For editorial matters, contact Sophie Ashley, editor, International Tax Review, ITR Premium and TPWeek [email protected]+44 20 7779 8339 For subscription enquiries, contact Nick Burroughs, subscriptions manager [email protected]+44 20 7779 8379 For advertising matters, contact Megan Poundall, business manager [email protected]+44 20 7779 8325 Next page www.internationaltaxreview.com Page 1 INDIA BUDGET 2013 Contents India wants stable tax regime Indian safe harbour rules will be issued says Chidambaram India: Eligibility of German limited partnership for treaty benefits India Budget 2013 SPECIAL FOCUS March 2013 The Indian budget this year has left tax practitioners disappointed, proposing a number of regressive, retrospective and extra-territorial provisions, which would increase the tax and compliance burden for companies operating in the country and impact the way cross-border transactions, and mergers and acquisitions, are carried out. The articles in this International Tax Review and TPWeek special focus aim to give you an overview of the key corporate tax issues in this year’s budget, allowing you to work out your next move.
Transcript
For editorial matters, contact Sophie Ashley, editor, International Tax Review,ITR Premium and [email protected]+44 20 7779 8339
For subscription enquiries, contact Nick Burroughs, subscriptions [email protected]+44 20 7779 8379
For advertising matters, contact Megan Poundall, business [email protected]+44 20 7779 8325
Next pagewww.internationaltaxreview.com Page 1INDIA BUDGET
2013
ContentsIndia wants stable tax regime
Indian safe harbour rules will be issued says Chidambaram
India: Eligibility of German limited partnership for treaty benefits
India Budget 2013 SPECIAL FOCUSMarch 2013
The Indian budget this year has left tax practitioners disappointed, proposing a number of regressive,retrospective and extra-territorial provisions, which would increase the tax and compliance burden forcompanies operating in the country and impact the way cross-border transactions, and mergers andacquisitions, are carried out. The articles in this International Tax Review and TPWeek special focusaim to give you an overview of the key corporate tax issues in this year’s budget, allowing you towork out your next move.
Taxpayers are often nervous in the lead-up to budgetary announcements, andrecent Indian Finance Bills have donenothing to ease those nerves by includinglegislation to retroactively alter the taxlaw. With Thursday’s budget speechlooming, taxpayers and their advisers aredemanding that certainty and stability arethe two focal points this time around.
“The industry is looking forward to an anti-dote to the confusion caused by the con-
troversial amendments to India’s income taxlegislation through Finance Act 2012 regardingretrospective taxation of transfer of underlyingassets in India and the general anti-avoidancerules (GAAR),” said Amit Singhania, ofAmarchand & Mangaldas.In a January 14 press release, the Ministry of
Finance communicated its acceptance of severalof the recommendations of the ParthasarathiShome-led Expert Committee tasked withreviewing GAAR proposals.“Accordingly, Finance Act 2013 may give
effect to these recommendations,” saidSinghania. “However, the government’s take onthe retrospective amendment made in relationto the transfer of underlying assets and theVodafone dispute still remains unclear.”Sanjay Sanghvi, of Khaitan & Co, agreed that
this will be a focus area, saying the most promi-nent expectation from a corporate tax viewpointis for a “clear roadmap on the taxability in Indiaof an indirect transfer of Indian assets in off-shore transactions, particularly in light of very
pragmatic and positive recommendations fromDr Shome’s committee”.While certainty regarding GAAR and
Vodafone-style transactions are sure to be dom-inant themes, other provisions are expected, andSanghvi believes the minimum alternate tax(MAT) rate may be reduced, alongside changesfor power generating companies in the infra-structure space.“Power generation companies are expecting
an extension of the sunset clause for claimingtax holiday under Section 801A which current-ly provides that the tax holiday will be availableto a power generating company only if it com-mences generation and distribution of power byMarch 31 2013,” said Sanghvi. “Given theimportance of the power sector for the econo-my, it is quite likely the government will extendthis timeline by one or two years.”In terms of the likelihood of enactment,
Sanghvi believes the above measures are “verylikely to find a place in a Budget which will setthe tone for the direction of the Indian econo-my from here on”.In another effort to incentivise investment,
Singhania believes the budget may also extendthe tax incentives on long-term capital gains andinterest income earned on foreign debt.
Government incentivising investmentThe Indian government has changed itsapproach to foreign investment since the nega-tive reaction to its retroactive amendment to thetax code following the Vodafone court loss, andlast week a government release said it was con-sidering amicable settlement with Vodafoneregarding the long-running dispute.“The government has taken some very posi-
tive and pragmatic steps to restore the confi-dence of the international investment
community and Indian cor-porates and resident taxpay-ers,” said Sanghvi, whoreferenced the work of theexpert committees as evi-dence that the government iscommitted to removinguncertainty and unpre-dictability in the tax laws andto provide a stable androbust tax regime.However, Singhania is
refusing to draw conclusionsregarding the government’sstance until after Thursday’sbudget.“Though expert committees have been con-
stituted to review the controversial amendmentsintroduced by Finance Act 2012 and press state-ments seem to indicate the government is con-sidering accepting their recommendations, nolaw has been passed in this direction. This budg-et will decide whether the government’s com-mitment to restoring certainty in India’s incometax law is sincere,” said Singhania.In future, Singhania said, the government
should avoid imposing tax liabilities retrospec-tively. Effective functioning of the Authority forAdvance Rulings and implementation ofadvance pricing agreements are two avenueswhich could offer taxpayers significant certaintyregarding their tax positions, he added.
Tax on super-richThere are also rumours of individual taxchanges, which could impact corporate taxationby making certain avoidance schemes relativelymore attractive.“It has been suggested that the government
is debating the introduction of a super-rich tax
and an inheritance tax. Such measures mayincentivise round-tripping and tax avoidancestructures,” said Singhania.A tax on the super-rich could also affect com-
panies’ ability to attract talented individuals toIndia, particularly considering the competitiveindividual rates offered elsewhere in the region.The Associated Chambers of Commerce and
Industry of India (ASSOCHAM) sent a ques-tionnaire to 85 chief executive officers based onrumours of the super-rich tax, with 61% ofrespondents saying its introduction would be“ill-advised” and “act as a disincentive onwealth and value creation”.“The industry expects the Finance Minister
to give us a growth-oriented budget which pro-motes investment and revival of the economicsentiment. The so-called super rich tax will notyield much,” said Rajkumar Dhoot,ASSOCHAM president. “Besides, the best wayto remove social and economic inequalities is tokeep growing at 9-10% for a decade.”International Tax review hosted a web seminar on theIndian Budget on Thursday February 28.
Contents Next pagePrevious pagewww.internationaltaxreview.com Page 2INDIA BUDGET
P Chidambaram, the Indian FinanceMinister, said in his budget speechtoday that rules on safe harbours willbe issued.
The rules will be issued after reports on safeharbour, issued by a designated committee,
have been examined by the Finance Ministeron March 31.The announcement is long-awaited by tax
professionals who want to see more certaintyover their transfer prices with a smaller burdenon compliance.Safe harbours will provide taxpayers with
rules they can follow and a margin under whichtransfer prices will be automatically accepted bythe tax authorities.They should help to reduce the considerable
amount of tax litigation in the country, as, forcertain types of transfer pricing transactions,taxpayers will not need to collect as muchtransfer pricing data .It is hoped the safe harbour rules will make
India a more attractive location to invest inbecause they will lower the risk of transfer pric-ing adjustments by the tax authorities.The rules were originally tabled in the 2009
Finance Act but the margins have still not beenset.
“Specifying safe harbour norms is not easy,”said Samir Gandhi of Deloitte. “It involvesidentifying the activities which will be eligiblefor safe harbour and the determination ofmark-up or a margin for such activities.”Gandhi used Mexico as an example because
of its safe harbour rules relating to maquilado-ras (captive contract manufacturers operatingunder virtually risk-free conditions). He thinksthis is a good model for India because of thelarge number of captive units in the country.“To deal with this vexed issue, Mexico has
established the following safe harbours for theactivity of maquiladoras: 6.5% return on totalcosts and 6.9% return on value of assetsemployed. Similarly, Australia operates a safeharbour provision for services where 7.5% markup on cost is accepted. Similar administrativepractices of safe harbour are prevalent inSwitzerland and Belgium.”
Rajendra Nayak and Aastha Jain
T ax treatment of hybrid or fiscallytransparent entities has always
been a contentious issue when itconcerns the issue of availing bene-fits of a tax treaty in India.The Bombay High Court (HC)
recently ruled, in the case of theChiron Bearing Gmbh & Co (tax-payer) [TS-12-HC-2013(BOM)],on the eligibility of a German limit-ed partnership (LP) to claim taxbenefits under the India-Germanytax treaty.The taxpayer offered to tax its
income in the nature of royalty andfees for technical services (FTS) from India at alower rate of 10% by invoking the treaty. Underthe treaty, a person who is a resident of one orboth of the contracting states can claim thebenefits. A resident is defined under the treatyto mean a person which is liable to tax in a stateby virtue of its domicile. Further, “person”includes any entity treated as a taxable unit inGermany.Under the German tax laws, the taxpayer
was treated as a fiscally transparent entity andits income was taxed in the hands of its part-ners. However, it was liable to pay “trade tax”in Germany, a tax levied on its profits. Further,the taxpayer held a tax residence certificate(TRC) issued by the German authorities certi-fying that the taxpayer was liable to pay tradetax in Germany.The HC observed that trade tax paid in
Germany is one of the taxes covered under
Article 2 of the treaty and the taxpayer is filingtrade tax returns in Germany. Hence, the tax-payer is paying tax to which the treaty applies.Furthermore, the TRC issued by the GermanAuthorities evidences the fact that the taxpayeris considered as a taxable unit under the taxa-tion laws of Germany.The HC held that the taxpayer was entitled
to treaty benefits and the lower withholding taxrate applicable to royalty and FTS under thetreaty cannot be denied. Reliance placed by theIndian Tax Authority on OECD publicationsto deny treaty benefits was not sustained as theentire issue was specifically governed by thetreaty.Rajendra Nayak ([email protected]) &Aastha Jain ([email protected])Ernst & YoungTel: +91 80 4027 5275Website: www.ey.com/india
Contents Next pagePrevious pagewww.internationaltaxreview.com Page 3INDIA BUDGET
2013
Indian safe harbour rules will beissued says Chidambaram
India: Eligibility of German limitedpartnership for treaty benefits
Rajendra Nayak Aastha Jain
P Chidambaram
“It is hoped the safe harbour rules will make India a moreattractive location to invest in
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