On March 31, 2017, India enacted Finance Act 2017, which introduces measures in Clause 43 to limit interest expense deductions on related-party debts to 30% of the debtors (Indian company or an Indian permanent establishment (PE) of a foreign company) earnings before interest, taxes, depreciation, and amortization (EBITDA), or 30% of interest paid (or payable) to related parties in the previous year, whichever is lower. The measures align with the BEPS Action 4 recommendations.
The measures add a new Section 94B to the Income Tax Act (ITA), and will apply from April 1, 2018.
The EBITDA rules will apply not only to interest payments to “associated enterprises,” as defined in the ITA, but also to third party lenders that provide a loan to the taxpayer based on an associated enterprise providing an explicit or implicit guarantee to the lender.
The EBITDA limitation will apply only to taxpayers whose collective interest expenses exceed INR 10 million each year. Also, banks and insurance companies will be excluded from application of the EBITDA limitation, regardless of their level of interest expenses.
Any excess interest expense can be carried forward for eight years.
Additional Measures
Clause 42 of Finance Act 2017 introduces a “secondary adjustment” provision in a new Section 92CE of the ITA to address collateral effects from a primary transfer pricing adjustment by the Indian tax authorities (Central Board of Direct Taxation or CBDT). A secondary adjustment is required where a primary transfer pricing adjustment occurs in one of the following situations:
- Voluntarily made by the taxpayer in its Indian tax return.
- Made by a CBDT auditor, and accepted by the taxpayer.
- An advance pricing agreement (APA) is entered into by the taxpayer.
- Results from a mutual agreement procedure (MAP) decision.
The measures will apply to primary transfer pricing adjustments made on or after April 1, 2016.
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