The 2016 budget was presented today and as promised it was a balanced budget. Here are some of the proposals regarding international transactions.

Deferral of Place of effective Management

Finance Act , 2015 amended section 6(3) of Income Tax Act, 1961 (Act) so as to provide that a company would be resident in India in any previous year if it is an Indian company or its Place of Effective Management (POEM) in that year is in India. The POEM was defined to mean a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are in substance made. The said provision was going to be applicable from 1st April 2016 and draft guiding principles for determination of POEM were also released by CBDT on 23rd December 2015.

However ,there were concerns in applicability of POEM, in case of companies which considers itself a tax resident on another countries , but has not been assessed as tax resident in India. Multitude of sections like TDS, Advance payment of service tax, transfer pricing, MAT provisions must have been ignored by the company treating itself as non-resident.The trouble will rise multifold in case of assessment proceedings where company still claims it to be a foreign entity. The lack of any transition provisions raised issues of concern stakeholders and therefore there was a  demand to  defer the applicability of POEM till next year.

    So, In order to provide clarity in respect of implementation of POEM based rule of residence it has been proposed in the budget that 

a) Applicability of POEM based residence test to be deferred by one year

b) A transition mechanism for a company which is incorporated outside India and has not earlier been assessed to tax in India needs to be provided. The power to lay down  transition mechanism has been given to government

c) These transition provisions to  also cover any subsequent previous year upto the date of determination of POEM in an assessment proceedings.

d) Certain conditions to be provided and in case the conditions are not been followed, the benefit of such notification will not be available for the same 

It's an excellent move by the government which shows the genuine concern that any undercooked legislation will not be forced in the act. 

Equalisation Levy -

In the arena surrounded by Luxembourg leaks and gross underpayment of taxes by online sites, decades  old concepts of source country vs residence country, national boundaries, location based taxation does not works. The tax free model for e-commerce companies in India is pretty straightforward. It's subsidiaries in India only operate as marketing entity and no advertisement revenue is generated in the same. All the revenue becomes part of Global entity which does not a permanent establishment in India and therefore cannot be taxed. As pronounced in the famous judgement of ITO vs Right Florist Pvt Ltd - "

It is to be examined whether a search engine like Google or Yahoo can be said to have a PE, within its primary meaning, in India. The traditional concept of PE, which was conceived at a point of time when internet and e-commerce was not even on the radar, does not really fit into the modern day world in which virtual presence through internet , in certain respects, is as effective as physical presence for carrying on businesses. A search engine's presence in a location, other than the location of its effective place of management, is only on the internet or by way of a website, which is not a form of physical presence. As to whether website can be PE or not, guidance is found from High Powered Committee Report which, while recognizing the need to make form of presence tax neutral but realizing the limitations of the scope of existing principles and rules, observed that, "The Committee, supports the view that the concept of PE should be abandoned and a serious attempt should be made within OECD or the UN to find an alternative to the concept of PE". Clearly, conventional PE tests fails in this virtual world even when a reasonable level of commercial activity is crossed by foreign enterprise. 

In the light of the above discussions, even as per the High Power Committee, a website per se, which is the only form of Google's presence in India - so far as test of primary meaning i.e., basic rule PE is concerned, cannot be a permanent establishment under the domestic law. 

Therefore, it become a settled rule and in absence of any permanent establishment in India, the advertisement income received by these online websites used to be non-taxable in the country.

The Organization for Economic Cooperation and Development (OECD) has recommended, in Base Erosion and Profit Shifting (BEPS) project under Action Plan 1, recommended a virtual fixed place of business PE in the concept of PE i,e creation of a PE when the enterprise maintains a website on a server of another enterprise located in a jurisdiction and carries on business through that website. It also recommended to impose of a final withholding tax on certain payments for digital goods or services provided by a foreign e-commerce provider or imposition of a equalisation levy on consideration for certain digital transactions received by a non-resident from a resident or from a non-resident having permanent establishment in other contracting state.

In line with BEPS project, the finance minister has proposed an equalisation levy of 6% of the amount of consideration for specified services received or receivable by a non-resident not having permanent establishment ('PE') in India, from a resident in India who carries out business or profession, or from a non-resident having permanent establishment in India. Specified services currently only contain  online advertising in its ambit. Due care has been taken to exclude from its purview small advertisement if aggregate amount received by a non-resident from a resident does not exceed by Rs 1 lakh. It is also clarified that the tax will be applicable on gross basis and no expense will be allowed to be deducted for the same. The tax deductors who are till now in habit of non-deduction of tax on such payments will now have to be careful while going forward in such transactions. As it is not tax as part of Income Tax , there will be issues in getting credit of the same in foreign country. Also, constitutional validity of the  provision may also be challenged in the court for jurisdictional issues. All in all, although it may create level playing field local players,  this will surely make online advertising expensive.

Country By Country (CbC) reporting

Action 13 of the Action plan on BEPS required the development of "rules regarding transfer pricing documentation to enhance transparency for tax administration, taking into consideration the compliance cost for business ". The earlier chapter V of the OECD guidelines  followed a more principle based approach and did not specifically provide a list of documents to be included in documentation. Therefore a more robust and evolved process was required to create an effective   transfer pricing regime.

The budget provisions have proposed a specific reporting regime in respect of CbC reporting. The important elements of the provisions are as follows :-

a) the provision shall apply in respect of an international group having consolidated revenue above a threshold limit which  is , as prescribed by OECD, Euro 750 million currently .

b) the Indian resident parent entity of an international group, shall be required to furnish the report in respect of the group to the prescribed authority on or before the due date of furnishing of return of income

c) the Indian resident parent entity shall be an entity which is required or would have been required to prepare consolidated financial statement, if any entity of the group is listed, 

d) every constituent entity in India, of an international group having non-Indian resident parent entity, shall provide information regarding the country or territory of residence of the parent of the international group to which it belongs on or before the prescribed date

e) the report shall be furnished in prescribed manner which  shall be based on the template provided in the OECD BEPS report on Action Plan 13;

f) if the parent entity of the group is resident in a country where the Indian entity does not have any arrangement for exchange of CbC report or such country is not exchanging the report, then the constituent entity in India , have to file the report with Indian authority

g) Penalty for inaccurate furnishing of report will be Rs 5 lakhs

h) a graded penalty structure from 5,000 a day to 50,000 a day is in place for delay in filing the report 

Many countries like Australia, Netherlands, France, Finland & USA have legislated similar kind of provisions and it's another welcome move by finance ministry to bring transparency in the Transfer Pricing regime. However it's a sincere wish that , since the group entity wise data is reported to government, data collected from CbC reporting is not used to do transfer pricing adjustments on Profit split basis. 

Patent Box regime

It is not completely  an international tax issue, however we are discussing here as it is part of BEPS action plan 5 which ensures that taxpayers can only  benefit from IP regimes where they engaged in research and development and incurred actual expenditures on such activities.

Therefore,  In order to give a boost to indigenous research and development activities and to make our country a global R&D hub,  Section 115BBF is introduced. It provides that where the total income of the patentee resident in India includes any income by way of royalty in respect of a patent developed and registered in India, then such royalty shall be taxable at the rate of ten per on the gross amount of royalty.

It needs to be kept in mind that the following income shall not be considered as 'royalty'

a) any income chargeable under the head 'Capital Gains'

b) any income from sale of products manufactured from commercial exploitation of patented process or patented article 

Exemption for furnishing PAN

Since the introduction of the controversial section 206AA of act, there has been lot of debates on the applicability of the same. It also raised the compliance burden of non-resident and cost of transaction for the resident.  

Also as per the judgement of DDIT vs Serum Institute of India Ltd.

"Section 90(2) provides that the provisions of the DTAAs would override the provisions of the domestic Act in cases where the provisions of DTAAs are more beneficial to the assessee. There cannot be any doubt to the proposition that in case of non-residents, tax liability in India is liable to be determined in accordance with the provisions of the Act or the DTAA between India and the relevant country, whichever is more beneficial to the assessee, having regard to the provisions of section 90(2). In this context, it would be worthwhile to observe that the DTAAs entered into between India and the other relevant countries in the present context provide for scope of taxation and/or a rate of taxation which was different from the scope/rate prescribed under the Act. For the said reason, assessee deducted the tax at source having regard to the provisions of the respective DTAAs which provided for a beneficial rate of taxation. It would also be relevant to observe that even the charging section 4 as well as section 5 which deals with the principle of ascertainment of total income under the Act are also subordinate to the principle enshrined in section 90(2). Thus, insofar as the applicability of the scope/rate of taxation with respect to the impugned payments made to the non-residents is concerned, no fault can be found with the rate of taxation invoked by the assessee based on the DTAAs, which prescribed for a beneficial rate of taxation. However, the case of the revenue is that the tax deduction at source was required to be made at the rate of 20 per cent in the absence of furnishing of PAN by the recipient non-residents, having regard to section 206AA. It would be quite incorrect to say that though the charging section 4 and section 5 dealing with ascertainment of total income are subordinate to the principle enshrined in section 90(2) but the provisions of Chapter XVII-B governing tax deduction at source are not subordinate to section 90(2). Notably, section 206AA is not a charging section but is a part of a procedural provisions dealing with collection and deduction of tax at source. The provisions of section 195 which casts a duty on the assessee to deduct tax at source on payments to a non-resident cannot be looked upon as a charging provision.

In the current budget, a proposal has been mooted to allow a non-resident not to quote the PAN provided that certain prescribed conditions are adhered to. If the conditions provided are reasonable enough , it will bring a lot of respite to many   non residents transacting with our country.

Exemption of income of Foreign Company from storage and sale of crude oil stored as part of strategic reserves.

This one is a retrospective amendment i.e. from 1st April 2016 , but surprisingly a positive one. In order to achieve neutrality in terms of taxation to encourage the foreign national oil companies  & multinational companies  to store their crude oil in India and to build up strategic oil reserves, it is proposed exempt  any income accruing or arising to a foreign company on account of storage of crude oil in a facility in India and sale of crude oil there from to any person resident in India, if, -

a) such storage and sale by the foreign company is pursuant to an agreement or an arrangement entered into by the Central Government or approved by the Central Government; and

b) having regard to the national interest, the foreign company and the agreement or arrangement are notified by the Central Government in this behalf.

The government has shown a lot of intent with its bold proposals. I sincerely hope that the ground realities will also be the same.