Here’s one budget proposal that may bring back Vodafone-like horrors for foreign cos

The Finance Bill 2015 (the Bill) has quietly slipped in an amendment that could engender a fresh set of disputes with foreign companies away from the hitherto transfer pricing hair-splitting.

Hitherto, all Indian companies were residents and all foreign companies were non-resident, period. Of course foreign companies would have become residents had their entire control and management been located in India during the relevant previous year.

But then no foreign company ever in the annals of income tax in India has chosen to commit hara-kiri — by conducting all its board meetings in India.
So much so, the tax authorities in India never had an occasion to demand tax from a foreign company on its foreign income on the limited ground that being a resident it had to pay tax to the Indian government on its global income.

Indeed, incorporation outside India has been the preferred preliminary step before investing in India by the foreigners so that their foreign incomes were left severely alone by the Indian tax authorities.

All these are set to change now. The proposed amendment says a foreign company would be treated as resident if its place of effective management was situated in India at any time during the previous year. The explanation to the new regime goes on to elaborate when a foreign company’s global income would become liable to tax in India – place where key managerial and commercial decisions necessary for conduct of the business of an entity as a whole are in substance in India.

The amendment could well give the tax authorities fresh ammunition to gun after foreign companies. Should the Vodafone-type situation recur in future, the taxman would have a new law, a new argument to pummel the foreign company into submission.

Briefly, Hutch’s telecom operations in India were contrived to be controlled from Cayman Island where a shell company was floated wherein Hutchison Hong Kong had 67 percent stake. This was transferred to Vodafone UK for a hefty price. The tax authorities in India put their shovel into the transaction consummated at a safe distance on the ground that the shell company abroad was all about the Indian telecom operations.

In other words, they contended that effectively what had changed hands were the shares of Indian company. The Bombay High Court agreed but the Supreme Court on appeal demurred. The result—retrospective amendment that made India a butt of joke if not a banana republic.

Jaitley seems to have devised a cunning game plan. In Hindi there is a saying which translates to the following effect: if you are unable to scrap frozen clarified butter with a straight finger, then try with a crooked one.
Jaitley has turned this homily on its head — if crooked finger fails you, use a straight finger. In other words, he is going to gun after India-centric foreign companies without having to do the difficult task of establishing business connection with India, a job that is at once challenging and potentially litigious.

Foreign companies have been shaken out of their cocoon. Now they cannot take their non-residential status for granted. The taxman would not have to twiddle his thumb helplessly despite knowing the so-called foreign company was India-centric at the relevant point of time.

Indeed the taxman has been given considerable latitude — at any time. Now there would be nitpicking galore with the taxman asserting that at the material point in time when the income was earned abroad, the place of effective management was in India.

Jaitley was applauded for deferring to the Bombay High Court verdict in another Vodafone case, this one involving transfer pricing emanating out of allotment of shares to foreign parent company by its Indian subsidiary for a song.
He would now be pilloried for locking with foreign companies again. The Cayman Island shell company in L’affaire Vodafone would be considered a resident in India under the new regime. Mercifully, this is not a retrospective amendment. While Hutchison and Vodafone therefore would escape its pincer, others doing encore might be caught.