Taxing buy-back proceeds as dividends
Section 68 of Companies Act 2013 permits buyback out of (a) retained earnings or (b) share premium or (c) proceeds of issue of another type of shares or securities. Hence, where a buyback is actually made out of share premium or proceeds of issue of another type of shares/securities, the new regime will lead to artificial taxation of capital receipt as dividend income. It should be clarified that the buyback proceeds should be treated as dividends only to the extent the company undertaking the buyback possesses accumulated profits. The balance consideration should enter the capital gains computation in a manner similar to capital reductions and liquidations.
Rationalisation of Significant Economic Presence (SEP) provisions
The import of physical goods should be expressly kept outside the purview of the SEP provisions. It is also recommended to bring out the rules for computing profits which can be attributed to an SEP in India. In addition, to reduce compliance burden, exemption should be provided from procedural requirements (like obtaining PAN, filing return, etc.) where SEP is triggered but treaty protection is available.
Making Safe Harbour Rules (SHR) more attractive
The high margins and low turnover thresholds prescribed for certain transactions have made the SHR, in its current form, unattractive . While the finance minister, had expressed the Government’s intention to expand the scope of the current SHR in last year’s budget speech to make it more attractive, there has been no major announcement on this yet. The Government should also provide a window to move pending cases from the advance pricing agreement (APA) programme or Tribunals/ Courts to the SHR programme. The rationalised SHR may also be incorporated as an accelerated APA option where eligible taxpayers can opt for this as an accelerated APA instead of a full APA process.
Enable mediation/ negotiation in TP assessments
At present, the resolution of TP issues through appellate/ judicial forums is a long-drawn and time-consuming process. Setting up an alternate dispute resolution mechanism in the form of a non-mandatory/ non-binding process of mediation at the time of assessment/ appellate stage, designed to arrive at a fair and agreed quantification of change in transfer prices, should thus be enabled. This mechanism should prevent the creation of disputes that would, in normal course, have travelled to higher appellate levels leading to a quick resolution of TP issues and tax certainty.
Valuation
- Valuation methodology in case of related party importation should be aligned from TP and customs valuation perspective in form of common APA.
- Alternatively, a mechanism similar to Advance Customs Valuation Arrangement (ACVA) followed in Korea by the Korea Customs Service (KCS) can be adopted in India.
