On February 29, 2016, the government issued the Budget Bill 2016, which contains measures to introduce an equilisation levy (BEPS Action 1), a patent box incentive regime (BEPS Action 5), and country-by-country (CbC) reporting (BEPS Action 13). Budget Bill 2016 also defers India’s place of effective management (PoEM) rules by one year from April 1, 2016, to April 1, 2017, which resemble controlled foreign company-type rules (BEPS Action 3). These measures are discussed below.
Equilisation Levy – BEPS Action 1
India is the first country to propose introduction of the equilisation levy on digital transactions discussed by the BEPS Action 1 recommendations. The equilisation levy proposals are set out in Chapter 8 (Clauses 160-177) of the Budget Bill 2016, and would be separate from the Income Tax Act.
Specifically, Clause 162 of Budget Bill 2016 would impose the equilisation levy at 6% on the gross amount of consideration for specified services received or receivable by a non-resident (who does not have a Permanent Establishment (“PE”) in India) from residents in India carrying on a trade or business (or a non-resident having a PE in India). The levy would not apply where the non-resident providing the service has a PE in India and the service is connect with such PE or where the total amount of consideration received/receivable by the non-resident does not exceed INR 100,000 in any fiscal year, or where the services are not performed for the purpose of carrying on a trade or business. The levy would only apply to B2B, not B2C, transactions.
The payer of the consideration subject to the equalisation levy would be required to deduct the equalisation levy from the amount payable to a non-resident, pursuant to Clause 163 of the Budget Bill 2016. If no deduction is made by the payer, the entire consideration will be disallowed in computing the income of the payer.
The equilisation levy would enter into force on a date determined by the government.
Patent Box Incentive Regime – BEPS Action 5
Clause 52 of Budget Bill 2016 would add a new Section 115BBF to the Income Tax Act, 1962 (ITA) that would provide a reduced tax rate for any qualifying royalties relating to patents developed and registered in India at 10% starting on April 1, 2017, for the 2017-2018 assessment year. India currently does not have a patent box incentive regime.
Also, the assignee of any patent expenditure would not be permitted to deduct the expenses under the proposals (proposed Section 115BBF(2)). The proposals define an eligible assignee as “a person resident in India and who is a patentee.” A patentee is defined as a “person … whose name is entered on the patent register as the patentee, in accordance with the Patents Act….”
CbC Reporting – BEPS Action 13
Clause 110 of Budget Bill 2016 would add a new Section 286 to the ITA to implement CbC reporting that aligns with the BEPS Action 13 recommendations. The CbC proposals would enter into force from April 1, 2017, and would apply starting with the 2017 tax year, one year later than the BEPS Action 13 recommendations.
The proposals indicate that the Indian tax authorities (Central Board of Direct Taxation) (CBDT) will issue regulations with the form and manner of filing the CbC report, which is to contain “aggregate information in respect of the amount of revenue, profit or loss before income-tax, amount of income-tax paid, amount of income-tax accrued, stated capital, accumulated earnings, number of employees and tangible assets not being cash or cash equivalents, with regard to each country or territory in which the group operates (proposed Section 286(3)(a)). The CbC report would also require disclosure of “the nature and details of the main business activity or activities of each constituent entity….”
CbC Reporting Threshold
While the proposals do not provide a threshold for filing the CbC report, on December 7, 2015, a senior official from the Indian Ministry of Finance said that threshold would equal €750 million or more, as converted into Indian rupees using a conversion rate from February 2015 (about INR 52.79 billion).
Clauses 100 and 102 of the Budget Bill 2016 proposals include the following documentation penalties:
- Penalties for non-compliance with new documentation requirements:
- Penalty for failure to furnish a Master File – INR 500,000.
- Penalty for failure to furnish a CbC report or further information called for in respect of the CbC report – INR 5,000 to 50,000 per day, depending on the period of delay.
- Penalty for providing inaccurate information in a CbC report – INR 500,000.
- Penalties for transfer pricing adjustments:
- No penalty where TP documentation has been maintained, the transaction declared, and material facts disclosed.
- However, a penalty of 50% of tax on the TP adjustment will apply where TP documentation is not maintained.
- Penalty at 200% of tax on TP adjustment will apply where the transaction is not declared or material facts are not disclosed.
On a related note, on December 4, 2015, the Indian Commissioner for Income Tax said that India will use best practices in handling sensitive business information in CbC reports, and that it intends to keep any disclosed CbC information confidential. The senior official said that India has taken (or intends to take) the following steps in preparation of CbC reporting:
- Domestic legislation will ensure implementation of the CbC reporting requirements.
- India will align its present transfer pricing rules on documentation with the new standardized approach under the OECD BEPS Action 13 recommendations.
- Risk assessment systems by the government are being developed for the effective use of information.
- India is strengthening the effectiveness and efficiency of its mutual agreement procedure (MAP) in some of its income tax treaties.
- India will establish mechanisms for receiving and transmitting information to and from tax administrations in other countries.
Place of Effective Management (PoEM)
While India does not have any CFC rules, on December 23, 2015, the CBDT released guidance (in draft form) for determining a company’s PoEM that resemble CFC-type rules. Enacted under Finance Act 2015, the PoEM provisions aim to tighten India’s corporate tax residency status rules, so as to prevent companies from avoiding tax residency status in India by shifting insignificant or isolated control and management roles or functions outside India.
The new rules were to come into effect on April 1, 2016, but Clause 4 of the Budget Bill 2016 defers their entry into force to April 1, 2017.
As background, Finance Act 2015 amended the ITA to provide that a company is an Indian tax resident in any previous year, if either of the following apply:
- It is an Indian company.
- Its PoEM in that year is in India.
According to the draft PoEM guidance, the process of determining PoEM is based primarily on whether a company is engaged in active business outside of India. For this purpose, a company engaged in active business outside of India is presumed to be outside India, if the majority of the meetings of the company’s board of directors (BOD) are held outside India. However, if the facts and circumstances establish that the BOD is “standing aside” and not exercising their management powers, but rather such powers are being exercised by either the holding company or any other person(s) resident in India, the PoEM of the company is considered to be in India.
Further, a company may be treated as engaged in an active business outside of India, only if all of the following apply:
- The company’s passive income (e.g., income from certain related-party purchase and sale transactions, dividend, interest, rent, and royalty) is not more than 50% of its total income.
- Less than 50% of the company’s total assets are situated in India.
- Less than 50% of the company’s employees are situated in India or are resident in India.
- The payroll expense incurred on such employees is less than 50% of its total payroll expenditure.
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