Finance Bill 2015 proposal- Residential Status of
Companies- Repercussions
Present government, which is
offering red carpet welcome for foreign investors and also liberalising the tax
regime for funds raising activities in India, is at the same time making
terrain tough for domestic companies having foreign subsidiaries or foreign
companies having operations in India through PE.
One amendment which is
expected to encounter lot many challenges is change in the way Residential
Status of companies in India is to be tested.
Finance Bill 2015 propose that Company will be resident in India (i.e
its global income will be taxable in India) if:-
a)
It is
an Indian Company
b)
Its
place of effective management , at any time in that year, is in India
For the purposes of this clause “place of effective management” means a
place here key management and commercial decisions that are necessary for the
conduct of the business of an entity as a whole are, in substance made.
The million dollar question is
whether propose amendment to tax global income of foreign company in India is
in consonance with Power vested in Indian Constitution to tax income having
territorial nexus with India i.e whether place of effective management of
foreign company, at any in India, established sufficient territorial nexus with
India to justify the taxation of global income of foreign company in India.
The expected hiccups upon operation
of above-said propose amendments are as under:-
1.
Sharing
Business secrets with Income tax department.
Since the
concept of Place of effective management (POEM) is quite subjective, foreign
company may be required to share with Indian Income tax Authority all key
management and commercial decisions to substantiate that nothing of such sort
has taken place in India.
2.
Referring
to Mutual Agreement Procedure
a) In
case there is DTAA between foreign Country, where foreign company is
incorporated, and India, there needs to attribute the residential status of said company under
DTAA to any one of the Country, which can claim to have right to tax its global
business income.
b) Under
DTAA, following steps are required for arriving at the Residential status of
Company:-
i)
Determine Place of Incorporation or place of
management of company.
ii)
If place of Incorporation is in one country and
place of management is in other country or place of management is in both the
countries, determine the place of effective management
iii)
Company will be the resident of Country where the
place of effective management is located
iv)
DTAA has provided any criterion to evaluate
Residential Status criterion, where place of effective management is located in
the both the countries.
v)
If that be the case, company has to invoke the
Mutual Agreement Procedure under DTAA for arriving at its residential status under
DTAA.
c) Thus
for any decision of foreign company taken
in India, which is claimed by IT Authorities to be key management
decision, said company has to go Competent Authorities of both the countries
under Mutual agreement procedure to conclude on its residential status.
d) This
aspect will further deteriorate the ranking of Indian under World Bank’s ease
of doing business Index.
3.
Impediment
in International taxation
a) Considered
a Case where foreign Company is located in Country X and it has cross border
transaction (Say FTS) with country Y.
b) At
the time of transaction between X and Y, the foreign company was resident of
country X.
c) Under
DTAA between X and Y, Y (Source country) does not have right of taxation and as
such, country Y does not withhold the tax on FTS payment made to foreign
Company in country X
d) Later
on due to some business exigency, certain Key management decision of foreign
company is taken in India and it becomes resident of Indian under Proposed
amendment and also under DTAA between Country X and India.
e) Suppose
India has DTAA with country Y and under said DTAA, Country Y has right of
taxation on FTS payment.
f) Now
Foreign Company is Resident of India under DTAA between India and country X. In
this case, Foreign Company claim to be resident of Country X under DTAA between
X and Y seems doubtful.
g) In
this scenario, Country Y may claim that foreign company, which has now become
resident of India, is also liable to pay tax in Country Y on FTS payment and
will further lead to the complexities relating Triangular Treaties issues.
h) Thus
proposed amendment is likely to create obstacles in the smooth functioning of
International Taxation
4.
Other
Procedural Issues
Certain
payments to foreign company from India (when foreign company was resident of
foreign company), which is not taxable under DTAA but taxable under Income Tax
Act, , may cast liability on payer for non-deduction of TDS, if foreign company
becomes resident of India later on due to operation of proposed amendment.
I think that ease and
certainty in the operation of taxing statute is pressing need in current
scenario, merely favourable tax frame work for fund raising activities
unaccompanied by analogous treatment in corporate taxation will not serve the
desire purpose.
