key international tax and transfer pricing developments
August, 06th 2019
Following the re-election of the Modi government, this year’s budget was presented by India’s first full-time female Finance Minister, Mrs. Nirmala Sitharaman. The finance minister maintained the theme that it is well within India’s capacity to reach a $5 trillion economy by 2025.
India Budget 2019, presented July 5, includes only a few proposals on cross-border taxation and transfer pricing; however, these proposals will have a material impact on cross-border transactions.
Offshore fund taxation Let’s first deal with the biggest reform, which is the revival of the special taxation regime for offshore fund managers by way of relaxing some of its rules.
The offshore funds regime, enacted in the Budget 2015-16, was the outcome of intense deliberations of Prime Minister Modi’s and former Finance Minister Jaitley’s offices. Both were convinced of the economic rationale for fund managers and the need for fund managers to be located in India.
The difficulty was that the presence of such fund managers in India would pose a risk to the fund income, which otherwise is not liable to tax as non-Indian sourced income.
Enabling regulations issued by the Central Board of Direct Taxes in April 2016 to operationalise the law were viewed as restrictive, onerous, and unwieldy, given international best practices. The outcome was that few fund managers choose to locate in India.
India Budget 2019 has revisited the 2016 guidance, changing the requirements for relief from Indian taxation. To qualify, the corpus of the fund must not be less than 1 billion rupees at the end of a period of six months from the end of the month of its establishment.
Further, relief is granted if the remuneration paid by the fund to an eligible fund manager is not less than a prescribed limit instead of the arm’s length price.
Although this seems a relaxation from existing rules, other conditions continue to apply and one needs to await how the funds will react to the budget.
Withholding tax payments to nonresidents There has been considerable litigation on India’s withholding tax provisions in cases of payments to non-residents.
Although India’s High Court settled this issue, the tax administration chose not to follow jurisprudence citing that they have appealed to the Apex Court.
Budget 2019 amendments somewhat affirm the ratio laid down in the case of Herbalife International India Private Limited  384 ITR 276, wherein the Delhi High Court held that imposition of withholding of tax on payments to a nonresident is discriminatory since resident recipients are not subjected to such withholding of tax and that the withholding tax is inapplicable in the context of Article 26(3) of India-US tax treaty.
India Budget 2019 has proposed to amend Indian law to remove this anomaly and put to rest such discrimination to nonresident taxpayers.
Transfer pricing, country-by-country reporting On the transfer pricing front, India Budget 2019 seeks to rationalize provisions on secondary adjustments and advance pricing agreements (APAs) to address challenges faced by taxpayers.
India’s secondary adjustment law came into effect on April 1, 2017. For APA’s concluded before the law’s effective date, the secondary adjustment law does not apply.
India Budget 2019 prescribes a tax payment of 18 percent plus surcharge and cess in lieu of the requirement to repatriate the quantum of a secondary adjustment.
The budget clarifies that upon the conclusion of an APA, the revenue officer cannot commence fresh assessment proceedings in relation to the filing of a modified return reflecting the APA outcome.
India Budget 2019 also clarifies that for country-by-country reporting, in situations where the Indian company is an ‘alternate’ reporting entity, the accounting year shall be construed as followed by the ultimate parent entity.
Procedural reform Under India’s tax laws, a person responsible for payment to nonresidents on income chargeable to tax must determine the appropriate sum liable for withholding tax and may make an application to the Tax Inspector for a reduced or NIL withholding of tax.
The process is currently manual. To streamline the process, with use of technology to reduce the processing time and help the tax administrator monitor payments to nonresidents, India Budget 2018 has proposed to amend the law by prescribing the form and manner of application and also the manner of determination of sums chargeable to tax.
Gifts made to persons outside India Section 9 of the Income Tax Act, 1961 relates to income deemed to accrue or arise in India. Under the Act, nonresidents are taxable in India in respect of income that accrues or arises in India or is received in India or is deemed to accrue or arise in India or is deemed to be received in India.
Under the existing provisions of the Act, a gift of money or property is taxed in the hands of the donee, except for exemptions.
The government is of the view that gifts are made by persons being residents in India to persons outside India and are claimed as non-taxable (in India) as the income does not accrue or arise in India.
India Budget 2019 has proposed to tax such gifts to persons outside India. It has been clarified that tax treaty benefits, if any, shall not be affected. Almost 46 of 90 tax treaties signed by India have embedded India’s right to tax such gifts.
More Indian international tax developments on the way As we digest the budget proposals, we can say without any hesitation that there is more to come by way of new direct tax legislation in the area of international taxation.
On June 25, India deposited with the OECD in Paris its instrument of ratification of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI).along with its final position in terms of covered tax agreements, reservations, options and notifications under the MLI.
As a result, the MLI will enter into force for India from October 1, and its provisions will affect India’s tax treaties from FY 2020–21 onwards.
India has expressed its position to agree to the application of Article 7(1) of the Convention dealing with a principal purpose test (PPT) alone as an interim measure. India, however, has also expressed its intention to adopt optional provisions of limitations of benefits (LOB), in addition to PPT, through bilateral negotiations.
In June 2007 at the Paris MLI ceremony, India had expressed its intention to adopt the PPT with a simplified LOB.
The public consultation on profit attributions to permanent establishments closed middle of May. This addressed the significant economic presence law that India legislated in 2018.