Budget may pave the way for controlled foreign corporations

The upcoming Budget may see the introduction of concept of Controlled Foreign Corporations (CFC) to tax the passive incomes parked in foreign subsidiaries of Indian MNCs, say tax experts.

This could happen if the government were to take a pragmatic decision to altogether scrap the concept of Place of Effective Management (POEM), they added.

Anand Kakarla, Tax Partner, BDO India, said that it is anticipated that this Budget is likely to introduce the concept of ‘Controlled Foreign Corporation’ (CFC) regulations replacing the concept of taxing a foreign company if its ‘place of effective management’ (POEM) is in India.

As against the potential risk of global income being exposed for Taxation in India, CFC will tax only the passive income of certain foreign entities located in low-tax jurisdiction and being controlled from India

“Well drafted CFC regulations could extend help to avoid the subjective nature of applying POEM criteria for Outbound Indian Companies,” Kakaria said.

In the current Global Business Eco System when India going global story is percolating even to the SME/Startup Community in India, CFC could bring in more objectivity and certainty to overall Tax exposures, he added.

Aseem Chawla, Managing Partner, ASC Legal, said that the present draft POEM guidelines do reflect the CFC concept.

“If the government is keen to get CFC regulations in place (which were also proposed in the direct taxes code) then it should make it clear and bring it in an unambiguous manner rather than a disguise manner leading to more controversies,” Chawla told BusinessLine .

Rahul K Mitra, Partner, National Head, Transfer Pricing & BEPS, KPMG India, said: “Though designing effective CFC rules is one of the mandates of BEPS Action Plans, yet, one would need to evaluate the need for introducing CFC rules in India”.

CFC rules are generally meant to counter propensity on the part of MNCs to defer taxes through parking of passive incomes (e.g. royalties, fees, interests, capital gains, profits made from buying and selling products from and to related parties, etc.) at the level of foreign subsidiaries, instead of repatriating the same back as dividends, he said.

Assuming that the passive incomes in question pass the necessary tests of legitimacy, or else, such incomes would anyway need to be taxed in India under specific or general anti avoidance rules, it is doubtful whether Indian MNCs would prefer to park the same abroad purely to avoid taxes in India, since foreign dividends are currently charged at a nominal rate of 15 per cent.

Indian MNCs would prefer to dividend back the cash to service its equity or debt obligations in India, by paying the nominal tax of 15 per cent, he added.

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