Selected issues on Capital Gains for Non-residents Chamber of Tax Consultants - International Tax Study Circle

Transcription

1 Selected issues on Capital Gains for Non-residents Chamber of Tax Consultants - International Tax Study Circle CA Rutvik R Sanghvi 30 th April 2014

2 Contents Accrual & Deemed Accrual of Capital Gains in India Indirect Transfers Forex Fluctuation Adjustment Tax Rates for Non-residents Sec 112 & Forex Fluctuation Adjustment Taxability under DTAA Ch. XIIA - Special provisions for NRIs Taxability of FIIs TDS u/s

3 Accrual and deemed accrual Section 45 Any profits or gains arising from the transfer of a capital asset Sec 5: Transfer within India Sec 9(1)(i): Asset within India NR R or NR NR R or NR India Outside India Outside India India Asset Asset 3

4 Indirect transfers - provision NR Co. XY Co. X NR Outside India India Explanation 5 to Section 9(1)(i): An asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India Retrospective amendment 4

5 Indirect transfers issues What is substantial value? 50%? How should value be computed? Tax credit Tax on actual sale of underlying assets? Valuation of capital assets situated in India? Retail sales? Offshore group reorganisations which are otherwise not taxable Assets deemed to be situated in India far reaching Other incomes like dividends? Transfer not necessary 5

6 Indirect transfers transfer not necessary X Shareholder Co. PQR Co. QR Co. R Outside India India Co. PQR is liquidated Shareholder X receives shares in Co. QR on liquidation Substantial value in Co. QR s shares due to investment in Co. R Shares of Co. QR deemed to be in India Section 46(2) applies No transfer u/s. 45 6

7 Indirect transfers the future? Direct Taxes Code 2013 Substantial value more than prescribed value or 20% Assets located in India tangible or intangible Income taxable in India: Income earned as if transfer in India Value means fair market value of asset without reduction of liabilities as on specified date Specified date means the last date of accounting year preceding transfer of capital asset x Value of assets of Co. in India Value of all assets of Co. 7

8 Indirect transfers DTAA relief Section 9(1)(i) not a non-obstante clause Section 90(2) applies wherever DTAA beneficial Sanofi Pasteur Holding SA Groupe Industrial Marcel Dassault, In re Vodafone South Ltd. Implications? 8

9 Forex Fluctuation Adjustment Full value of consideration received on transfer is to be reduced by the expenditure on transfer and the cost of acquisition or improvement Sec 48 1 st proviso, Sec 48 Forex Fluctuation Adjustment (FFA) Capital gains shall be computed by converting the amount of sale consideration into the same foreign currency as was used at the time of purchase. FFA applicable to 9 capital gains short-term or long-term; arising on transfer by a non-resident; of shares or debentures of an Indian company; purchased out of foreign currency.

10 Forex Fluctuation Adjustment Sr. No. Particulars In Rupees In USD a. Cost (at Rs. 45 per USD) 45,000 1,000 b. Sale consideration (at Rs. 60 per USD) 60,000 1,000 c. Gain in respective currency ( b a ) 15,000 Nil d. Taxable gain on account of application of FFA Nil 10

11 Forex Fluctuation Adjustment - Issues Is the provision mandatory? Sr. No. Particulars In Rupees In USD a. Cost (at Rs. 45 per USD) 45,000 1,000 b. Sale consideration (at Rs. 30 per USD) 60,000 2,000 c. Gain in respective foreign currency ( b a ) 15,000 1,000 d. Gain on account of application of FFA (USD 1,000 at Rs. 30) Intention to give relief CBDT circular However, provision does not offer choice 11 e. Additional Gain taxable on account of appreciation in value of Rupee ( d - c ) 30,000 15,000

12 Forex Fluctuation Adjustment - Issues Provision applicable to Shares or debentures received as gifts or by way of inheritance NRO Deposits covered? Foreign exchange utilised However non-repatriable investments No relief for fluctuation from date of remittance till date of purchase Reinvestments Forex rate of which date to be considered? Gains earned in rupees to be adjusted? FFA and Indexation benefit provisions mutually exclusive 12

13 Tax rates Short-term Capital Gains Type of asset Rate of tax Legal provisions Equity Shares or units of an equity-oriented fund, on which STT is paid 15% Section 111A Capital assets other than those mentioned above including off-market sale of listed equity shares and units of equityoriented fund Slab rates for individual & HUF 40% for foreign companies 30% for those not covered above Rates in force as per Part I to the First Schedule of the relevant assessment year s Finance Act No marginal relief No relief for senior or very senior citizens 13

14 Tax rates Long-term Capital Gains Type of asset Applicable tax rates Unlisted Securities Up to A.Y : 20% From A.Y : 10% Listed securities on which STT is not paid on transfer (Lower rate of tax as per Proviso to Section 112(1)) Lower of: 10% tax before availing indexation benefit; or 20% tax after availing indexation benefit. Listed securities on which STT is paid on transfer Exempt from tax as per Section 10(38) No marginal relief 14

15 Sec 112 & Forex Fluctuation Adjustment Proviso to Section 112(1) states that where long-term gains are earned on sale of listed securities or units, the tax rate applicable would be restricted to 10%. Applicable on gains computed before giving effect to the provisions of the second proviso to Section 48, i.e., on gains earned before taking indexation benefit. No bar on applying Forex Fluctuation Adjustment before availing lower rate of 10% Dual benefit of FFA and 10% tax rate available? 15

16 Sec 112 & Forex Fluctuation Adjustment Assessee s stand Revenue s stand Indexation benefit is not availed on gains on which Forex Fluctuation Adjustment is applied. Hence, lower tax rate of 10% is available. Cairn UK Holdings Ltd. Del HC [2013] 38 taxmann.com 179: Literal interpretation No explicit stipulation in the Act. Timken France, In re [2007] 164 Taxman 354 (AAR); McLeod Russel India Ltd., In re [2008] 168 Taxman 175 (AAR); Compagnie Financiere Hamon, In re [2009] 177 Taxman 511 (AAR); Alcan 16 Inc. v. DDIT (16 SOT 8). Lower rate of 10% applies only to gains eligible for indexation benefit. As gains adjusted for forex fluctuation are not eligible for indexation benefit no relief of lower rate available. Cairn UK Holdings Ltd. AAR Delhi [2011] 12 taxmann.com 266 : The words before giving effect to used in proviso the Section 112 can come into play only if the assets sold are first qualified for indexation benefit. BASF Aktiengesselschaft vs. DDIT (293 ITR 1)

17 Capital Gains under DTAA Article 13 of the OECD and UN Models Gains taxable where alienator is resident - COR Taxability based on types of assets sold Immovable property Articles 13(1) & 13(4) 17 Gains can also be taxed where property is situated - COS Whether property is residential or commercial Whether property is capital asset or stock-in-trade Sale of shares in a company where value is principally from immovable property situated in COS taxable also in COS Before indirect transfer provisions, such shares not taxable in India Abuse possible by dilution in value of shares represented by immovable property just before sale BEPS Action 6: Amendment to refer to situations where shares or similar interests derive their value at any time during a certain period as opposed to at the time of alienation only

18 Articles 13(1) & 13(4) Artic le UN Model 13(1) Gains derived by a resident of a Contracting State from the alienation of immovable property referred to in Article 6 and situated in the other Contracting State may be taxed in that other State. 13(4) Gains from the alienation of shares of the capital stock of a company, or of an interest in a partnership, trust or estate, the property of which consists directly or indirectly principally of immovable property situated in a Contracting State may be taxed in that State. In particular: 18 (a) Nothing contained in this paragraph shall apply to a company, partnership, trust or estate, other than a company, partnership, trust or estate engaged in the business of management of immovable properties, the property of which consists directly or indirectly principally of immovable property used by such company, partnership, trust or estate in its business activities. (b) For the purposes of this paragraph, principally in relation to ownership of immovable property means the value of such immovable property exceeding 50 per cent of the aggregate value of all assets owned by the company, partnership, trust or estate. OECD Model Same as UN Model Gains derived by a resident of a Contracting State from the alienation of shares deriving more than 50 per cent of their value directly or indirectly from immovable property situated in the other Contracting State may be taxed in that other State.

19 DTAA Article 13 Shares exceeding certain percentage of investee company - Article 13(5) UN Model Absent in OECD Model; DTAA with Mauritius, Singapore, etc. If X, resident of Country A, sells share of an Indian company I Co., and such shares exceed a certain minimum percentage of X s capital in such I Co., then India can tax such gains. Country A can also tax the gains. UN Model 2011 Shares can be held directly or indirectly At any time during the 12 month period preceding such alienation 19

20 Article 13(5) Variation in wording Shares representing threshold limit vs. Shares forming part of threshold limit Shareholder X holding 25% Threshold limit of 20% Shareholder Y holding 25% Sale of 5% holding each time Outside India India I Co. I Co. One possible view that gains not taxable in India Gains taxable in India on each sale Gains should be taxable in India under both types of wordings 20

21 DTAA Article 13 Other provisions Movable property owned by PE or FB - Article 13(2) Taxable in India if PE or FB in India Short-term gain u/s. 50 as per block of assets Ships & Aircraft - Article 13(3) NR earns Capital Gains from sale of: ships or aircraft operated in international traffic; boats engaged in inland waterways transport; or movable property pertaining to such operation. Gains can be taxed only in Contracting State in which the place of effective management of the enterprise is situated. However, immovable property pertaining to above covered in Art. 13(1) Other property - Article 13(6) 21 Taxable in COR, India does not get right to tax Used for double non-taxation under Mauritius, Singapore DTAAs

22 Capital Gains under Mauritius DTAA Capital Gains on sale of shares taxable only in Mauritius No tax on capital gains in Mauritius Benefit of double non-taxation Flip flop treatment by Government No clarity yet Possibly through revision in DTAA Circular 789 upheld by SC in Azadi Bachao Andolan Aditya Birla Nuvo Vodafone Intl. BV Sanofi Pasteur Holding SA 22

23 Capital Gains under Singapore DTAA Capital Gains taxable only in Singapore, not in India Singapore does not tax capital gains Double non-taxation Applicable until India-Mauritius DTAA provides similar relief Limitation of Benefits clause Benefit of Singapore treaty not available if Test 1 Affairs of Singapore resident are arranged with the primary purpose to take advantage of treaty The case of entities not having bona fide business shall be covered by clause (1) OR Test 2 Shell/Conduit Co. - any legal entity with negligible or nil business operations or with no real and continuous business activities carried out in Singapore Deemed to be a Shell/Conduit Co. if its op expenses are < 2L SGD p.y. in last 24 months Deemed not to be a Shell/Conduit Co. if it is listed in Singapore; and if its op expenses are >= 2L SGD p.y. in last 24 months 23

24 Capital Gains under Cyprus DTAA Similar benefits on capital gains as India-Mauritius DTAA. No tax payable in India on sale of shares in an Indian company. CBDT has notified Cyprus as Notified Jurisdictional Area u/s. 94A from 1/11/ All parties to transactions with a person in Cyprus shall be treated as AEs and TP provisions will apply. Additional documentation to be maintained. Any payment on which tax is deductible at source and made to a person located in Cyprus, will be liable for deduction of tax at source as per the rates under the Act or 30%, whichever is higher. Impact on capital gains? Sec 94A does not deny treaty benefits Deduction at higher rate only on sum chargeable to tax As no tax on capital gains, 30% rate not applicable However, transaction will be scrutinised thoroughly

25 Capital Gains under Other DTAAs UK & USA DTAAs Taxable in both countries as per domestic law Netherlands DTAA Gains from shares taxable only in Netherlands If Dutch company holds at least 10% of Indian Co. gains taxable in India Only if sale happens to Indian Resident If sale happens to NR, then gain taxable only in Netherlands Gain taxable only in Netherlands if realised in course of corporate organisation, reorganisation, amalgamation, division, etc. and buyer or seller owns at least 10% of the other co. s capital 25

26 Ch. XIIA Special provisions for NRIs Assets covered Incomes covered Tax rate Specified assets if purchased, a. Investment income which 20% acquired or subscribed to in is defined as income convertible foreign exchange: derived from the specified a. Shares in an Indian company; assets, but excluding b. Debentures in or deposits with dividends referred to in an Indian company which is not a private company; and c. Specified Government securities. Section 115O b. Long-term capital gains 10% Most provisions are now not beneficial 26 Long-term gains earned on listed securities which are not traded on a stock exchange (not exempt under Sec10(38)). As per Section 112(1)(c)(ii), such gains are taxable at 20% as compared to 10% under Section 115E.

27 Chapter XIIA - Issues Deposits of banking companies Only public companies covered Branches of Foreign companies not covered Short-term gains - investment income? Favourable - Smt. Trishla Jain [1990] 34 ITD 523 (Delhi) Short-term gain falls within definition of income hence covered - Against - Sunderdas Haridas v. ACIT [1998] 67 ITD 89 (Mum.) Investment income is to be considered distinct from income - If short-term capital gains were to be covered, the same would have been specified in the Act clearly. Income derived from any asset should flow from the use of the asset, and not from capital realisation on sale of the asset. 27

28 Taxability for FIIs Governed by Sec 115AD Code in itself Type of asset Shortterm Gains Longterm Gains Equity shares or units of an equity-oriented fund, on which STT is paid, i.e., which are sold on the stock exchange 15% Exempt u/s. 10(38) Capital assets other than those mentioned above. Off-market sale of listed equity shares and units of equity-oriented fund are also covered here 30% 10% Benefit for short-term gains on which STT is not paid. Computation to be done without 1 st & 2 nd provisos to Sec 48 No tax to be deducted from capital gains - u/s. 196D 28

29 Taxability of FIIs - Issues Capital Gains vis-à-vis Business Income Held as business income Fidelity Advisors and XYZ/ ABC Equity Fund Considered as Capital Gains Under SEBI Regulations, an FII can only invest and not do business - Fidelity North Star Fund In case of transfer of securities held as stock-in-trade or investments, income would be taxable as capital gains L.G. Asian Plus Ltd. vs. ACIT Taxation of gains on derivatives Derivatives are covered within the definition of securities mentioned in Section 115AD - Platinum Asset Management Ltd. 29

30 TDS u/s. 195 Deduction on capital gain or on gross sum Transmission Corporation ITR 587 (SC) GE India Technology Centre TAXMANN 234 (SC) Karnataka High Court in Samsung Electronics overruled Few Bangalore ITAT decisions have not applied GE India correctly Instruction No. 2/2014 default only in respect of appropriate proportion chargeable to tax Can the payer himself determine the amount of tax to be deducted at source? GE India Technology Centre Approaching the tax officer u/s. 195(2) not mandatory. 30

31 Section 206AA PAN requirement Non-obstante provision Obligation to furnish PAN on NR receiving income In absence of PAN, higher of the following rates applicable: Rate specified in the relevant provision of the Act; Rate or rates in force; or Rate of 20% Section applicable also when PAN incorrect or invalid Treaty Override? Credit in the other country may not be available for additional tax burden Applicable where no tax payable? No, as provision applicable only on sum or income or amount on which tax is deductible 31

32 Tax Residency Certificate Section 90(4) & (5) Introduced w.e.f NR cannot avail benefit under Treaty without Tax Residency Certificate (TRC) Applies to all NRs without any threshold limit TRC will be necessary but not sufficient past? TRC not required in case no treaty benefit availed LOB clause? 32

33 Interplay of DTAA, PAN & TRC 33

34 Thank you! CA Rutvik Sanghvi 34