 "Tax law uncertainty remains a concern for foreign investors")
The government’s Wednesday decision of not going for an appeal in the Vodafone tax case removed uncertainty over transfer of shares by Indian subsidiaries of multinational companies (MNCs) to their foreign parents. Now, tax analysts say, foreign investors are eyeing similar steps by the authorities in other areas of dispute — those related to other transfer pricing issues, retrospective taxation in cases of indirect transfers and royalty payments carried out in 2012.
The government has mostly settled cases similar to the Vodafone one but it is yet to sort out issues related to mark-ups in other transfer-pricing (TP) cases.
The other worry of investors relate to retrospective amendments about which the government had earlier assured investors about extreme caution in using these laws in practice. The amendments, though, remain in statute and have not been removed.
On Wednesday, the government had decided against challenging the Bombay High Court’s ruling in favour of telecom operator Vodafone in a TP case related to transfer of Vodafone India Services Pvt Ltd (VISPL) shares to parent company.
VISPL is a wholly owned subsidiary of Vodafone Tele-Services (India) Holdings Ltd, Mauritius, a non-resident company. In August 2008, VISPL had issued shares (at a premium of Rs 8,509) for a total consideration of Rs 246.4 crore to Vodafone Mauritius. This was shown as “capital receipts” in the books of accounts. VISPL reported this transaction as an “international transaction” and stated this did not affect its income. The transfer-pricing officers did not accept the company’s share valuation. There also were questions whether income arising out of such share transfers could be taxed in India.
With the Bombay High Court ruling that this income could not be taxed in India, and the government not appealing against it, similar cases now stand settled.
However, there still are TP cases where there are disagreements between firms and taxmen over margins or mark-ups in transactions between MNCs and their Indian subsidiaries. This issue is yet to be settled, particularly with regard to the business process outsourcing and knowledge process outsourcing sectors. While this issue has been settled with the US, as New Delhi and Washington have sealed an agreement to this effect, MNCs’ and other nation’s major concern are mark-ups and tax dues on costs for services provided.
Instead of a fixed mark-up, the framework sets out the process for determining it. “The mark-up is now based on activities of the company. That will make it easier for companies and tax authorities to work through cases,” said a tax official.
Deloitte India Partner Neeru Ahuja says tax authorities are taking margins of as high as 30-35 per cent, which BPO and KPO companies find too high. After signing of agreement with the US, tax authorities are now looking forward to similar pacts with the UK, France and other European markets, to settle such controversies with MNCs.
Also, the government might sign bilateral advance-pricing agreement with the US after assessing the impact of the agreement on the mark-up issue. Many MNCs adopt advance-pricing agreements to avoid litigation while doing business in India — 146 such applications were filed in 2012, and 232 the next year. India recently signed a bilateral advance-pricing agreement with Japan’s Mitsui for five years. Such bilateral agreements involve the governments on the two sides, as well as the companies concerned, unlike unilateral ones where the foreign government concerned is not involved.
The finance ministry also tries to prevent TP disputes through safe harbour rules for companies engaged in IT, KPO, BPO, pharma, auto components etc. However, these have not drawn much takers as margins are too high at 20-30 per cent.
In the first tranche, the governments are hoping to resolve 60 cases in various stages of litigation and assessment, pending with the income-tax department.
There are more than 250 cases against US companies, some dating back to 2004. Many of these include royalty and permanent establishment and involve software development and infotech-enabled services.
In this respect, retrospective amendments related to widening of ambit of royalty for software payments and payments to telecasting companies still remain in statute. The amendment, carried out in the Finance Act of 2012, is valid since 1976.
The more publicised and controversial retrospective amendment related to indirect transfers is also there in law, though the government has assured the investors it will apply this in practice with extreme caution. The government has acknowledged on several occasions, the amendment that led to a dispute with Vodafone, even after the Supreme Court verdict in the company’s favour, has scared investors away. Vodafone and India have gone for an arbitration in this case.
Ahuja said though the government had assured investors, the fact that amendments were there in the Finance Act created uncertainty in the minds of foreign investors.
In the Budget for 2014-15, Finance Minister Arun Jaitley had said: “The sovereign right of the government to undertake retrospective legislation is unquestionable. However, this power has to be exercised with extreme caution and judiciousness, keeping in mind the impact of each such measure on the economy and the overall investment climate.”
He had assured investors the government ordinarily would not bring about any change retrospectively. The finance minister had also said the government had decided all fresh cases arising out of retrospective amendments of 2012 in respect of indirect transfers would be scrutinised by a high-level committee of the Central Board of Direct Taxes, before any action is initiated in such cases.
“This only refers such cases to higher authorities but does not remove uncertainty,” said a tax expert who did not wish to be named.
Besides, there are subjective phrases, such as assets of foreign companies have to be substantial in India if retrospective amendment on indirect transfer is to be applied. While the draft Direct Taxes Code had proposed assets of foreign companies in India have to be 20 per cent of its total assets to trigger retrospective amendment, the existing Income-Tax Act is silent on the matter. The initial DTC draft had proposed the definition of substantial to include 50 per cent of assets of foreign companies in India.
The government has mostly settled cases similar to the Vodafone one but it is yet to sort out issues related to mark-ups in other transfer-pricing (TP) cases.
The other worry of investors relate to retrospective amendments about which the government had earlier assured investors about extreme caution in using these laws in practice. The amendments, though, remain in statute and have not been removed.
On Wednesday, the government had decided against challenging the Bombay High Court’s ruling in favour of telecom operator Vodafone in a TP case related to transfer of Vodafone India Services Pvt Ltd (VISPL) shares to parent company.
VISPL is a wholly owned subsidiary of Vodafone Tele-Services (India) Holdings Ltd, Mauritius, a non-resident company. In August 2008, VISPL had issued shares (at a premium of Rs 8,509) for a total consideration of Rs 246.4 crore to Vodafone Mauritius. This was shown as “capital receipts” in the books of accounts. VISPL reported this transaction as an “international transaction” and stated this did not affect its income. The transfer-pricing officers did not accept the company’s share valuation. There also were questions whether income arising out of such share transfers could be taxed in India.
With the Bombay High Court ruling that this income could not be taxed in India, and the government not appealing against it, similar cases now stand settled.
However, there still are TP cases where there are disagreements between firms and taxmen over margins or mark-ups in transactions between MNCs and their Indian subsidiaries. This issue is yet to be settled, particularly with regard to the business process outsourcing and knowledge process outsourcing sectors. While this issue has been settled with the US, as New Delhi and Washington have sealed an agreement to this effect, MNCs’ and other nation’s major concern are mark-ups and tax dues on costs for services provided.
Instead of a fixed mark-up, the framework sets out the process for determining it. “The mark-up is now based on activities of the company. That will make it easier for companies and tax authorities to work through cases,” said a tax official.
Deloitte India Partner Neeru Ahuja says tax authorities are taking margins of as high as 30-35 per cent, which BPO and KPO companies find too high. After signing of agreement with the US, tax authorities are now looking forward to similar pacts with the UK, France and other European markets, to settle such controversies with MNCs.
Also, the government might sign bilateral advance-pricing agreement with the US after assessing the impact of the agreement on the mark-up issue. Many MNCs adopt advance-pricing agreements to avoid litigation while doing business in India — 146 such applications were filed in 2012, and 232 the next year. India recently signed a bilateral advance-pricing agreement with Japan’s Mitsui for five years. Such bilateral agreements involve the governments on the two sides, as well as the companies concerned, unlike unilateral ones where the foreign government concerned is not involved.
The finance ministry also tries to prevent TP disputes through safe harbour rules for companies engaged in IT, KPO, BPO, pharma, auto components etc. However, these have not drawn much takers as margins are too high at 20-30 per cent.
In the first tranche, the governments are hoping to resolve 60 cases in various stages of litigation and assessment, pending with the income-tax department.
There are more than 250 cases against US companies, some dating back to 2004. Many of these include royalty and permanent establishment and involve software development and infotech-enabled services.
In this respect, retrospective amendments related to widening of ambit of royalty for software payments and payments to telecasting companies still remain in statute. The amendment, carried out in the Finance Act of 2012, is valid since 1976.
The more publicised and controversial retrospective amendment related to indirect transfers is also there in law, though the government has assured the investors it will apply this in practice with extreme caution. The government has acknowledged on several occasions, the amendment that led to a dispute with Vodafone, even after the Supreme Court verdict in the company’s favour, has scared investors away. Vodafone and India have gone for an arbitration in this case.
Ahuja said though the government had assured investors, the fact that amendments were there in the Finance Act created uncertainty in the minds of foreign investors.
In the Budget for 2014-15, Finance Minister Arun Jaitley had said: “The sovereign right of the government to undertake retrospective legislation is unquestionable. However, this power has to be exercised with extreme caution and judiciousness, keeping in mind the impact of each such measure on the economy and the overall investment climate.”
He had assured investors the government ordinarily would not bring about any change retrospectively. The finance minister had also said the government had decided all fresh cases arising out of retrospective amendments of 2012 in respect of indirect transfers would be scrutinised by a high-level committee of the Central Board of Direct Taxes, before any action is initiated in such cases.
“This only refers such cases to higher authorities but does not remove uncertainty,” said a tax expert who did not wish to be named.
Besides, there are subjective phrases, such as assets of foreign companies have to be substantial in India if retrospective amendment on indirect transfer is to be applied. While the draft Direct Taxes Code had proposed assets of foreign companies in India have to be 20 per cent of its total assets to trigger retrospective amendment, the existing Income-Tax Act is silent on the matter. The initial DTC draft had proposed the definition of substantial to include 50 per cent of assets of foreign companies in India.