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Rules to tax Indian subsidiaries:Finance Ministry
By siliconindia
New Delhi: The finance ministry intends to introduce Controlled Foreign Company (CFC) rules which will permit authorities to widen domestic laws for taxing profits of Indian subsidiaries abroad.This will help to verify outbound investment in tax havens in order to prevent delay of tax by foreign branches of Indian companies, reports Vrishti Beniwal, Business Standard.
The profits incurred by the foreign arms of Indian companies are taxed only when they are allotted through dividends to the parent. Instead of bringing the profit to India these companies use the fund for foreign investment. This leads to non -payment of tax on profits made by the foreign arms.
According to a senior official in the Finance Ministry, "A committee under the director general of Income Tax (international taxation) was formed to give its recommendations on taxing income of CFCs to boost the government's revenues. The committee recently submitted its report to Central Board of Direct Taxes (CBDT) Chairman S N Moorthy."
The CFC rules need an amendment to be submitted to the Income Tax Act. The rules can be either introduced in the Finance Bill of 2011 or in the second draft of the Direct Taxes Code, which is expected to be released for public issue this month.
The developed countries like U.S, the UK, Japan and Germany, where outbound investments have exceeded capital inflows have adopted CFC rules. This idea has faced opposition from some quarters of India on the ground that the country is not prepared for such a regime. It argues that capital inflows are still higher than outflows.
S P Singh, Senior Director, Deloitte, said "The rules will not impact small investors. These are to check tax avoidance by large investors. Whenever outward investments go beyond a minimum threshold, such rules come into the picture," Singh said.
CFC rules do not work when the foreign subsidiary is listed or distributes a particular percentage or profits every year. Even in cases of a high-tax jurisdiction when it's total income does not exceed a particular threshold, CFC rules do not apply.
