The ripples from the 2008 global financial crisis (GFC) were felt all around the world, causing unprecedented strain on national exchequers and on companies’ balance sheets for several years. The COVID-19 pandemic is expected to cause greater economic hardship than even the GFC or the great depression of 1929[1]. Such events often lead to policy makers pushing for aggressive tax regimes aimed at bulking up national exchequers and tightening of regulatory frameworks to prevent leakages from their economies through tax evasion, money laundering and other such white-collar crimes.

In keeping with the global trend, India has, in the recent past, adopted a very strict approach towards offenses such as tax evasion, money laundering and benami transactions. The current pandemic and its economic repercussions are sure to test the regulatory framework as individuals and corporates alike are tempted to push the envelope. Even prior to the pandemic, the Indian Income Tax department had detected approximately INR 37,946 crore worth of tax fraud in financial year 2018-19 and INT 6,520 crore in April-June 2019.[2]

Continue Reading Tax and White-Collar Crimes: The whole nine yards (Part I)

Mauritian entities have found it difficult to benefit from the capital gains tax exemption under the India- Mauritius double taxation avoidance agreement (DTAA) upon exit from Indian investments with the tax department questioning the said benefits. Recently, the Authority for Advance Ruling (AAR), declined to give a ruling on taxability of a Mauritian resident in India, on the grounds that the transaction was prima facie designed for avoidance of tax.[1]

Continue Reading AAR declines ruling to a Mauritius resident, alleging that transaction was designed to avoid tax

Rules for minimum remuneration notified for Indian managers of offshore funds to qualify for exemption from taxable presence in India

Background

Section 9A of the Income-tax Act, 1961 (“IT Act”) carves out a special taxation regime to exempt eligible offshore funds from being regarded as having a business presence in India and hence subject to taxation in India, despite their fund managers being located in India. If the offshore funds as well as the Indian fund managers satisfy the requirements set out in Section 9A of the IT Act, the fund management activity carried out through such fund managers shall not constitute the offshore fund’s ‘business connection’ in India. Further, section 9A excludes an eligible investment fund from being treated as resident in India for tax purposes, merely because the eligible fund manager undertakes fund management activities for the offshore funds while situated in India. Thus, section 9A helps mitigate adverse Indian tax consequences for offshore funds having their fund managers in India.

Section 9A prescribes several conditions for an offshore fund and its Indian fund managers to be eligible for exemption from taxable presence or residence in India. One of the conditions for an eligible fund manager to avail the above exemption is prescribed under section 9A(3)(m) of the IT Act, in relation to the remuneration of the fund manager. Earlier, Section 9A merely stipulated a subjective criterion, stating that the remuneration paid to the fund manager should be on an arms’ length basis. The Finance (No. 2) Act, 2019 had made this provision more objective and definite. It now stipulates that the remuneration paid by the fund to an eligible fund manager for undertaking fund management activity should meet a minimum threshold as calculated under section 9A. Pursuant to this change, the manner of calculating the minimum threshold has now been prescribed under Rule 10V of the Income-tax Rules, 1962 (“IT Rules”).

The Notification

The Central Board of Direct Taxes (“CBDT”) has notified on May 27, 2020 (“the Notification”), the rules for computation of minimum management fees that eligible fund managers must receive from eligible offshore funds in order to avail the beneficial regime under section 9A of the IT Act. The CBDT had earlier published draft rules in this regard, in December 2019, which through a public consultation process, have been adopted into the IT Rules and made applicable with effect from May 27, 2020. In addition, the Notification also amends the reporting requirements applicable to eligible fund managers. We have discussed below the details of the Notification.

Minimum manager remuneration

The minimum management fees payable to eligible fund managers shall be computed as follows:

  1. Where the offshore fund is registered as a Category I Foreign Portfolio Investor (“FPI”) under Regulations 5(a)(i) to 5(a)(iv) of the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019 (“FPI Regulations”), the minimum management fee payable shall be 0.1% of the ‘assets under management’ (“AUM”). Category I FPIs under Regulations 5(a)(i) to 5(a)(iv) of the FPI Regulations include central banks, sovereign wealth funds, other Government related funds with at least 75% direct or indirect Government ownership, pension funds, university funds, banks, appropriately regulated entities such as investment advisors, portfolio managers, broker/ swap dealers, etc. In addition, entities from Financial Action Task Force (FATF) member countries, which are themselves appropriately regulated or whose investment managers are appropriately regulated Category I FPIs, or from other countries notified by the Central Government for this purpose, are also eligible to avail registration as Category I FPI.
  2. In case of all other types of eligible funds, the minimum management fee shall be:
    • 3% of the AUM; or
    • In case of profit-linked manager remuneration, 10% of profits derived by the fund in excess of the specified hurdle rate from the fund management activity undertaken by the fund manager; or
    • In case of funds with multiple investment managers, 50% of the management fee, whether in the nature of fixed charge or linked to the income or profits derived by the fund from the management activity undertaken by the fund manager, paid by such fund in respect of the fund management activity undertaken by the fund manager as reduced by the amount incurred towards operational expenses, including distribution expenses.

For this purpose, AUM has been defined as the annual average of the monthly average of the opening and closing balances of the value of such part of the fund, which is managed by the fund manager.

The Notification also provides for a mechanism for approval from the CBDT where the management fee paid to the eligible fund manager is lower than the thresholds stipulated above. In such a scenario, the offshore fund may seek approval for a lower amount of remuneration from the relevant authority of the CBDT.

Replacement of the subjective criterion of remuneration from an arms’ length basis to specific thresholds is a welcome move and will go a long way in reducing litigation and uncertainty.

Reporting Requirements

With the change in the language in respect of minimum remuneration in section 9A Rules 10V(5) to 10V(10) of the IT Rules, which applied to the determination of arm’s length remuneration under the erstwhile provisions will not apply with effect from April 1, 2019 (i.e., with effect from assessment year 2020-2021). The Notification now prescribes a single report in Form 3CEJA, to be duly verified by an accountant, in relation to information and record-keeping by the eligible fund manager. Alongside Form 3CEJA, the annexure requires the eligible fund manager to submit documents, including details of eligible investment funds for whom the eligible fund manager has undertaken fund management activity, particulars of remuneration received in respect of each eligible investment fund and each activity undertaken, and particulars of any other transaction undertaken by the fund manager with/on behalf of the eligible investment fund. The amended rules no longer deem the eligible fund manager and the eligible offshore fund to be related parties for the purposes of the Indian transfer pricing regulations. Accordingly, the reduced compliance requirements will have a positive effect on the administrative burden and costs of the eligible fund manager, where these entities are not related parties. However, such report will have to be filed in addition to other transfer pricing compliances, where the eligible fund manager and the eligible fund are related parties under the transfer pricing regulations.

Takeaways

The above changes are a welcome move and are intended to provide an impetus to the Indian fund management activities. The minimum manager remuneration prescribed seems to be consistent with customary market practices, and it should be feasible for funds to meet the threshold management fee. Thus, the earlier lack of clarity and uncertainty on minimum manager remuneration have been eliminated and the compliance burden for eligible fund managers in terms of transfer pricing audits and record maintenance has been reduced to a significant extent, through these changes in the Rules. The safe harbour regime has been made more accessible to global fund groups looking to structure their operations through Indian managers.


Tax relief in times of Covid-19 – A review of the Indirect Tax measures

Given the disruptions in domestic and international supply chains due to the Covid-19 pandemic, the Government announced a slew of indirect tax measures to protect the interests of taxpayers. With the extension of the lockdown, it is important to take a look at the steps, which have been undertaken and the next steps required to reinforce the Government’s commitment towards economic regeneration. Continue Reading Tax relief in times of Covid-19 – A review of the Indirect Tax measures

OECD’s-views-on-factors-impacting-tax-policies-and-determination-of-‘PE’-and-‘POEM’-in-times-of-COVID-19

In our previous blog, we discussed some measures which were suggested by the Organisation for Economic Co-operation and Development (“OECD”) to ease the cash flow crunch being faced by taxpayers due to the COVID-19 situation. In continuation with the same, this blog will focus on the key issues highlighted by the OECD, which should be considered by nations while granting these benefits.

In addition to the above, restriction on movement of people due to lockdowns imposed in various countries is also likely to give rise to other issues. The OECD has analysed tax treaty provisions to determine the potential impact of such restrictions on exposure to permanent establishments (“PE”) and the ‘place of effective management’ (“POEM”) of companies. This analysis is also discussed in this blog. Continue Reading OECD’s views on factors impacting tax policies and determination of ‘PE’ and ‘POEM’ in times of COVID-19

Indian Tax measures to counter COVID-19 impact - How do they compare with OECD’s suggestions

At a time when economic activities have come to a standstill on account of the lockdown imposed by the government to tackle the Covid-19 pandemic, some leeway in tax laws will provide much needed relief to taxpayers. Many countries, including India, have announced various economic relief measures, ranging from financial aid and provision of free/ subsidised food and water to debt repayment deferrals. The idea essentially is to help people cope with the substantial reduction in their cash flows to meet their daily and business needs, especially for businesses with permanent employees whose rights may be protected legally, meeting their working capital requirements for maintaining the supply-chain, transporting goods, meeting their other contractual commitments, including those related to debt and so on. Businessmen have no control over tax payouts since the amount or percentage to be paid is fixed by the government, unless governments provide tax relief to ease cash flows.

In this context, the Organisation for Economic Co-operation and Development (“OECD”) has sprung into action to make a compilation of: (i) measures contemplated by tax administrations; (ii) constraints pertaining to those measures; (iii) recommendations to deal with the impact under tax treaties due to travel restrictions and ensuing possible tax exposures, which arise unintentionally and temporarily; and (iv) some recommendations on ‘good to have’ practices by businesses for their business continuity. The stated purpose of the compilation and these guidelines is to assist tax administrations and businesses in formulating their own possible measures. The compilations and guidelines are not recommendations with regard to any particular measures and they recognise that circumstances and considerations will vary for every country. Continue Reading Indian Tax measures to counter COVID-19 impact: How do they compare with OECD’s suggestions?

Covid-19 – A Tale of two Courts

As the world grapples with the Covid-19 pandemic; different approaches of the judiciary to pending tax matters merit attention. In mid-March, both the Kerala and Allahabad High Courts proactively took note of the risk to lawyers, court staff and judges on account of increase in the number of petitions being filed daily and passed orders restricting the Centre and State Governments from initiating tax recovery proceedings or taking any coercive measures till April 6, 2020.[1] The Kerala High Court also held that the assessment proceedings required to be completed before March 31, 2020 could also be deferred subject to the order of the Court. Continue Reading Covid-19 – A Tale of two Courts

Provisions for taxing dividend income, receive yet another upgrade

The Finance Bill, 2020 (the “Bill”) was recently passed by the Lok Sabha (Lower house of the Parliament) on March 23, 2020, with more than 50 amendments to the Bill. The Bill has now received the presidential assent and has become an Act (“Finance Act”).  The new provisions proposed by the Bill, for taxing dividends have also been amended to expand the scope of certain benefits and to provide more clarity surrounding the applicability of these provisions. Through this blog, we would like to discuss changes pertaining to taxation of dividends.

Deduction for dividends received from foreign companies and business trust

As per the erstwhile section 115-O of the Income-tax Act,1961 (“IT Act”), distribution of dividends by a domestic company was subject to an additional income tax, called Dividend Distribution Tax (“DDT”), in the hands of the company at an effective rate of 20.56% (inclusive of the applicable surcharge and cess). Such tax was treated as the final tax on dividends and the dividends were generally exempt from any further incidence of tax in the hands of the investors. Further, in order to reduce the cascading effect of DDT, domestic companies while computing the amount of dividends on which DDT is paid were allowed a deduction for dividends received from its subsidiary (i.e. where the company holds more than 50% of the shareholding of the subsidiary), provided DDT was paid by the subsidiary during the same financial year. Similar deduction was also available on account of dividends received from a foreign company on which tax was payable by the domestic company under section 115BBD of the IT Act, provided the domestic company held at least 26% equity shareholding in the foreign company. Continue Reading Provisions for taxing dividend income, receive yet another upgrade

Dividend Distribution Tax Abolishment - Here’s Something Lost in Translation

The government has said taxes on income received from dividends will now have to be paid by the shareholders instead of the dividend distributing company. The Finance Bill 2020 presented alongside the Union Budget on February 1, 2020 abolished the imposition of Dividend Distribution Tax (“DDT”) w.e.f. FY 2020-21. Over two decades ago, the Finance Act 1997 under Income Tax Act, 1961(“IT Act”), introduced DDT wherein the taxes on dividend were directed to a single point i.e. to be paid by the dividend distributing company and the incidence of tax shifted from the recipient to the payer. Doing away with this practice, the government has once again reverted to the pre DDT days. Present rate of DDT is @15% on gross basis plus surcharge and cess, resulting in net tax rate of 20.56%. Continue Reading Dividend Distribution Tax Abolishment: Here’s Something Lost in Translation

MLI Impact on Treaty Benefit Tax Blog

The Base Erosion and Profit Shift (“BEPS”) programme, initiated by OECD, had recommended a host of action plans, which could be implemented by making changes to the international tax treaties. . However, there are more than 3000 bilateral tax treaties entered into by contracting countries and it would have taken years to amend them. To solve this problem, over 100  jurisdictions negotiated and concluded a multi-lateral instrument (“MLI”) in November 2016. Countries that agreed to change their tax treaties were required to sign and notify the OECD Secretariat.  India was amongst the first few signatories to the MLI in 2017 and ratified   it on June 25, 2019. Thus, its network of bilateral tax treaties would be impacted by the provisions of the MLI where its treaty partner is also a signatory. It is, therefore, necessary now to read the applicable tax treaty with MLI, based on the treaty partner’s position and reservations on the provisions of the MLI. Continue Reading Have You Checked the Applicability of Multi-Lateral Instrument Impacting Your Treaty Benefit Claim?