Double taxation treaties do not excuse FBT

FOREIGN ENTERPRISES

The Finance Act, 2005 has introduced a new levy of additional income tax, fringe benefit tax (FBT). It taxes the fringe benefits provided or deemed to have been provided by an employer to his employees.

The rate of tax is 30 per cent on the value of fringe benefits. The meaning of the term "fringe benefit" and ascertainment of its value are specifically provided in the newly introduced Chapter XII-H of the Income-Tax Act.

Initially, there was some doubt as to whether the FBT is applicable to foreign companies or not. However, in the long-awaited Circular No. 8/2005 dated August 20, 2005 issued by the Central Board of Direct Tax (CBDT), it has been clarified that the FBT will apply to a foreign company if it has employees based in India.

On the question as to whether the FBT is chargeable from an entity even if its income is exempt under a double taxation avoidance agreement (DTAA), the CBDT has clarified that exemption, if any, under a DTAA is only in respect of income of the entity. However, the FBT is a liability of an entity qua employer. Therefore, the tax is payable by a non-resident employer if it fulfils the various conditions relating to its charge-ability laid down in Chapter XII-H of the Income Tax Act.

When foreign companies send their employees on "tour" to India, are they required to pay FBT on their travel cost, particularly when they are not subject to income tax in India? The board has clarified that if a foreign company is not an employer in India (that is, it does not have any employees based in India), it is not liable to pay FBT in India.

However, if a foreign company is an employer in India (that is, it has employees based in India), it will be liable to pay the FBT in respect of the fringe benefits provided or deemed to have been provided to the employees.

Is a foreign company required to pay the FBT even if its employee(s) are not taxable in India in terms of any tax treaty? The answer is that if a foreign company has employees based in India and the remuneration received by all its employees is not taxable in India""in terms of the article relating to dependent services in any treaty""such foreign companies would not be liable to pay the FBT in India.

If foreign company has a permanent establishment (PE) in India and it incurs expenditure outside India, which is claimed as a deduction in computing the income of the PE in India, will it have to pay FBT on the expenses incurred outside India?

It has been clarified that in a case where a foreign company has a PE in India, the FBT is payable on the expenditure incurred on account of fringe benefits which under the law are deemed to have been provided and which are attributable to the operations of the PE of the foreign company in India, irrespective of whether the expenditure is attributed to the operations of the PE is incurred in India or outside India.

Does a foreign company have to pay FBT for deputing personnel to India for short duration under technical supervision contracts? What will be the position if such expenses are reimbursed by the Indian entity to the foreign company or the Indian entity directly bears the expenses incurred by the expatriates?

The board has clarified that a foreign company is liable to pay the FBT if the salary, as defined in Section 17 of the Act, of such employees is liable to income tax in India.

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