Revised dtc proposal on internationl taxation taxpert 2010

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Revised dtc proposal on internationl taxation taxpert 2010

  1. 1. TAXPERT Professionals Private Limited New Delhi – Mumbai - ChandigarhImpact of Revised DirectTax Code on InternationalTaxation20th June, 2010 TAXPERT Professionals Private Limited
  2. 2. The Direct Tax Code Bill, 2009 (“DTC”) was released by the government of India on 12th August, 2009 forpublic comments along with a discussion paper. On 15th June, 2010 a revised discussion paper is released. Itis meant to respond to the major concerns of stakeholders.This article highlights key provisions that would affect Residence Rules & Scope of Taxation ofcompanies, and primarily companies engaging in cross-border transactions. Original DTC Draft Provisions Revised Discussion Paper Existing Provision as per the Proposed Provisions Income Tax Act, 1961 TEST OF RESIDENCE IN CASE OF FOREIGN COMPANIES Under the DTC, a foreign The "place of effective 1. company would be deemed to be management" is used as the The test of residence for resident in India if the test for determining whether a foreign companies is the management and control of its company incorporated outside “place of effective affairs are situated “wholly or India is resident in India. management” or “place of partly” in India at any time central control and during the financial year. “Place of effective management” for these management”. The inclusion of the word purposes would be defined to “partly” sets a very low threshold mean: for regarding a foreign company At the same time, it is noted as resident in India. • The place where the board that the existing definition of of directors of the company or its Executive directors, as residence of a company in the the case may be, make their Income Tax Act, 1961 based decisions; on the control and management of its affairs Or being situated wholly in India is too high a threshold. If the board of directors routinely approves the commercial and strategic decisions made by the executive directors or officers of the company, the place where such executive directors or officers of the company perform their functions. TAXPERT Professionals Private Limited
  3. 3. CONTROLLED FOREIGN CORPORATIONS (CFC) Under these provisions, if A provision introducing the ‘passive income earned’ by a taxation of CFC income as an foreign company controlled anti-avoidance measure is directly or indirectly by a proposed for the first time. resident in India, and such income is not distributed to There is no existence in shareholders resulting in present situation of such deferral of taxes, then it will be proposal in the current deemed to have been distributed provision of the Income Tax in the hands of resident Act, 1961. shareholders as ‘dividends received’ from the foreign company. TREATY VIS A VIS DOMESTIC TAX LAWThe draft DTC contains a The domestic law or theprovision that the “later in time” relevant tax treaty, whichever is The current provisions of thedoctrine would apply in the event more beneficial to the tax payer, Income-tax Act provide thatof a conflict between the to be applied. between the domestic lawprovisions of a tax treaty and the and relevant DTAA, the oneprovisions of the DTC. The revised Discussion Paper which is more beneficial to indicates that the DTC would be amended to provide for a the taxpayer will apply. limited tax treaty override in the following circumstances:- • when the General Anti Avoidance Rule is invoked, or ; • when Controlled Foreign Corporation provisions are invoked, or; • when Branch Profits Tax is levied. TAXPERT Professionals Private Limited
  4. 4. GENERAL ANTI AVOIDANCE RULES (“GAAR”)The provisions of GAAR was While the government has There is no existence inintroduced in DTC to deal with decided to retain the proposed present situation of suchspecific instances where a GAAR in its existing form, it proposal in the currenttaxpayer enters into an has clarified that not every provision of the Income Taxarrangement, the main purpose of arrangement that would Act, 1961.which is to obtain a tax benefit mitigate tax liability would beand the arrangement is entered classified as an impermissibleinto or carried on in a manner not avoidance agreement.normally employed for bona fidebusiness purposes, is not at arm’s GAAR would be invoked onlylength, abuses the provisions of if the arrangement besidesthe DTC or lacks economic obtaining a tax benefit for thesubstance. taxpayer is also covered by one of the following four conditions It represents misuses to abuse of the provisions of the code It lacks commercial substance It is entered or carried on in a manner not normally employed for bona fide business purposes It is not at an arms length. For further information get in touch with us taxpertprofessionals@gmail.co ; or call us + 91 9769134554 TAXPERT Professional………………….. Adding value with Quality and Commitment TAXPERT Professionals Private Limited

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