CBDT releases Draft Notification to Amend Income Tax Rules, 1962 [Read Draft Notification]

The Central Board of Direct Taxes ( CBDT ) yesterday released a draft notification which proposes to amend Rule 44E, Form 34C, 34D and 34DA of Income Tax Rules, 1962 as per Base Erosion and Profit Shifting (BEPS) Action Item 5. The proposal has been made with a view to improving transparency in tax rulings.

What is BEPS?

The Base erosion and profit shifting (BEPS) refers to tax planning strategies used by multinational companies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity. The project headed by the OECD was initiated by the G20 in 2012.The Action 5 Report is one of the four BEPS minimum standards. The minimum standard of the Action 5 Report consists of two parts. One part relates to preferential tax regimes, where a peer review is undertaken to identify features of such regimes that can facilitate base erosion and profit shifting, and therefore have the potential to unfairly impact the tax base of other jurisdictions. The second part includes a commitment to transparency through the compulsory spontaneous exchange of relevant information on taxpayer-specific rulings which, in the absence of such information exchange, could give rise to BEPS concerns.

Reasons for the Proposed Amendment.

According to the draft notification issued the exchange of Permanent Establishment (PE) rulings (by Authority for Advance Rulings) are required to be done not only with the countries of residence of all related parties with whom taxpayer enters into transaction but also with the country of residence of the immediate parent company and the ultimate parent company. In order to implement the recommendations made in the Action 5 of BEPS, Form 34C, 34D and 34DA need to be modified. With such modification, it is expected that details such as name, address and country of the residence of non-resident’s immediate parent company or ultimate parent company would be captured at application stage itself. Rule 44E and respective Forms are proposed to be amended in order to make it consistent with the Finance Act,2017.

The Draft Notification seeks comments and suggestions from the general public, which may be sent via an email to ts.mapwal@nic.in by 25th April.