Controlled foreign cos on radar

TAX REGIME READIES FOR GLOBALISATION

FM may introduce rules to tax income from Indian-owned foreign subsidiaries.

Indian companies may have to shell out taxes on dividend received from overseas arms even if such income is parked outside the country.

Finance Minister P Chidambaram may introduce Controlled Foreign Companies (CFC) rules to tax income from Indian-owned foreign subsidiaries.

That means, irrespective of whether the income is brought to India or parked outside, Indian tax rates will be have to be paid on such income.

A CFC is a legal entity that exists in one jurisdiction but is owned or controlled primarily by taxpayers of a different jurisdiction.

It could not, however, be confirmed whether these rules will be announced in the budget on February 29 or be part of a new direct tax code that is expected later in the year. 
  

INDIA INC: OUTWARD BOUND (Recent overseas M&As by Indian companies)
Acquirer	Target	Size	Year
Tata Steel	Corus	$12.2 bn	2007
Hindalco	Novelis	$10.8 bn	2007
Suzlon Energy	RE Power	$1.7 bn	2007
Essar Steel Holdings	Algoma Steel	$1.6 bn	2007
United Spirits	Whyte & Mackay	$112 mn	2007
Tata Power	PT Kaltim  Prima Coal	$1.1 bn	2007
Wipro Technologies	Infocrossing	$600 mn	2007
Godrej Consumer  Products Ltd	Kinky	$13.75 mn	2008
Bilcare	Singular ID	$13.25 mn	2008
Rolta India	TUSC	$45 mn	2008
Great Offshore	Sea Dragon	$1.4 bn	2008
Tata Chemicals	General Chemicals	$1 bn	2008

The CFC tax is being considered as a result of the growing mergers and acquisitions by Indian companies overseas.

Indian companies typically set up CFCs to buy companies abroad and park the income from such acquired companies in CFCs to avoid paying tax in India. Dividends repatriated from overseas ventures are taxed at the corporation tax rate of 33.6 per cent against 17 per cent (including surcharge and education cess) on dividends received by domestic companies from domestic subsidiaries.

"With more and more Indian companies going overseas, this is the right time to bring in CFC regulation in the domestic law," said Shyamal Mukherjee, deputy tax leader, PricewaterhouseCoopers.

The CFC rules should be framed in such a way that, they benefit both government and corporations, he added.

Income tax officials explained that the current non-tax status of Indian CFCs means that investments are flowing from India but returns from such investments are not flowing back in. The country is also forefeiting tax revenue on Indian companies' overseas income.

All developed countries tax the CFCs of their corporations and India's income tax department has been studying global tax law for some time. The move to introduce a CFC tax has gathered momentum following relaxations in domestic exchange control rules.