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India To Introduce Patent Box Regime, CbC Reporting

by Mary Swire, Tax-News.com, Hong Kong

29 February 2016


Indian Finance Minister Arun Jaitley has unveiled the nation's 2016 Budget, which includes a slew of measures, including significant announcements in the area of international tax law.

The Budget, delivered on February 29, includes a new country-by-country (CbC) reporting requirement for large groups. It will apply to those with consolidated annual revenues over the EUR750m-equivalent in Indian rupees, INR55.8bn. A CbC report will be required from the parent entity of an international group, if it is resident in India; every constituent entity in India of an international group with an overseas parent; and in some situations, by an India entity belonging to an international group.

The CbC report would be based on the template provided in the OECD's Report on Action 13 of the base erosion and profit shifting Action Plan. The new reporting requirement, if approved, would take effect on April 1, 2017.

Next, the Budget proposes to introduce a "patent box" regime in the country with effect from April 1, 2017. A new section 115BBF is proposed to be included in the Income Tax Act (ITA) to provide for a concessionary 10 percent rate for royalties from certain intellectual property developed and registered in India.

The Ministry explained: "In order to encourage indigenous research and development (R&D) activities and to make India a global R&D hub, the Government has decided to put in place a concessional taxation regime for income from patents. The aim of the concessional taxation regime is to provide an additional incentive for companies to retain and commercialize existing patents and to develop new innovative patented products. This will encourage companies to locate the high-value jobs associated with the development, manufacture, and exploitation of patents in India."

To stimulate housing activity, any distribution made out of the income of a special purpose vehicle to a Real Estate Investment Trust or a Infrastructure Investment Trust having specified shareholding will not be subjected to Dividend Distribution Tax.

The Budget includes a number of tax benefits with a view to establishing an international financial center in India. In particular, companies located in the international financial services center will be exempt from dividend distribution tax; and minimum alternate tax will be charged at a nine percent rate. In addition, foreign currency transactions involving the sale of commodity derivatives that take place through a recognized establishment in the international financial services center will be exempt from commodity transactions tax.

Jaitley's Budget also contains measures aimed at reducing litigation and providing tax certainty, particularly in the contentious area of retrospective taxation. For instance, the Budget proposes a new, one-time Dispute Resolution Scheme to allow taxpayers to settle ongoing disputes arising from the retrospective amendment to the ITA. This would allow the taxpayer to simply pay tax arrears (excluding interest and penalty), provided that they withdraw their cases filed in any court or tribunal.

Finally, the Budget defers the application of the place of effective management (POEM) test until April 1, 2017. Through the 2015 Finance Act, India amended section 6 of the IT Act to introduce POEM as the test to determine the place of residence of companies in the country. The change was intended to take effect from April 1, 2016, but amendments to the legislation are planned.

TAGS: court | Finance | tax | patents | India | interest | law | accounting | financial services | Organisation for Economic Co-operation and Development (OECD) | ministry of finance | multinationals | legislation | transfer pricing | tax reform | currency | legislation amendments | trade | services | research and development | Tax

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