{"id":3890,"date":"2017-02-20T11:40:23","date_gmt":"2017-02-20T06:10:23","guid":{"rendered":"https:\/\/taxclick.org\/?p=3890"},"modified":"2017-02-22T11:30:16","modified_gmt":"2017-02-22T06:00:16","slug":"budget-2017-bringing-india-closure-global-practices","status":"publish","type":"post","link":"https:\/\/taxclick.org\/type\/fema\/budget-2017-bringing-india-closure-global-practices\/","title":{"rendered":"Budget 2017 – Bringing India closer to Global practices"},"content":{"rendered":"

\u201cArise,\u00a0awake, and\u00a0stop not\u00a0till the goal is reached\u201d<\/strong> said by Swami Vivekanada seems to be the motto of the Indian government which is relentlessly working on bringing India at Global footing as far as the taxation laws are concerned. Year by year India is adopting the international best practices for all the reasons it may have, be it for preventing the abuse of treaty, abuse of income tax regulations or to enhance and accelerate the level of compliance. Adopting, adjusting, readjusting, learning and relearning from the countries with better systems and administration in place.<\/span><\/p>\n

The budget 2017-18 saw the bringing of more international best practices in force.<\/span><\/p>\n

In Budget 2016-17 also government made progressive steps towards bringing India as one of evolved jurisdiction with regard to its taxation policies by introduction of equalisation levy on specified digital transactions, country-by-country reporting requirements for multinational companies and Patent box regime providing for reduced tax rates for royalty relating to patents based on nexus approach etc. Infact, India became the first country to introduce equalization levy on digital transactions, at the rate of 6% on the gross consideration for specified services I,e. online advertisement and related services provided by foreign companies which do not have a permanent establishment in India.<\/span><\/p>\n

Keeping the trend going, in Budget 2017-18 introduced more provisions.<\/span><\/p>\n

Below we have discussed the relevant new concepts brought in by Budget 2017-18<\/span><\/p>\n

Thin capitalisation Rules in case of thinly funded entities<\/span><\/strong><\/span><\/h2>\n

A company is typically financed or capitalized through a mixture of debt and equity. The way a company is capitalized often has a significant impact on the amount of profit it reports for tax purposes as the tax legislations of countries typically allow a deduction for interest paid or payable in arriving at the profit for tax purposes while the dividend paid on equity contribution is not deductible. Therefore, the higher the level of debt in a company, and thus the amount of interest it pays, the lower will be its taxable profit. For this reason, debt is often a more tax efficient method of finance than equity. Multinational groups are often able to structure their financing arrangements to maximize these benefits. For this reason, country’s tax administrations often introduce rules that place a limit on the amount of interest that can be deducted in computing a company’s profit for tax purposes. Such rules are designed to counter cross-border shifting of profit through excessive interest payments, and thus aim to protect a country’s tax base.<\/span><\/p>\n

Under the initiative of the G-20 countries, the Organization for Economic Co-operation and Development (OECD) in its Base Erosion and Profit Shifting (BEPS) project had taken up the issue of base erosion and profit shifting by way of excess interest deductions by the MNEs in Action plan 4. The OECD has recommended several measures in its final report to address this issue.<\/span><\/p>\n

\"Bringing<\/a><\/p>\n

In view of the above, in Budget 2017 it is proposed to insert a new section 94B, in line with the recommendations of OECD BEPS Action Plan 4, to provide that interest expenses claimed by an entity to its associated enterprises shall be restricted to 30% of its earnings before interest, taxes, depreciation and amortization (EBITDA) or interest paid or payable to associated enterprise, whichever is less.<\/span><\/p>\n

The provision shall be applicable to an Indian company, or a permanent establishment of a foreign company being the borrower who pays interest in respect of any form of debt issued to a non-resident or to a permanent establishment of a non-resident and who is an ‘associated enterprise’ of the borrower. Further, the debt shall be deemed to be treated as issued by an associated enterprise where it provides an implicit or explicit guarantee to the lender or deposits a corresponding and matching amount of funds with the lender.<\/span><\/p>\n

The provisions shall allow for carry forward of disallowed interest expense to eight assessment years immediately succeeding the assessment year for which the disallowance was first made and deduction against the income computed under the head “Profits and gains of business or profession to the extent of maximum allowable interest expenditure.<\/span><\/p>\n

In order to target only large interest payments, it is proposed to provide for a threshold of interest expenditure of one crore rupees exceeding which the provision would be applicable.<\/span><\/p>\n

Banks and Insurance business are excluded from the ambit of the said provisions keeping in view of special nature of these businesses. This amendment will take effect from 1st April, 2018 and will, accordingly, apply in relation to the assessment year 2018-19 and subsequent years.<\/span><\/p>\n

Secondary Adjustment <\/span><\/strong>in case of Transfer Pricing <\/span><\/strong>
\n<\/span><\/h2>\n

“Secondary adjustment” means an adjustment in the books of accounts of the assessee and its associated enterprise to reflect that the actual allocation of profits between the assessee and its associated enterprise are consistent with the transfer price determined as a result of primary adjustment, thereby removing the imbalance between cash account and actual profit of the assessee.<\/span><\/p>\n

The OECD Transfer Pricing Guidelines for Multinational Corporations and Tax Administrations (\u201cOECD transfer pricing guidelines\u201d) define the term secondary adjustments as \u201can adjustment that arises from imposing tax on a secondary transaction\u201d. A secondary transaction is further defined as \u201ca constructive transaction that some countries will assert under their domestic legislation after having proposed a primary adjustment in order to make the actual allocation of profits consistent with the primary adjustment.\u201d<\/em><\/span><\/p>\n

As per the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD transfer pricing guidelines), secondary adjustment may take the form of constructive dividends, constructive equity contributions, or constructive loans.<\/span><\/p>\n

The provisions of secondary adjustment are internationally recognised and are already part of the transfer pricing rules of many leading economies in the world. Whilst the approaches to secondary adjustments by individual countries vary, they represent an internationally recognised method to align the economic benefit of the transaction with the arm’s length position.<\/span><\/p>\n

In order to align the transfer pricing provisions in line with OECD transfer pricing guidelines and international best practices , a new section 92CE is inserted which provides that the assessee shall be required to carry out secondary adjustment where the primary adjustment to transfer price, has been made suo motu by the assessee in his return of income; or made by the Assessing Officer has been accepted by the assessee; or is determined by an advance pricing agreement entered into by the assessee under section 92CC; or is made as per the safe harbour rules framed under section 92CB; or is arising as a result of resolution of an assessment by way of the mutual agreement procedure under an agreement entered into under section 90 or 90A.<\/span><\/p>\n

As in the Finance Bill 2017 lists the following instances of Primary Adjustment:<\/span><\/p>\n