Income-tax department notifies foreign tax credit rules

Foreign tax credit will be available against tax amount, surcharge and cess payable but not for interest, fee or penalty (July 1, 2016)

In a move that will facilitate outbound investment by Indian companies, the income-tax department has notified rules to make it easier for them to claim credit for taxes paid overseas.

The foreign tax credit rules notified by the Central Board of Direct Taxes (CBDT) lay down the mechanism by which Indian companies can reduce their tax liability in India by claiming credit for tax paid in other countries.

The government had put out the draft rules in April seeking stakeholder feedback, which it has now finalized and notified.

As per the final rules, the foreign tax credit will be available against the amount of tax, surcharge and cess payable but not for the amount payable as interest, fee or penalty.

The rules make it easy for claiming foreign tax credit by accepting a self-declaration from the taxpayer on the taxes paid in the foreign country. The earlier draft had mandated a certificate from the foreign tax authorities, which was flagged by companies as impractical.

The rules also allow claiming tax credit for disputed foreign tax claims but do not specify the exact mechanism for the same.

The draft had said that credit cannot be claimed against any foreign tax paid under protest by a taxpayer and currently under dispute. It also did not specify how the credit can be claimed in case the dispute gets settled.

“It will help companies investing overseas in increasing their competitiveness as they can now claim tax credit for taxes paid overseas. This will reduce their tax liability,” said Ajay Rastogi, tax and regulatory partner at PwC India.

“The final rules allow for claiming tax credit for a disputed foreign tax liability. The rules say that you can only claim the credit once the dispute is settled but do not explain how you can claim credit going back 5 or 10 years in case the dispute drags on,” he said, adding that the rules also do not allow for claiming credit for minimum alternate tax.

“The rules now eliminate grey areas such as foreign tax credit on disputed foreign tax liability and also make it easier for the taxpayer to comply with the documentation requirements,” said Rakesh Nangia, managing partner, Nangia & Co.

“The government has appreciated the concerns of the taxpayers and given an option of providing self-certified documents. This process is much simpler than the complex and difficult procedure involving obtaining a certificate from a foreign tax authority,” he said in a note.

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