Union Budget 2016 – International tax proposals
With the adoption of the BEPS package, OECD and G20 countries laid the foundations of a modern international tax framework under which profits would be taxed where economic activity and value creation occurs. It is now time to focus on implementation of the recommended changes in a consistent and coherent manner. The OECD recognizes that countries are sovereign and measures may therefore be implemented in different manners. It is however expected that countries will seek consistency and convergence when deciding upon implementation of the measures.These measures range from new minimum standards to revision of existing standards, common approaches which will facilitate the convergence of national practices and guidance drawing on best practices. Implementation measures would therefore involve revisions to the OECD TP Guidelines, changes to bilateral tax treaties, including through the multilateral instrument, as well as domestic tax law changes. The 2016 Union Budget was widely expected to outline India’s commitment to the BEPS agenda and an implementation road map.
BEPS actions relating to transparency through country-by-country reporting (CbCR) and improved transfer pricing documentation were clearly expected to be the priorities for the Government.With regard to CbCRand TP documentation implementation, the Government has broadly adopted the recommendations and guidance contained in Action 13. While enabling legislative amendments have been proposed, more details can be expected when the rules are notified.
BEPS risks which stand exacerbated by the digital economy have been a concern for India. While the OECD/ G20 countries have agreed to monitor developments and analyse data that will become available over time to address Digital Economy taxation, the Action 1report also suggests that countries could introduce provisions in their domestic tax law as additional safeguards against BEPS, provided they respect existing treaty obligations.
In order to address the tax challenges arising from the Digital Economy, it is proposed to insert a new Chapter titled “Equalisation Levy” in the tax law, to provide for an equalisation levy of 6 % of the amount of consideration for specified services received or receivable by a non-resident not having permanent establishment (‘PE’) in India, from a resident in India who carries out business or profession, or from a non-resident having permanent establishment in India.
It is important to recognize that much ground has shifted in the global tax debate. Many countries (including those with relatively lower corporate tax rates) have enacted the so called “patent or innovation box” regime in order to spur innovation and domestic manufacturing. The regime grants a lower tax rate on profits from intangibles, “boxing” them off from rest of the system. In order to encourage indigenous research & development activities and to make India global R & D hub, the Budget proposes to put in place a concessional taxation regime for income from patents.With a strong technology and knowledge driven economy, India may be in a sweet spot to attract investors in such a regime, who now need to ensure that such regimes are not harmful tax practices under the “nexus approach” as recommended by the OECD BEPS project i.e. taxpayers can use IP regimes only if they show significant R&D occurs in that jurisdiction.
The provisions of section 6 of the Act provide for conditions in which residence in India is determined in case of different category of persons. Section 6(3) deals with conditions to be satisfied for a company to be treated as resident in India in any previous year. Prior to amendment of section 6(3) by the Finance Act 2015, a company was said to be resident in India in any previous year if it was an Indian company or during that year the control and management of its affairs was situated wholly in India. The Finance Act, 2015 amended the above provision so as to provide that a company would be resident in India in any previous year if it is an Indian company or its Place of Effective Management (POEM) in that year is in India. The POEM was defined to mean a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are in substance made.
In the context of implementation of POEM based residence rule, certain issues, relating to the applicability of current provisions of the Act to a company which is incorporated outside India and has not earlier been assessed to tax in India, have arisen. In particular, the issues relate to applicability of specific provisions of the Act relating to Advance tax payment, applicability of TDS provisions, computation of total income, set off of losses and manner of application of transfer pricing regime. These provisions have compliance requirements which would not have been undertaken by the company at relevant time due to absence of any such requirement under tax laws of country of incorporation of such company. Similarly, issues of computation of depreciation also arise when in earlier years it has not been subject to computation under the Act. Problems highlighted also arise due to the fact that a company may be claiming to be a foreign company not resident in India but in the course of assessment, it is held to be resident based on POEM being in fact in India. This determination would be well after closure of the previous year and it may not be possible for company to undertake many of procedural requirements.
In order to provide clarity in respect of implementation of POEM based rule of residence and also to address concerns of the stakeholders, the Budget proposes to defer applicability of POEM based residence test by one year as well as provide a transition mechanism.
The BEPS project reflects the view that current international tax standards have not kept pace with changes in global business practices. It also sets out that the gaps in the interaction of domestic tax rules of various countries, the application of bilateral tax treaties to multi-jurisdictional arrangements and the rise of the digital economy have led to weaknesses in the international tax system. The BEPS final reports include recommendations for significant changes in key elements of the international tax architecture. International tax changes stemming from the OECD BEPS project will transform the global tax environment. The 2016 Budget shows that India is fully committed to implementing a number of BEPS recommendations which may get implemented over a period of time through legislative amendments as well as changes to rules and administrative procedures.The international tax proposals implemented in the Union Budget 2016 could be far reaching. International investors would need to carefully monitor developments and assess impact on their operations.
