Since the presentation of the Indian Budget proposal for the year 2013 on 28 February several specifications and additional changes have been communicated. The impact of the changes in the Indian Tax law on multinational companies doing business in India include several important factors which shall be outlined – in summary – below.
A first article published in March 2013 focused on the impact the proposed changes might have on cross-border business between Switzerland and India. In this article, specific updates on the topics of the first article (e.g. Tax Residence Certificate (TRC) or obligation to file tax returns by Permanent Account Numbers (PAN) holders) or new topics such as the Direct Taxes Code (DTC) Bill and the Advanced Pricing Agreements (APA) shall be addressed.
Direct Taxes Code (DTC) Bill
DTC Bill aims to overhaul the over 50-year-old Income Tax Act. The DTC Bill was introduced in Parliament in 2010 and was referred to the standing committee on finance. Now, DTC Bill is almost ready and will be – according to the Finance Minister – taken up in the Monsoon session of Parliament.
Enforcement of the obligation to file an income tax return by all PAN holders
Permanent Account Number (PAN) holders are requested to file an income tax return. The Finance Ministry systematically tracked non-filers of income tax returns holding a PAN card and sent letters to some 100,000 high-priority cases (out of the identified target segment of some 1.2 million non-filers with PAN cards) seeking to know whether the person had filed his income tax return or not. Preliminary data analysis showed that a large number of taxpayers had filed returns and paid self- assessment tax after initiation of this exercise. This initiative led to over Rs 6 billion taxes in the last few months from some of these high-priority cases.
The Finance Ministry has decided to send another 70,000 letters in May to certain high-priority cases. Of these, the first batch of 35,000 letters was sent on May 20th. A compliance management cell has also been set up to ensure follow-up action on the cases where letters had been sent. This cell will track return filing and tax payment of the target segment. Meanwhile, the Ministry has urged all taxpayers to disclose their true income and pay appropriate taxes within the current financial year.
Tax Residence Certificate (TRC)
Different from the initial intention (see my blog article on 13 March 2013), the TRC is not required containing in prescribed particulars for claiming treaty benefits. Various countries may issue their TRC as before. However, Indian authorities can ask for additional information or documents to assess the entitlement for treaty benefits. The TRC satisfies only a residence test and not the criteria of beneficial ownership.
Advance Pricing Agreement (APA) Program
The Finance Act 2012 introduced the APA Program in India effective from 1 July 2012. The Central Board of Direct Taxes (CBDT) notified the Advance Pricing Agreement Scheme on August 30th, 2012, which contained detailed Rules and Forms for Applications/Annual Compliance. Currently, the CBDT has published a comprehensive “APA Guidance with FAQs” (Guidance Note) as part of its Tax Payers Information Series. There are answers to FAQs on the India APA Scheme. Following key points addressed in the Guidance Note can be highlighted:
- A Unilateral APA can be converted into a Bilateral APA before the finalisation of the terms of the APA. Taxpayers can request for Unilateral APA for certain transactions and Bilateral APA for other transactions, even in one application, which shall be filed with the Competent Authority (CA) of India.
- Requests for a Bilateral or Multilateral APA are accepted by the Indian CA only in cases where:
- A tax treaty exists between India and other country(ies) containing an article on Mutual Agreement Procedure (MAP),
- The said tax treaty contains provisions corresponding to Article 9(2) of the OECD Model Tax Convention, and
- The APA program exists in the other country.
- In case of Multilateral APA application, if negotiations with one or more countries fail, the taxpayer can either opt for Unilateral APA or even a Multilateral APA not involving the country with which agreement could not be reached.
- The taxpayer need not enter into an APA in respect of all its international transactions. However, if one international transaction is intrinsically linked with another international transaction in a manner that it cannot be benchmarked independently, the tax administration can inform the taxpayer that both the international transactions need to be covered.
- Pre-filing consultation is mandatory. The understanding reached at the end of the pre-filing consultation would be reduced in writing and also communicated to the taxpayer. This will form the basis for the final application.
- Mere filing of the APA application will not have any impact on the action required to be taken by the Assessing Officer (AO) and the Transfer Pricing Officer (TPO) under the Indian Income-tax Act, 1961 (Act). Such proceedings by the AO/TPO shall continue till APA is concluded and modified return is filed. Therefore, it is advisable to start APA process early.
- Past history of the taxpayer’s case is one of the several factors which will be looked at and discussed in the process of negotiating an APA, but it is not mandatory that the same position as taken in the past shall guide or decide the APA process. The APA authorities would look at the evidences and information with an open mind.
- The Filing Fee is based on value of international transactions. Merely because the value of the international transactions eventually happens to be more than what was earlier projected, this would have no effect on the quantum of fee which has already been paid. If one international transaction is part of many other inter linked transactions and it cannot be separately benchmarked, all the international transactions would need to be covered in the APA and the fee calculated accordingly.
- If taxpayer admits having Permanent Establishment (PE), APA request could be filed for profit attribution to PE.
- Internationally, most countries allow sharing of APA information with on-field audit officers. The confidentiality provisions of the Act also allow such sharing within the income tax department.
- There are no roll back provisions in the APA Scheme. Therefore, the TPO cannot be directed to undertake audits of prior periods consistent with the APA outcome.
- Annual compliance audit is a focused audit with a view to ascertaining compliance with terms of the APA and would not be as wide ranging or broad based as a regular TP audit.
- The visit by the APA team to the premises of the taxpayer would be in consultation with the taxpayer and on a pre-agreed date and time with sufficient notice to the taxpayer. The purpose of a visit by the APA team is only to understand the business model of the taxpayer and to ascertain the functional profile.
As indicated in the Preface to this Guidance Note, the Guidance Note shall prove to be an effective and convenient tool to educate the taxpayers in complying with provisions of the APA program. Though the Guidance Note clarifies that there are no provisions for roll back of APAs, the persuasive value of the APAs over the audits for prior periods, cannot be completely ruled out.