I have been told that there is a law in the United States, which will require financial institutions to disclose foreign assets held by US persons. I want to know the criteria for being treated as a US person and what would be the implications under the American law.
P.K. Mehta, Dubai
The American government has enacted the Foreign Account Tax Compliance Act (Fatca) five years ago. This legislation is meant to identify and report accounts and investments outside the US which are held by any US person. A US person would mean a person who is a citizen of the US or is resident in that country. If a person is born in the US, he would also be treated as a US person.
Others who are covered are those who have a mailing or correspondence address in the US or even have in-care-of address. If a person has a US telephone number or has given power of attorney or signing authority to a person with a US address, or has given standing order to pay funds to an account in the US, he will also be treated as a US person. Foreign financial institutions are required to report the account and financial details to the relevant authorities. If a US person fails to comply with Fatca, he would be liable to a substantial fine and 30 per cent withholding tax on the assets located outside the US.
The finance minister promised a non-adversial tax regime for foreign investors. Have any measures been taken to implement this decision in respect of cross border transactions with group companies?
K.C. Raghu, Abu Dhabi
The most contentious issue for foreign investors has been in the realm of transfer pricing, as virtually in every case there has been litigation. To avoid legal disputes, the Central Board of Direct Taxes (CBDT) enters into an Advance Pricing Agreement (APA) based on predetermined rules. This agreement is essentially a contract between the foreign tax payer and the Indian tax authorities, setting out the method for determining the income in respect of transactions between associated companies or entities. This pertains to pricing of assets, services and other transactions as defined in the transfer pricing provisions of the Income-tax Act, 1961.
The APA programme has been appreciated globally by foreign investors for the fair approach of the Indian tax authorities and quick disposal of applications. This agreement is generally for five years, but the government has now notified rules for rolling back the agreements entered into at present and making them applicable even for the preceding four financial years. This would ensure that the validity of the agreement would be for nine years, that is, four preceding years and five subsequent years. However, for availing of the roll back provision, an application has to be made to the CBDT. The time limit for filing the application has been extended to May 31, 2015.
We have a family business in India, which is run as a partnership firm. My brothers feel that it is better to convert the firm into a limited company in order to avail of substantial bank finance. If the assets of the partnership firm are transferred to a limited company, would the firm be liable to pay capital gains tax?
P.R, Munde, Doha
A partnership firm and a limited company are separate assessable entities under the income-tax law. Therefore, when assets are transferred from one entity to another, it would result in capital gains tax liability. However, with a view to encourage corporatisation, section 47 grants exemption from capital gains tax where a firm is succeeded to by a limited company, subject to fulfilment of certain conditions.
The first condition is that all the assets and liabilities of the partnership firm should be transferred to the limited company. Further, all the partners of the firm should become shareholders of the company in the same proportion in which their capital accounts stood in the books of the firm. The total shareholding in the company of the partners of the firm should be atleast 50 per cent of the total equity share capital of the company and such shares should be retained by the erstwhile partners for atleast five years. Lastly, the partners of the firm should not receive any consideration or benefit in any other form or manner.
The writer is a practising lawyer specialising in tax and exchange management laws of India.
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