Spelling out clearly the conditions for treating a company as a subsidiary of a foreign company or a CFC, the DTC Bill has said that a company which is a resident of a country which has a lower tax rate and one or more Indian residents hold management control over it, will be treated as a CFC and taxed accordingly in India. The rules in the DTC also have the formula for the income attributed to the CFC for tax purposes.
Here, it is important to mention that the foreign firms, where a CFC rule is applied will be taxed as per the domestic tax rules and not as per the treaty with the firms resident country. Meanwhile companies which are listed on a stock exchange are also spared from the CFC rule.
India has been dealing with the problem of tax avoidance with many foreign companies operating in India through tax haven nations to take the benefit of lower or no tax in the tax haven. The use of intermediary entities in a tax-free or low-tax jurisdiction enables a tax resident to defer (or avoid) the domestic tax liability on the income until it is repatriated to the residence state.
The CFC rules have been primarily framed as an anti-deferral measure. It is also applied in many well developed economies of the world, revenue secretary Sunil Mitra told reporters while briefing on the issue.
Under the CFC rules, the domestic law effectively extends the residence rules to tax the income. The CFC rules are in use in almost 25 countries over the world.
With regard to the CFC rules prescribed by Indian tax authorities in form of the DTC Bill, experts say that the drafting needs to bring clarity on the foreign tax credit that would be claimed.
The issue that needs a clarity is the availability of foreign tax credit. How is a company going to avail tax credit for the tax paid by it in other country, said K R Sekar Partner Deloitte.
Inclusion of CFC regulations will have significant impact on Indian companies establishing global foot print by setting up intermediary holding companies. Generally, holding companies are set-up to mobilize investments or raise funds for investing in various jurisdictions, said Samir Kanabar, Tax Partner, Ernst & Young.