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Taxing Times Ahead for Slump Sale Transactions

Slump sale transactions are a preferred method of transferring a business as a going concern. They are often used for internal restructuring purposes and for sale of a whole or part of a business undertaking to a third party. Several global transactions also comprise of a slump sale element to execute the transfer of the Indian business to the buyer’s affiliate in India. In a slump sale, a business undertaking is transferred by one party to another as a going concern for a lumpsum consideration, without attributing specific values to assets and liabilities. Continue Reading Taxing Times Ahead for Slump Sale Transactions

CBDT notifies thresholds to determine ‘significance’ of significant economic presence

Non-resident taxpayers may now have to watch out for a new nexus norm that will require enterprises with no physical presence in India to pay taxes in India on their business profits attributable to transactions or activities that constitute a ‘significant economic presence’ (“SEP”) of the non-resident in India. Continue Reading CBDT notifies thresholds to determine ‘significance’ of significant economic presence

Karnataka HC affirms discount on issue of ESOPs is a tax-deductible business expenditure

Rewarding employees through share-based benefit schemes has been an effective tool for the companies to not just recognise their contribution to the company, but also retain them by imbibing a sense of belonging and ownership. One such scheme, popular among the companies for almost last two decades, has been grant of Employee Stock Option Plans (“ESOPs”). In simple terms, an ESOP is an option and not an obligation, provided by a company to its employees, to purchase its shares at a future date at a pre-determined price, which is ordinarily less than the market price, on satisfaction of certain prescribed conditions. While the issuance of ESOPs entail various tax implications for both the employer and the employees, the scope of this blog is limited to ascertaining the validity of an employer’s right to claim the perceived discount granted on the issue of shares as a tax deductible business expenditure. Recently, the Karnataka High Court (“HC”) affirmed the ruling of the special bench of the Bangalore Income Tax Appellate Tribunal (“ITAT SB”) in the case of Biocon Ltd.[1], wherein it was held that discount on issuance of ESOPs is an allowable business expenditure under Section 37(1) of the Income-tax Act, 1961 (“IT Act”) for the employer. Continue Reading Karnataka HC affirms discount on issue of ESOPs is a tax-deductible business expenditure

Clarity on eligibility criteria for funds set up by Category I FPIs for exemption from taxable presence in India

Background

A special  taxation regime, provided under Section 9A of the Income-tax Act, 1961 (“IT Act”), exempts eligible offshore funds, with their fund managers located in India, from treating them as having taxable business presence in India. On satisfaction of the requirements set out in Section 9A of the IT Act, management of the funds through such Indian fund managers would not constitute the offshore fund’s ‘business connection’ in India. It is important to note that when an offshore fund, satisfying these conditions is not taxable in India on its business income under the domestic law, then the question of it not having permanent establishment under the applicable double taxation avoidance agreement (“DTAA”) becomes moot. Additionally, Section 9A also excludes an eligible investment fund from being treated as resident in India for tax purposes under the provision of ‘Place of Effective Management’ when the eligible fund manager undertakes fund management activities while situated in India. Continue Reading Clarity on eligibility criteria for funds set up by Category I FPIs for exemption from taxable presence in India

CBDT NOTIFIES RELAXATION IN FAIR VALUATION NORMS- ARE THEY ENOUGH

 

Income-tax Act, 1961 (“IT Act”) provides for certain anti-avoidance provisions, like Section 56(2)(x) and Section 50CA, which seek to impose tax on certain assets, that were received or transferred for an inadequate consideration. Section 56(2)(x) of the IT Act stipulates that where certain assets, including shares and securities are received for a value which is less than their fair market value (“FMV”), then the difference between the FMV and actual consideration paid would be subject to tax in the hands of the recipient under the ‘other incomes’ head. Similarly, in the hands of the seller / transferor, Section 50CA provides for deeming the FMV of unquoted shares as the sale consideration for computing the capital gains arising from the transfer of such shares at a value which is less than the FMV. Continue Reading CBDT NOTIFIES RELAXATION IN FAIR VALUATION NORMS- ARE THEY ENOUGH?

In its recent ruling[1], the Income Tax Appellate Tribunal Bench at Delhi (ITAT) has reiterated the well-established principles, including (i) validity of Trusts; (iii) use of Trusts to hold treasury shares[2]; and (iii) the taxation of its income as a representative of the beneficiary/beneficiaries under the provisions of sections 160-166 of the Income-Tax Act, 1961 (IT Act). The ITAT further upheld the principle that trustees are to be assessed as ‘representative assessee’ in the same and like manner as beneficiaries and therefore, creation of a Trust is not a tax evasion device as the Trust will have the same tax liability and exemptions accruing to the beneficiary.

Continue Reading Trust is Trustworthy, not a Device to Evade Tax: ITAT Delhi

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)

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.

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?