Budget 2015: Projecting India as safe harbour for MNCs

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Updated: March 1, 2015 10:01:12 AM

Finance minister Arun Jaitley brought relief to multinational companies by easing the rigours...

Finance minister Arun Jaitley brought relief to multinational companies by easing the rigours of provisions relating to offshore transfer of assets in India and proposing a lower withholding tax on royalty paid to a foreign associate. He also proposed a liberal safe harbour limit for certain domestic transactions that attract tough transfer pricing audits.

Jaitley proposed that sale of Indian assets executed through holding companies incorporated abroad would attract a tax demand only if the Indian asset accounts for more than half of the assets that are changing hands globally. Besides, there would be no tax demand on offshore sale of Indian assets if the Indian assets are worth less than R10 crore.

Jaitley said many of the recommendations of the Shome panel to make the 2012 amendments to the Income Tax Act regarding offshore sale of Indian assets have been accepted in full or with modifications. The government also proposed to reduce the rate of tax that should be deducted at source while an entity pays royalty to a foreign company to 10% from the existing 25%. Double tax avoidance agreements with other countries provide for a 10% or 15% tax on royalty payments and the lower among the rates specified in the domestic law or the treaty applies to companies.

Thus, the actual benefit of reduction would go to entities in countries like US since India’s treaty with the US provides for 15% tax on royalty, which is above the rate now proposed to be incorporated in the domestic tax law.

Jaitley also proposed to bring further clarity on applicability of indirect transfer provisions to dividends paid by foreign companies to their shareholders through a clarificatory circular. “These changes would eliminate the scope for discretionary exercise of power and provide a hassle-free structure to the taxpayers,” he said.

He also proposed a higher safe harbour limit of R20 crore for subjecting certain domestic transactions to rigourous transfer pricing audits, up from the current R5 crore. Vaishali Mane, ED, Walker Chandiok & Co, said this increase would benefit small companies from unnecessary compliance hassles.

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