Budget 2016: International tax reforms

Unveiling the Budget 2016-17 today, Mr. Arun Jaitley, the Finance Minister, stated that the Budget proposals were built on the agenda of ‘Transforming India’ with nine distinct pillars’, including tax reforms, promoting ease of doing business and ensuring fiscal discipline.

The Finance Minister affirmed that amidst the global headwinds, the Indian economy has held its ground firmly. Without doubt,the international community, especially those looking at India as a preferred investment destination would agree that India is surely moving towards attracting foreign investments. The Government attempted to bring increased transparency into the tax system by taking various measures such as issuing draft guidelines on determining the Place of Effective Management, providing clarity on applicability of MAT to Foreign Companies, appointing committees to address tax-related issues, constitution of Income-tax Simplification Committee, etc.

The year 2015, witnessed exceptional changes to the global tax landscape: Base Erosion and Profit Shifting (BEPS) discussion drafts turned into final recommendations, changed the cross-border tax landscape so significantly. Also, the Indian government actively participated in the Organisation for Economic Co-operation and Development (‘OECD’), BEPS project. Being the first Union Budget after release of the final reports by the OECD, BEPS has been the talk of the tax town and was likely to influence tax policy changes in the Budget.

Some of the key changes introduced in the Budget, as being originating from the BEPS report are discussed below:
* Country by country reporting – Indian multinationals having a consolidated revenue exceeding 750 mn Euro, would be subjected to exhaustive documentation norms through a three tiered standardized approach on country by country reporting, master and local file, as a legislative base to BEPS recommendations.

This will require taxpayers to articulate consistent TP positions and provide tax administrations with useful information to assess TP risks, make determinations about where audit resources can most effectively be deployed and, in the event audits are called for, provide information to commence and target audit enquiries.

Patent Tax – Based on the Recommendations of OECD in its Report on Action 5 – ‘Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance’, India has sought to tax income by way of royalty at the rate of ten percent in respect of a patent developed and registered in India, leading to taxation in the jurisdiction where substantial R&D activities are carried out rather than the jurisdiction of legal ownership.

Equalisation Levy – BEPS concerns arising from the digital economy has been a key area of focus for India. The Government with a view to address concern on Digital Economy, has sought to introduce ‘Equalisation Levy’ of 6% of the amount of consideration received/ receivable by a non-resident from a person resident in India or from a non-resident having a PE in India, for services relating to online advertisement, including any provision for digital advertising space or any other facility or service for the purpose of online advertisement.

The Government acknowledged that there is a need to accelerate the positive momentum and investment climate in the country. The new residency criteria for foreign companies introduced in the last Finance Act i.e. Place of Effective Management (POEM) and the release of draft guidelines to determine the PoEM stirred a few emotions in the industry. In these circumstances, the deferral of POEM by one year is a welcome step. With a focus towards ease of doing business and reducing compliance burden, the provisions which provided for higher rate of tax for non-residents in absence of PAN have been done away with and the clarification on non-applicability of MAT retrospectively, on  FII’s and FPI’s not having a place of business in India, in line with the recommendations of the Committee headed by Justice A.P Shah has attempted to end the controversy.

The previous budget provided an impetus to fund managers to relocate to India without having to deal with the fear of creating a Permanent Establishment (PE) in India. The condition was that the Fund had to be a resident of a country which India has a treaty or tax information exchange agreement. Given the concerns raised by the industry, where a fund may not qualify as a tax resident of a country on account of domestic laws or legal framework, with a view to rationalize the regime, to rationalize the regime, it has now been clarified to include a Fund established in a specified territory notified by the Central Government.

With a view to curb litigation on transfer pricing matters, the Government has proposed to deny the right of filing appeal by the Department against the DRP order. On the flip side, in instances where a matter has been stayed by Court or reference for exchange of information has been made by a CA, the time limit available has been extended by a  minimum of sixty days.

ET 29 Feb 2016 Jayesh Sanghvi EY



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