Indirect tax transfers: CBDT notifies rules to arrive at fair market value
July, 04th 2016
Hoping to provide clarity to multinational companies operating in India, the Finance Ministry has notified rules for computing the fair market value (FMV) of Indian and global assets of the foreign company or entity and determining the income attributable to assets situated in the country.
The “indirect transfer” rules come after draft guidelines issued by the Central Board of Direct Taxes (CBDT) in May, provide the guidelines to compute the income arising from transfer of any share or interest in a foreign company or entity that derives its value substantially from the assets located in India.
“These rules will be applicable June 28, 2016. The rules are a part of the government’s continuing effort at providing predictable, transparent and fair tax regime,” said the CBDT on Thursday.
In case the asset is the share of a listed Indian company, the CBDT has said its fair market value would be the price on the stock exchange on that day while for shares of unlisted Indian companies, the value would be determined by a merchant banker or accountant based on any internationally accepted valuation methodology.
Where the asset is an interest in a partnership firm or an association of members, the CBDT has said its FMV would also be determined by a merchant banker or accountant. The value of other assets would be determined on how much it would fetch in the open market, said the CBDT, adding that this would also be computed by a merchant banker or accountant.
The FMV of all assets of a foreign company would be determined based on the market capitalisation and book value of its liabilities in case of listed firms or those of non-connected persons.
In case of shares of an unlisted foreign company, the FMV would be based on the value determined by a merchant banker or accountant along with the value of its liabilities.
The CBDT has also listed the information and documents to be provided in this regard and said that any one of the Indian concern of the foreign entity may be designated to provide information and documents on behalf of all the concerns in Form 49D.
Tax experts have welcomed the move but said that more clarity is required on issues such as valuation.
“The Rules do not make it clear whether the Indian tax authorities will be bound to accept such a valuation method.
“They also do not take into account a situation where the capital gains arising to the foreign transferor may be exempt from taxes in India under a tax treaty,” said Rakesh Nangia, Managing Partner, Nangia & Co.