHORE PROCEDURES” (SDOP) AND FOR US TAXPAYERS RESIDING OUTSIDE THE US AS “STREAMLINED FOREIGN OFFSHORE PROCEDURES” (SFOP )

4. DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA)

NR Professionals are expert in Interpretations and analysis conceding real intent behind any clause or DTAA article incorporation. We envisage future dispute and issues and resolve it with very international transactions / Cross Border Transaction’s initial phase itself. The basic objective is to promote and foster economic trade and investment between two Countries by avoiding double taxation.

Tax payers have the option to pay tax as per the provision of the Act or applicable Double Taxation Avoidance Agreement (DTAA), whichever is more beneficial. Double taxation can be avoided either in the form of income exemption or by claiming credit of taxes paid in another jurisdiction. A DTAA becomes applicable in cases where an individual is a resident of one nation, but earns income in another.

What is DTAA (double taxation avoidance agreement) in Income tax?

The Double Taxation Avoidance Agreement or DTAA is a tax treaty signed between India and another country (or any two/multiple countries) so that taxpayers can avoid paying double taxes on their income earned from the source country as well as the residence country. … This is where the DTAA becomes useful for taxpayers.

Types of Model Conventions?

(A) OECD Model
(B) UN Model
(C) US Model

(A) OECD Convention / Model

What is Full form of OECD? What is OECD model Convention?
OECD full form is “The Organization for Economic Co-operation and Development.” It is an international organization that works to build better policies for better lives for all member of OECD Countries. OECD meaning in very simple terms is to provide base for OECD guidelines and sharing of expertise among OECD member countries.

       All OECD Members consisting of governments, policy makers and citizens, we work on establishing evidence-based international standards, OECD economic outline and finding solutions to a range of social, economic and environmental challenges. From improving economic performance and creating jobs to fostering strong education and fighting international tax evasion, we provide a unique forum and knowledge hub for OECD data and analysis, exchange of experiences, best-practice sharing, and advice on public policies and international standard-setting. This Model mostly followed by Developed Nations favoring resident based taxation.

(B)  UN Convention / Model:

       United Nations Convention may refer to: Organizations, mainly in economic and social fields and for the promotion of human rights, that are set up by the United Nations Economic and Social Council under the authority of Article 68 Of the United Nations Charter. This Model mostly followed by Developing and Developed countries favoring taxation-based source income.

(C)  US Convention / Model:

     The Government of the United States of America and the Government of other jurisdiction, intending to conclude a Convention for the elimination of double taxation with respect to taxes on income without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in this Convention for the indirect benefit of residents of third states).

SCOPE OF SERVICES:

1. Tax efficient structuring of cross border transactions
2. Structuring cross-border mergers and acquisitions
3. Indian Entry Strategy
4. India exit strategies
5. DTAA interpretation and advisory including:

• Advice on double tax avoidance agreements and efficient utilization
• Issues related to treat interpretation such as characteristic of income
• Permanent Establishment analysis including advice on the ways to avoid the exposure

6. Advice on taxability on Liaison Offices, Branch Offices and Project Offices
7. Withholding tax issues while doing business with Indian clients and obtaining withholding certificates
8. Issues relating to treaty interpretation such characterization of income and permanent establishment concerns
9. Assist in understanding MLI implications over DTAA
10. Advice for elimination of double taxation
11. Capital Gains under Double Taxation Avoidance Agreement
12. Tax advice aspects on Financing transactions
13. International tax planning of Structuring of investments
14. Advising on transnational joint ventures and collaborations
15. Globalization of Indian enterprises abroad
16. Tax efficient structuring of cross border transactions

5. ROYALTY AND FEES FOR TECHNICAL SERVICES

On account of increase in cross-border transactions, payments in the nature of royalty and fees for technical services (‘FTS’) have also increased considerably. The Organization for Economic Cooperation and Development (OECD) Model Convention and the United Nations (UN) Model Convention have an article for the taxation of royalty. However, the taxation of FTS was not there in both the Conventions. This is because, import of technical services is not common within the developed countries and thus, both the conventions never felt the need to include an article on taxation of FTS. However, with the changing times and considering the situation of the developing countries, the recently amended UN Model Convention 2017 has included an article on taxation of FTS.

Many of the double taxation avoidance agreement which India has entered into with the other countries does have an article on taxation of fees for technical services.

What constitutes Royalty as per the IT Act, 1961?

Royalty under the Indian Income Tax act, 1961 is defined under Section 9 of the Act. This section provides that consideration flowing in from the following items fall under the category of royalty:

a) the transfer of all or any rights (including the granting of a license) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property;
        b) the imparting of any information concerning the working of or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property;
        c) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property;
       d) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill;
       e) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;
       f) the transfer of all or any rights (including the granting of a license) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection             with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or
       g) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v).

What constitutes Fees for Technical Services as per the I-T Act, 1961?

Fees for Technical Services (FTS) have been defined in Section 9 itself under clause (vii) as any consideration (including lump sum) for rendering of any managerial, technical or professional services including the services of technical or other personnel. However, considerations for assembly, mining or similar project undertaken by the recipient have been taken out of the ambit of the definition of FTS. Similarly if any sum is received by a non-resident technician is chargeable to tax as salaries, the receipt cannot be taxable as FTS.
Following are not in the nature of FTS:

          • Consideration for any construction, assembly, and mining or like project.
          • Salary received by a person in connection with providing technical service.

What is Royalty and Fees for Technical Services as per DTAA or Treaties or Model Conventions?

The term “royalties” as used in this DTAA/Model Conventions means:

           (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof ; and
          (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of Article 8.

The term “fees for technical services” as per DTAA/Model Conventions means:

Payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services :

(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received ; or
(b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design.

SCOPE OF SERVICES:

• Tax advisory

• Preparation and filing of Income-tax Return

• Withholding tax return

• Issuance of technical opinions on questions of law; Issuance of remittance certificates under Form 15CA/

• Form 15CB and other compliance certificates if any.

• Representation before the revenue authorities including appellate level and tax tribunal and allied assistance on litigation management including strategic advisory.

6. PERMANENT ESTABLISHMENT

What is Permanent Establishment?

The most important issue in the treaty based international fiscal law is the concept of Permanent Establishment (PE).All the three model conventions namely, UN (United Nations) Model, OECD (Organization for Economic Co-operation and Development) Model and US (United States of America) Model use PE as the main instrument to establish taxing jurisdiction over a foreigner’s business activities.

Treatment of Permanent Establishment?

Once it is determined that a foreign firm has a PE in India, profits linked to its activities in India will be taxed as “Business Income” in accordance with Article 7 of the treaties. … They must apply for PAN, TAN and should be registered under regulations of Indirect tax.

The concept of permanent establishment (‘PE’) gained importance as many entities started carrying out business in foreign countries by way of presence in that country either through an office set-up or through any of its employee or other personnel. As the business is carried out by the entity in the foreign country, the right to tax income generated from such business should also be with that foreign country.

This gives rise to the cross-border taxation based on the PE of the entity in the foreign country. The double taxation avoidance agreement has generally two type of permanent establishment – fixed place and dependent agency PE. However, most of the double taxation avoidance agreements (DTAA) which India has entered into with other countries has an additional concept of Service PE wherein if the employee or personnel of the foreign entity is present in India for more than the specified threshold limit providing services to another person/entity in India then the said employee or personnel shall constitute a service PE of the foreign entity in India. Income attributable to the foreign entity on account of the presence of such employee/personnel in India shall be taxable in India.c

Permanent Establishment as per Income Tax Act, 1961:

As per section 92F(iiia) of Income Tax Act, 1961, ‘Permanent Establishment‘ includes a fixed place of business through which the business of the enterprise is wholly or partly carried on. … These agreements are generally called DTAA agreement and may also called as Tax Treaties.

SCOPE OF SERVICES:

• Tax advisory

• Income attribution

• Assistance in obtaining Tax Registrations

• Obtaining certificate under section 197

• Preparation and filing of Income-tax Return

• Issuance of technical opinions on questions of law;

• Representation before the revenue authorities including appellate level and tax tribunal and allied assistance on litigation management including strategic advisory.

7. GENERAL ANTI AVOIDANCE RULE (GAAR)

What is General Anti Avoidance Rule (‘GAAR’)?

The General Anti-Avoidance Rule (GAAR) is an anti-tax avoidance law in India to curb tax evasion and avoid tax leaks. It came into effect on 1st April 2017. The GAAR provisions come under the Income Tax Act, 1961. GAAR is a tool for checking aggressive tax planning especially that transaction or business arrangement which is/are entered into with the objective of avoiding tax. It is specifically aimed at cutting revenue losses that happen to the government due to aggressive tax avoidance measures practiced by companies. The Vodafone case, the biggest sensation of Indian Taxation history is one of the main reasons for the framework of GAAR.

Concept of Tax Evasion, Tax Avoidance and Tax mitigation:

What is Tax mitigation: It is a ‘positive’ term in the context of a situation where taxpayers take advantage of a fiscal incentive provided to them by a tax legislation by complying with its conditions and taking cognisance of the economic consequences of their actions. Tax mitigation is permitted under the Act. This tax reduction is acceptable even after GAAR has come into force.

What is Tax evasion: It is when a person or entity does not pay the taxes that is due to the government. This is illegal and liable to prosecution. Illegality, wilful suppression of facts, misrepresentation and fraud—all constitute tax evasion, which is prohibited under law. This is also not covered by GAAR as the existing jurisprudence is sufficient to cover tax evasion/Sham transactions.

What is Tax avoidance: It includes actions taken by a taxpayer, none of which are illegal or forbidden by the law. However, although these are not prohibited by the law, they are considered undesirable and inequitable, since they undermine the objective of effective collection of revenue. GAAR is specifically against transactions where the sole intention is to avoid tax. In this the taxpayers used legal steps which results in tax reduction, which steps would not have been undertaken if there was no tax reduction. This kind of tax avoidance planning is sought to be covered by GAAR.

Broad Scope of GAAR?

With GAAR there is no difference between tax avoidance and tax evasion. All transactions which have the implication of avoiding tax can come under the scanner of GAAR.

When Can GAAR Apply?

As per the provision of the Income Tax Act, GAAR would apply to an arrangement entered into by the tax payer which may be declared to be an impermissible avoidance agreement (IAA). This provision starts with a non-obstante clause. Thus, it has an overriding applicability.

What is Impermissible Avoidance arrangement (IAA)?

The provision of GAAR is to codify the doctrine of ‘substance over form’ where the real intention of the parties and purpose of an arrangement is taken into account for determining the tax consequences, irrespective of the legal structure of the concerned transaction or arrangement.

Therefore, GAAR provisions are applicable to “Impermissible avoidance arrangement” (IAA) for which following two conditions have to be satisfied :

1. The main purpose of entering into such arrangement is to obtain tax benefit, and

2. If the arrangement:

• Creates rights or obligations, which are not ordinarily created between persons dealing at Arm’s Length Price (or)
• Results, directly or indirectly, in the misuse or abuse of the provisions of The Income Tax Act (or)
• Lacks or deemed to lack commercial substance in the whole or in part (or)
• Is entered or carried out by means or in a manner which is not ordinarily employed for bona fide purpose.

SCOPE OF SERVICES:

• GAAR evaluation

• Issuance of technical opinions on questions of law;

• Representation before the revenue authorities including appellate level and tax tribunal in relation to the arrangements alleged to have been anti-avoidance arrangements.

8. BASE EROSION AND PROFIT SHIFTING (BEPS) & MULTILATERAL INSTRUMENT (MLI)

(A) Base Erosion & Profit Shifting (BEPS)

What is BEPS (Base Erosion & Profit Shifting)?

Base erosion and profit shifting (BEPS) refers to tax planning strategies used by multinational enterprises that exploit gaps and mismatches in tax rules to avoid paying tax. Developing countries’ higher reliance on corporate income tax means they suffer from BEPS disproportionately. BEPS practices cost countries USD 100-240 billion in lost revenue annually. Working together within OECD/G20 Inclusive Framework on BEPS, 141 countries and jurisdictions are collaborating on the implementation of 15 measures to tackle tax avoidance, improve the coherence of international tax rules and ensure a more transparent tax environment.

What is inclusive framework for BEPS?

The Inclusive Framework on BEPS allows interested countries and jurisdictions to work with OECD and G20 members on developing standards on BEPS related issues and review and monitor the implementation of the BEPS Package. … The results of the peer reviews show strong implementation throughout the world.

List of BEPS Action Plans:

In Feb 2103 OCED published a report addressing Base Erosion profit Shifting explaining the need for analyzing the issue of tax base erosion and profit shifting by global corporations. OCED further followed it up by publishing draft action plan which identifies 15 actions to address BEPS in comprehensive manner. They are:

1. Address the Tax Challenges of digital Economy

2. Neutralize the effects of hybrid mismatch arrangements

3. Strengthen Controlled Foreign Company rules

4. Limit Base erosion via interest deductions and other financial payments

5. Counter harmful tax practices most efficiently

6. Prevent treaty abuse

7. Prevent the artificial avoidance of PE status

8. Considering Transfer pricing for Intangibles

9. Considering Transfer pricing for Risk and capital

10. Considering Transfer pricing for other high risk transactions

11. Establish methodologies to collect analyze data on BEPS

12. Require Tax payers to disclose their aggressive tax planning arrangements

13. Re-Examine Transfer pricing documentation

14. Make Dispute resolution mechanism more effective

15. Develop a Multilateral Instrument

(B) Multilateral Instruments (MLI):

What is Multilateral Instruments?

The MLI offers concrete solutions for governments to close the gaps in existing international tax rules by transposing results from the OECD/G20 BEPS Project into bilateral tax treaties worldwide. The MLI modifies the application of thousands of bilateral tax treaties concluded to eliminate double taxation. It also implements agreed minimum standards to counter treaty abuse and to improve dispute resolution mechanisms while providing flexibility to accommodate specific tax treaty policies.

The provisions of the MLI require the mandatory amendment of bilateral tax treaties to allow for certain minimum standards to be applied in respect of bilateral treaties. The BEPS multilateral instrument looks to: … Treaty benefits would be denied to a resident of a contracting state who is not a ‘Qualified Person’

How to prevent treaty abuse?

To avoid situations of treaty abuse, either of the three should be incorporated in the bilateral treaties through MLI. As far as India’s situation is concerned, India has adopted ‘Principal Purpose Test’

What is the Principal Purpose Test in MLI?

PPT provides that benefits of Covered Tax Agreement shall not be granted in respect of income or capital, if it is satisfied that obtaining the benefit was one of the principal purposes of any arrangement or transaction subject to certain exception. It is relevant that burden of proof lies of proving the PPT is on the tax department.

In November 2016, over 100 jurisdictions concluded negotiations on the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“Multilateral Instrument” or “MLI”) that will Swiftly implement a series of tax treaty measures to update international tax rules and lessen the opportunity for tax Avoidance by multinational enterprises. The MLI which was signed by 68 jurisdictions on 7th June 2017 will enter into force on 1st July 2018. The number of signatories as on date is 78 jurisdictions.

Based on the provisions of BEPS, many countries have already started amending their domestic tax laws to bring the same in line with BEPS. India is one such country where in the past two years, finance minister has brought in amendments such as introduction of equalization levy, secondary adjustment, concept of significant economic presence, modification of the dependent agent definition, etc. which are in line with the BEPS provisions.

SCOPE OF SERVICES:

• BEPS Review

• Modifications to existing business models

• Tax Advisory

• Issuance of technical opinions on questions of law.

• CbCR and Master File related compliances.

• Other compliances similar to the one above, as may be mandated from time to time under the Act.

9. WITHHOLDING TAX ON FOREIGN REMITTANCES

What is Withholding Tax on Foreign Remittances?

As per the Act any sum payable to the non-resident which is chargeable to tax in India should be subject to withholding taxes. Accordingly, the person making the payment to the nonresident shall be liable to withhold appropriate taxes. In case the payer does not withhold taxes from the foreign remittances liable to tax in India then withholding tax proceedings shall be initiated against such payer. Further, the payer shall also not be eligible to claim deduction for such foreign remittances from its taxable income in India

SCOPE OF SERVICES:

• Applicability of withholding tax

• Issuance of technical opinions on questions of law

• Issuance of Form 15CB

• Filing of the withholding tax return

What is Form 15CB?

Form 15CB is required for payments made to Non-Resident, not being a Company, or to a Foreign Company which are taxable and if the payment exceeds ₹5 Lakh. Form 15CB is an event-based form and is required for each remittance that satisfies the condition laid. In form 15CB, a CA certifies the details of the payment, TDS rate, TDS deduction and other details of nature and purpose of remittance. In other words, Form 15CB is the Tax Determination Certificate in which the CA examines a remittance with regard to chargeability provisions.

10. FOREIGN TAX CREDIT

What is Foreign Tax Credit?

Foreign tax credit is the credit claimed in the country of residence for the taxes paid in any other country/source Country in case the income is taxable both, in the country of source as well as the country of residence. The purpose of claim of foreign tax credit is to avoid double taxation of income. Accordingly, if an income is taxed in the source country then the same should not be taxed again in the country of residence.

SCOPE OF SERVICES:

• Eligibility of foreign tax credit

• Issuance of technical opinions on questions of law;

• Filing of Form 67

What is Form 67?

As per Rule 128 of the Income Tax Rules, 1962, a resident taxpayer is eligible to claim credit for any foreign tax paid, in a country or specified territory outside India. The credit shall be allowed only if the assessee furnishes the required particulars in Form 67 within the specified timelines.

11. Issues regarding Place of Effective Management (PoEM)

We can assist in determining the overall strategy of the MNE group in light of the BEPS provisions and assist with the new compliance requirements arising as a result of such projects. In addition, we can also assist in analyzing various intangibles and determine whether group members contributing towards the development, enhancement, maintenance, protection and exploitation of intangibles are being remunerated appropriately in line with the Significant People’s Functions (SPFs) being performed. Further, we can also assist in performing a diagnostic review to evaluate the company’s readiness and preparedness in respect of TP compliance obligations and equip the group to meet the documentation deadlines and help ensure that there is alignment between the local and global documentation.

BEPS – TP action points

Intangibles

Based on the BEPS recommendations, an in-depth scrutiny by the tax authorities worldwide is likely on transactions involving intangibles. Tax authorities are likely to draw inference and support from OECD/BEPS guidelines in determining the return from intangibles. It is therefore essential to analyze how the various Intellectual Property Rights (IPRs), brands, etc. are positioned and whether all group members contributing towards the development, enhancement, maintenance, and the protection and exploitation of intangibles, are being remunerated appropriately and also for determining :

• Location of IPRs vs place of conceptualization and development of such IPRs

• Legal ownership vs beneficial ownership of intangibles and related payments.

Three tier TP Documentation including a Country-by-Country (CbyC) reporting

One of the most important action plans pertaining to transparency is the three-tier TP documentation structure recommended by the OECD for MNEs resident in member and G20 countries.

The three-tier documentation structure:

• Applies to all MNEs whose ultimate parent is a resident of OECD/G8/G20 countries

• Requires providing an overview of the MNE’s global value chain

• Identifies if revenues and profits generated in all jurisdictions are commensurate with substance

• Detects artificial shifting of substantial amounts of income into tax-advantageous environments by an automatic exchange of information between the tax authorities

• Recognizes where groups are located in tax havens or enjoy tax incentives

• Provides transparency on the authenticity of functions, assets and risks of MNEs’ operations.

Each MNE having intercompany transactions with their group companies would be required to prepare:

• Master file to provide the MNE’s blueprint

• Local file to provide material TP positions of the local entity/taxpayer with its foreign affiliates; and

• CbyC Report to provide jurisdiction-wise information.

NR Professionals renders its ignited services into the area of determining Place of Effective Management (POeM).

The Finance Bill, 2015 introduced the concept of POEM for determination of residence of companies by way of amending Section 6 of the Act replacing the words ‘control and management’ by ‘POEM’

POEM is said to have affected could be decided based on following determinants:

• The place where key management and commercial decisions that are necessary for the conduct of the entity’s business as a whole are in substance made.
• The place where the actions to be taken by the entity as a whole are determined.
• Place where majority of the board of directors or equivalent body usually meet.
• Location of and functions performed at head-quarters of the entity.
• The place where the chief executive officer and other senior executives usually carry on their activities.
• Corporate books are located.
• Which country’s laws govern the legal status of the person. Whether determining POEM in one contracting state would lead to improper use of benefits under DTAA.

NR Professionals, in light of relevant provisions of Income Tax Act 1961, renders services for determining whether foreign entities has Place of Effective Management in India or not.