Basics Of International Tax – Advanced Tax Laws and Practice Important Questions
Question 1.
Explain in the context of provisions contained under the Income-tax Act, 1961, the Income Test, and the Assets test with reference to the passive foreign investment company.
Answer:
Income Test
- Under the Income test, a foreign corporation is considered a Passive Foreign Investment Company ‘PFIC’ if 75% or more of the foreign corporation’s gross income for the taxable year consists of passive income.
- Passive income includes dividends, interest, royalties, rents, annuities, net gains from certain commodities transactions, net foreign currency gains, income equivalent to interest, payment in lieu of dividends, income from notional contracts, and income from certain personal service contracts.
Assets Test
- Under the Assets test, a foreign corporation is considered a PFIC if 50% or more of the foreign corporation’s assets produce or are held to produce passive income. In applying the Assets Test, the fair market value of the assets is generally used to work out on the FMV method.
- The general exception is a foreign corporation that is not publically traded and is a controlled foreign corporation, which must use the adjusted basis (the basis method) of its assets in applying the Assets Test. A taxpayer may also elect to utilize the basic method, but, once this is done, may not change back to the FMV method without IRS content.
Question 2.
A non-Indian company is treated as a resident, only if the place of effective management is situated wholly in India during the previous year. Comment.
Answer:
All Indian companies within the meaning of Section 2(26) of the Act are always resident in India regardless of the place of effective management of its affairs. The Finance Act, 2015 has amended the test of residence for foreign companies to provide that a company would be treated as a resident in India if its place of effective management at any time during the previous year is in India.
“Place of effective management” to mean a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance made [Explanation to section 6(3)]
Question 3.
XYZ Ltd., a foreign company, has its head office in the USA. The Board of Directors (BOD) meetings are held in the USA. However, the Board of Directors has delegated major powers to a committee in Kolkata and the members of this committee are based in Kolkata. The Board of Directors ratified the decisions of the said committee.
In the light of the above,
- Discuss the place of effective management (POEM) of XYZ Ltd.
- Discuss the guiding factors of POEM for the Board of Directors delegating authorities to the Committee.
Answer:
The location where the company’s Board of Directors (BOD) regularly meets and makes decisions may be the company’s Place of Effective Management (POEM) provided the Board:
- Retain and exercises its authority to govern the company; and
- Does, in substance, make the key management and commercial decisions necessary for the conduct of the company’s business as a whole.
In the given case, the board meetings are held in the USA, but the same formalize the decisions taken by the committee at Kolkata. Hence Place of Board meeting held in the USA cannot be POEM, as power is delegated to a committee ) which is based in Kolkata.
Guiding factors when Board Delegating Authorities to Committee are as under:
If the Board of Director had delegated some or all of its major authorities to j one or more committees consisting of senior management, then POEM shall I be at the place where:
- Members of the executive committee are based and
- Where the committee develops and formulates key decisions for formal approval by Board.
Hence in a given case, the POEM of XYZ Ltd. will be Kolkata, as discussed above.
Question 4.
Jim Crow Tex. Inc. is a company incorporated in London (England). 2 60% of its shares are held by Sampat Pvt. Ltd. a domestic company. Jim Crow Tex. Inc. has its presence in India also. The data relating to Jim 2 Crow Tex. Inc. for the financial year 2018-19 are as under:
| Particulars | India | England |
| Fixed assets at depreciated values for tax purposes (₹ in crores) | 60 | 90 |
| Intangible assets (₹ in crores) | 80 | 190 |
| Other assets (₹ in crores) | 20 | 60 |
| Income from trading operations (₹ in crores) | 16 | 37 |
| Income from investments (₹ in crores) | 29 | 18 |
| Number of employees(Residents in respective countries) | 70 | 30 |
State for the purpose of Place of Effective Management (POEM) whether the Jim Crow Tex. Inc. shall be said to be engaged in ‘Active Business Outside India’ (ABOI) under Income-tax Act, 1961 on the basis of:
- Income criteria
- Assets criteria
- A number of employees criteria.
Answer:
(1) Income Criteria:
The passive income should not be more than 50% of its total income. Total Income during the previous year 2018-19 is ₹ 100 crores [(16 crore + 29 crore) + (37 crores + 18 crores)] Passive Income is ₹ 47 crores being income from investment (29 crores in India and 18 crores in England).% of passive income to total income = 47 crores/100 crores × 100 = 47%. Since passive income is 47% Le. not more than 50% of its total income, the income condition for Active Business outside India ‘ABOT test is satisfied.
(2) Assets Criteria:
Should have less than 50% of its total assets situated in India Value of Total Assets during the previous year 2018-19 is ₹ 500 crores [160 crores in India + 340 crores in England]. Value of Total Assets in India during the previous year 2018-19 is ₹ 160 crores.% of assets situated in India to total assets = 160 crores/500 crores × 100 = 32%. Since the value of assets situated in India is less than 50% of its total assets i.e. 32%, the assets condition for Active Business outside India ‘ABOT tests “s is satisfied.
(3) Employee Criteria:
Less than 50% of the total number of employees should be situated in India or should be residents in India. The number of employees situated in India or residents in India is 70. The total number of employees is 100 (70+30).% of employees situated in India or are resident in India to a total number of employees is 70/100 × 100 = 70% Since employees situated in India or are resident in India are more than 50% of its total employees Le. 70%, the employee condition for Active Business outside India ‘ABOI ‘ test is not satisfied.
Basics Of International Tax Notes
Determination of residential status Section 6 of Income-tax Act)
- Individual
- HUF
Note: They could be Resident Ordinary Resident, Resident Not Ordinary Resident or Non-Resident
Firms/AOP/Local Authorities
Companies
Note: They could either be Resident or Non-Resident