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Cfc 11.07.10
Cfc 11.07.10
Cfc 11.07.10
Cfc 11.07.10
Cfc 11.07.10
Cfc 11.07.10
Cfc 11.07.10
Cfc 11.07.10
Cfc 11.07.10
Cfc 11.07.10
Cfc 11.07.10
Cfc 11.07.10
Cfc 11.07.10
Cfc 11.07.10
Cfc 11.07.10
Cfc 11.07.10
Cfc 11.07.10
Cfc 11.07.10
Cfc 11.07.10
Cfc 11.07.10
Cfc 11.07.10
Cfc 11.07.10
Cfc 11.07.10
Cfc 11.07.10
Cfc 11.07.10
Cfc 11.07.10
Cfc 11.07.10
Cfc 11.07.10
Cfc 11.07.10
Cfc 11.07.10
Cfc 11.07.10
Cfc 11.07.10
Cfc 11.07.10
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Cfc 11.07.10

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  • 1. Certificate Course on International Taxation by ICAI Controlled Foreign Corporation Presented by: Mr. Paresh P. Shah Chartered Accountant P. P. Shah & Associates Email: ppshahandassociates@gmail.com 11th July 2010 P. P. Shah & Associates
  • 2. Overview of the Presentation Concept of CFC CFC Rules – A Rationale Meaning of CFC Structure of CFC Regulations Tax Treaty & CFC Rules Tax Planning with CFC regime Compliance & Statutory reporting 11th July 2010 P. P. Shah & Associates
  • 3. Concept of CFC An Anti avoidance tool normally introduced to prevent deferral of tax payable on the foreign source income by the taxpayer in their country of residence 11th July 2010 P. P. Shah & Associates
  • 4. Tax Deferral - Illustration US Co. engaged in manufacturing laptop, with US$ 800 as manufacturing cost, sales it to India at US$ 1200. Selling, distribution and administration cost incurred in India is US$ 200. US Co has a wholly owned subsidiary (WOS) in India and also a WOS in Mauritius which does not perform any activity in respect of laptop manufacturing or its sales Case I: US Co sales the laptop to WOS in India Case II: US Co sales the laptop to WOS in Mauritius which in turn sales to I Co 11th July 2010 P. P. Shah & Associates
  • 5. Tax Deferral Case I Sale to I Co at US$ 900 Profit accrues as under US Co: US$ 100 I Co: US$100 Assuming tax in India & USA @ 35% Effective tax implication for US Co is US$ 70 11th July 2010 P. P. Shah & Associates
  • 6. Tax Deferral Case II Sale to M Co at US$ 850 Sale to I Co at US$ 900 Profit accrues as under US Co: US$ 50 M Co: US$ 50 I Co: US$ 100 Assuming tax in India & USA @ 35% Effective tax implication for US Co is US$ 52.50 Saving of US$ 17.50 11th July 2010 P. P. Shah & Associates
  • 7. CFC – A Rationale Economic objective of state Policy of Capital Export Neutrality Policy of Capital Import Neutrality Exempt Foreign Source Income CFC and Exchange control Working Group recommendation to amend ITA, 1961 to introduce CFC & Thin Capitalisation 11th July 2010 P. P. Shah & Associates
  • 8. Tax Avoidance Avenues Tax Deferrals Base erosion techniques Income splitting & shifting Conduit Company Thin Capitalisation [OECD MC Art.1 Paragraph 7 to 23] 11th July 2010 P. P. Shah & Associates
  • 9. Tax Avoidance Measures CFC Anti treaty shopping Limitation of benefits Round tripping Subject to tax approach Look through approach Thin Capitalisation Rules Transfer Pricing Regulation 11th July 2010 P. P. Shah & Associates
  • 10. Tax Deferral – Snapshot Applicability to Residents Foreign Corporations controlled by resident shareholders Tax deferral – a discretion of resident shareholder Attribution of income of CFC to resident shareholder A Qualified CFC 11th July 2010 P. P. Shah & Associates
  • 11. CFC – Meaning A foreign Corporation is considered as CFC if it is controlled directly or indirectly by Resident/s Residents could be either Corporations or all the taxpayers 11th July 2010 P. P. Shah & Associates
  • 12. Structure of CFC Rules – Overview Applicability Global or Jurisdiction approach Taxable income under transaction or entity approach Types / Nature of income Exemption under CFC Rules 11th July 2010 P. P. Shah & Associates
  • 13. Applicability of CFC Rules Applicable to resident/s of the country under certain situations Control test: Normally resident shareholders controlling more than 50% of the voting power of subject CFC directly or indirectly A Qualified CFC - Normally defined under the domestic tax law or the corporation incorporated in the designated jurisdictions to prescribe Minimum & overall shareholding Minimum period of holding during the tax year Quantum of attribution Nature of income Date of trigger of the rules Operating subsidiaries and CFC Tax neutral jurisdictions and CFC 11th July 2010 P. P. Shah & Associates
  • 14. Application of CFC Rules Global Approach: CFC rules apply to all the CFCs irrespective of their tax rate (foreign tax rate) of the jurisdiction Designated Jurisdiction approach: CFC rules apply to only those CFCs whose income is subject to low rate of tax and they are residents of specified countries (normally tax heavens or those offering preferential tax regime) 11th July 2010 P. P. Shah & Associates
  • 15. Rules for Taxation of Income Active Income, Passive Income, Mixed Income Taxability of income could be either on transaction basis or on the basis of income of entity itself satisfying certain test as to nature and substantial percentage of income of that particular nature/type Deficiency of entity approach Retention of character of income v/s deemed dividend Double taxation and relief Tax credit of foreign taxes paid by CFC 11th July 2010 P. P. Shah & Associates
  • 16. Complex CFC Rules Precision and Comprehensiveness of the rules Rules for each types of income to be attributed to the resident Rules to exclude active income from the scope Rules to consider mixed income motive test Rules to exclude income earned by CFC related to Resident State, if taxed Rules to avoid round tripping or treat it as constructive dividend 11th July 2010 P. P. Shah & Associates
  • 17. Complex CFC Rules Avoid over burdening by providing threshold Avoid double counting of income due to step down subsidiary/ies being treated as CFC Provide tax credit for foreign taxes paid Keep track of distributed and undistributed income of CFC Taxation of capital of CFC to avoid inflated value of Capital Gains 11th July 2010 P. P. Shah & Associates
  • 18. CFC Rules & Exemptions Resident may be exempted: generally if CFC does not accumulate passive income or they are not used to divert income from domestic sources Has active income or income in high tax countries Income below the minimum threshold Qualified for acceptable distribution test Motive test passes Is widely held or listed company 11th July 2010 P. P. Shah & Associates
  • 19. CFC Rules & DTAA Is CFC Rules are in conflict with the provisions of the treaty? A domestic anti avoidance provisions to tax country’s own resident on their share of income earned or accrued in foreign jurisdiction Tax levied on their own residents does not lead to reduction in the profits of the foreign enterprise or the enterprise of the other state. It cannot therefore be said that it is a tax on profits of the foreign enterprise [OECD MC. Art. 7 Para 10.1] 11th July 2010 P. P. Shah & Associates
  • 20. CFC Rules & DTAA Improper use of the DTC Whether benefits of the conventions be available in case of abuse of the provisions of DTC Abuse of the provisions of the domestic law through anti avoidance rules and its conflict with DTC Taxes are levied through domestic law and generally restricted by DTC For some states abuse of DTC is also characterised as abuse of domestic law Question is whether convention can prevent application of anti avoidance provisions of the domestic law To the extent that these anti avoidance provisions/rules are for determinations of which facts give rise to a tax liability, there is no conflict 11th July 2010 P. P. Shah & Associates
  • 21. CFC Rules & DTAA Creditable taxes Another question to be answered in relation to DTC is the credit for foreign taxes paid at the first instance by the CFC and at the second instance of withholding taxes when CFC distributes the income by application of Article 10 of the convention [OECD MC. Art. 23 Para 37 to 39] 11th July 2010 P. P. Shah & Associates
  • 22. Tax Planning Negotiable tax rate of the tax heavens & tax neutral jurisdictions coupled with territorial based taxation Passing the control to JV partner while maintaining right to receive dividend Sale of holding before the trigger date 11th July 2010 P. P. Shah & Associates
  • 23. Compliance and Statutory Reporting Extensive Statutory Reporting Name of Foreign Corporation, its income in the form prescribed, normally as per Accounting Standard followed in the resident country Ownership of partnership by CFC, step down subsidiaries and their income Details of shareholder’s income Eg: CFC regime in USA: form requires about 20 types of details and contains 10 pages of memorandum guide for filling up the form 11th July 2010 P. P. Shah & Associates
  • 24. CFC – U.S. perspective 11th July 2010 P. P. Shah & Associates
  • 25. Definition CFC CFC means a Foreign Corporation whose more than 50% of the combined voting power of all classes of stock or more than 50% of total value is owned by U.S. shareholders U.S. Shareholder U.S. shareholder is any U.S. person owning at least 10% of the total combined voting power of all classes of voting stock of the foreign corporation Ownership Ownership shall include all forms of ownership; direct, indirect and constructive 11th July 2010 P. P. Shah & Associates
  • 26. Taxation of Income Shareholder’s pro rata share of CFC’s tainted earnings be deemed as dividend earned by US shareholder. Principal types of tainted earnings are Subpart F income (Section 958) Earnings invested in US property Previously excluded Subpart F income withdrawn from investments in less developed countries Previously excluded Subpart F income withdrawn from foreign base company’s shipping operations 11th July 2010 P. P. Shah & Associates
  • 27. Nature of Income Subpart F income Insurance Income (Sec 953) Foreign base company income (Sec 954) Personal Holding Income Sales Income Services Income Shipping Income Oil-related Income International boycott income determined u/s 999 Illegal bribes or kickbacks paid to a government employee or official Income from certain disfavoured foreign countries 11th July 2010 P. P. Shah & Associates
  • 28. Nature of Income Earnings invested in US property Debt Obligations Trade or service receivables Stock Tangible property Intangibles 11th July 2010 P. P. Shah & Associates
  • 29. Nature of Income Exceptions to Subpart F income US Source business income, if not exempted Gross insurance & gross foreign base company income is less than both $ 1 mn & 5% of CFC’s gross total income Gross insurance & gross foreign base company income exceeds 70% of total income than entire income is treated as sub Part I Income Foreign Income Tax @ 90% of maximum US Tax rate 11th July 2010 P. P. Shah & Associates
  • 30. Foreign Tax credit Deemed Credit provision Relief for double counting Deduction of actual distributions (Sec 959) Adjustment to cost of CFC’s shares (Sec 961) Application of US computation rules 11th July 2010 P. P. Shah & Associates
  • 31. Statutory Reporting (Sec 6038) Stock ownership US shareholders GAAP income statement and balance sheet Foreign income taxes Current and accumulated earnings and profits US shareholder’s pro rata share of Subpart F income and any increase in earnings invested in US property Transactions between the CFC and shareholders or other related persons 11th July 2010 P. P. Shah & Associates
  • 32. Questions 11th July 2010 P. P. Shah & Associates
  • 33. Thank You 11th July 2010 P. P. Shah & Associates

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