India

8 Chapter International Tax

    • International Tax related to India foray

      ■ International Tax general remarks

      (From domestic to foreign demand)

      After the war the Japanese company has been following the ever-expanding trend and it has now grown to become one of the world’s leading economic powers. With the development of the Japanese economy, Japanese companies have been aggressively conducting foreign investment in order to not only win the domestic demand but also the external demand. Globally in the borderless economy where risks or crisis prevails the progress proceeds and the companies are not only doing business within the country, but outside as well. As a result because of this kind of historical background, international tax issues also increases and various regulations have been provided every time these problems arise.

       

       “Foreign Tax credit in 1953 ~”

      Firstly it became a problem with double taxation between countries. This problem was manifested in the high economic growth, which have been reduced during the economy of the post war reconstruction period. Since Japan had no goods of its own so everything had to be imported. It is provided with overseas bases so that they can be efficiently executed. About these overseas bases and expatriates, if the income is generated in a foreign country then you will have to pay taxes in the country. And for the income which is generated within this country, the tax is imposed even on Japan and then this income becomes a problem as it is double taxable for the same income.

       

      　To cope with this double taxation, the provision of the “foreign tax credit” by the revision of the Corporation Tax Act was introduced in 1953. In the case of double taxation, the Japanese companies have to pay the amount which is deducted from the tax to be paid in Japan and the taxes paid in foreign countries. The high economic growth in Japan started almost 20 years later in the late 60’s which was recorded as the fastest growth of GDP and was ranked as the second largest in the world. Japanese companies have expanded their business for the improvement of the international status of Japan. More than ever Japan will now look forward to performing business in overseas.

       

      “Tax Haven 1978 ~”

      When Japan began to look abroad, from then onwards Japan and the company is facing a problem of tax avoidance through tax haven countries. Starting from that time till now, corporate tax rate in Japan has become high and is by far among the 40% of Asian countries in the effective tax rate base. In order to avoid this high tax burden, Japanese companies are proactively investing in a low tax country. It has built a scheme that reserves the profit to the low tax countries. Specifically Bahamas, Cayman, Singapore had been available to trade through Bangkok.

       

      The transactions are conducted through these countries which are having a low tax rate by reserving the benefits. Since it is possible to reduce the tax burden of the entire corporate group, the Japanese companies showcased the established affiliates in these countries and the capital and profits are now reserved. Many of these subsidiaries have no business entity other than corporation of registration (so called “paper company”) because it was possible to take a relatively easy scheme.

       

      In this way, profits of paper companies are reserved in countries having low tax rate like Japan. Due to the increasing number of companies which aim to reduce the tax burden by using the tax rate gap in overseas in 1978 used to do it through the transaction of affiliates in tax haven countries. The “sum taxation of retained amount of such specific foreign subsidiary (so-called tax haven countermeasures tax system)” has been regulated to act out.

       

       “Transfer Pricing Taxation year 1986~”

      As the internationalization of Japanese companies enhances in order to reduce the gap of wage rather than to export products from Japan to overseas, the export of goods strengthens the local production. This has so happened because it has increased the importance of establishing a factory in the world and likewise the efficiency of business has been achieved. As the business activities of overseas became active, not only the domestic ones but also more and more transactions of international earnings generated abroad have been increasing year by year.

       

      Then arises a problem which burdened Japan with high tax rate. Companies that aim to reduce the tax burden, by manipulating the trading price of such materials and products between overseas. The profits generated originally in Japan moved to overseas at a lower tax rate which was a tax scheme which was intentionally created to avoid high tax rate.

       

      To deal with international income transfers, each system was established within the corporate group for request pricing equivalent to trading in third-party transactions. This transfer pricing rules was enacted in 1986.

       

      　“GDP slowed in 1992”

      During the bubble time, Japan aimed to enter its money from domestic to foreign markets and many foreign companies entered the market of Japan as well. May be in a way of financing foreign companies doing business in Japan or “borrowing”.

       

      Dividend incurred on the Corporation Tax Law associated with investment does not become deductible because the tax on interest due to borrowing. To reduce the investment on the Corporation Tax Law was a way of funding to avoid borrowing which became a problem. As a measure to deal with this the “thin Capitalization Rules” was enacted in 1992.

      　

      With the globalization of corporate activities, the provision for the development of International Tax in Japan has been done. The main aim is to reduce the tax burden to operate the funds more efficiently so that the companies can maintain a good continuity in their business and can expand it as well. However this is to be pointed out by the taxation authorities. History reveals the fact that this system had been regulated in the past as well. After the “thin Capitalization Rules” had been enacted “Foreign Tax Credit” is “Tax Haven System” after 25 years and transfer pricing had been enacted after 8 years. In addition as the “Thin Capitalization Rules” after 6 years internationalization and legislation of companies in Kotogawa worked in an interlocking motion.

       

      Amendments in International Tax in Japan

       






       

       

       

       

       

       

       

       

       

       

      From now on Japanese companies were declining demand due to population decline in order to address the challenges of deflation. In order to cope with the issues such as the currency of Japan (yen) the business had to be shifted to overseas. To enter the era of international transaction and to succeed there it is important to understand the tax system.

       

      ■ Need for International Tax

      “International Law” does not mean that there is any such law like International Tax Law and International Trade Tax Law. “International Law" collectively means the comparison of the tax system in the bilateral tax treaties with each of the countries carrying transactions between them.

       

      The next two points roughly states that why International Law is required.

      ·         Elimination of double taxation between countries

      ·         And securing of taxation rights in each country(Prevention of Tax Avoidance)

       

      In other words companies conduct International Trade and then if it is taxed for one taxable income for both the countries like Japan and its partner country then it also affects the economy activity of the company itself. Elimination of double taxation is required and is necessary in a way to care by not impacting on business activities.

       

      On the other hand when free enterprise activities are allowed then companies could not do the tax avoidance. And if it is applied on own country then securing tax revenue leads to the national interest to ensure the tax revenue properly and to prevent tax avoidance.

       

      On the basis of the enterprise to understand the international tax related to business operations between countries is to by providing the taxation risk and by avoiding to get pointed out by the tax authorities of each country. This is important to promote measures to prevent unwanted taxes and double taxation.

    • Another Entry Form

      If you do business in India then the problem of the various taxes occurs in association with its activities. A prediction states that in the near future the problem may arise if it is not possible to keep kneaded measures then the business cannot be run smoothly.

       

      At the time of India foray on the perspective of the taxation issues between international countries generally these following matters will be raised.

       

      ・The understanding of the contents of the Indian Tax system.

      ·         Their existence and requirements of investment incentives in Indian Tax.

      ·         The presence or absence of Tax Treaty, confirmation of the contents.

      ·         The related taxation system at the time of the transaction between international countries (such as the presence or absence of the withholding tax)

      ·         Profit reflux scheme from India.

       

      During India foray different tax provisions related to each advance form will be raised. For example, export sales from Japan without providing the facilities locally, and in this case conducting business activities through agencies will lessen the relevant tax regulations and risks. However when performing business by providing a base in India, taxation is made to be generated income based as per the Indian Tax Law.

       

      Below some discussions will continue to verify the relationship between taxes for each form of business.

       

      ■ Performing business without providing the base.

      When doing a transaction with India even while performing export sales, etc. if special bases are not provided in India then taxation problem will occur in the transaction.

       

      If Permanent Establishment in India (PE: Permanent Establishment) does not exist then basically taxation in India will not occur. However, for example employees are long term stay in India and are doing the maintenance and support of products sold and involved with sales activities. As they are providing a substantial base and when they are certified to Indian Tax Authorities “PE certification taxation (for details see below)” then they are taxable to India. 

       

      In addition it is necessary to note that some contents of the transactions is sometimes imposed withholding the income tax at the time of collection of consideration.

       

      ■ Performing business by installing the base.

      　In the case where activity base is provided in India for expanding business, the tax provisions related to each advance form will be continued to be verified.

       

      Performing business by providing a Representative Office 

       

       

       
      　In case of representative office in India corporate tax does not occur only the normal cost which is recorded. Since operating activities are also impossible so big tax risk will never arise like suffering from the local corporation.


      However even if the taxpayer does not occur then also tax return can be created in every fiscal year. Only it is required just to submit a tax return until the legal deadline. In case of income generated in the representative office like accounting it will be in a form that can be incorporated into the income of Japan. So the Japanese will be on the profit side when the sum of income will be generated by the representative office and the corporation tax will be calculated.

       

      However, in case of a representative office which is considered as PE, and if there are sales offices (parent company of branch) in India, then Income Tax will be calculated as a foreign corporation in India.

      　

      Whereas a representative office of a foreign company cannot be operating commercial activities. And if some local representative from Japan had to be sent then it also becomes a salary burden for the company itself and withholding the payment of personal income tax may also become a tax liability for own country. In addition certain transactions (commission, professional services to such accounting firm) and while collecting the withholding tax at the time of payment of the price, the payer (representative office side) have been obliged to make monthly tax payments. In case of withholding payments there are many examples which show that the payment of the full invoice amount have been done without withholding. In this case a common response has been found out that the locals are made to adjust the unadjusted amount during the next payment at the same fiscal year.

       

      On the other hand, the other way out possible is that the withholding amount can also be adjusted at the time of payment during the time of next transaction in the same fiscal year in case a double payment to the suppliers have been made by mistake and the withholding amount have also been paid. In case of tax delay of withholding, the monthly interest rate of 1.5% (18% per annum) will be charged as delay interest.

       

      Since the operating activities is prohibited from the representative office, but interest from income related to bank deposits will occur but basically income from operating activities does not occur. So, the only activity cost which occurs is only in the local country and the Income Tax in India is not charged and so a major task risk will never be followed.

       

      However, as mentioned earlier, if the representative office is certified as PE (Permanent Establishment) and there are sales offices in India (parent company of branch) in India, then Income Tax will be calculated as a foreign corporation in India.

       

      However, even if the taxpayer does not turn out then also tax return can be created in every fiscal year. Only what is needed is to submit a tax return until the legal deadline. For income generated by the representative office through accounting it will be in a form that is incorporated into the income of Japan. And the Japanese side will be on profit after the sum of income is generated by the representative office and the calculations will be done as per the corporation tax.

       

      Also if a local representative is to be sent from Japan then also Japan will be under the payroll burden which can be a problem for the country because of the tax liability. This withholding payment of the personal tax in Japan which may occur and for that reason care must be taken of that.

      Performing activities by establishing sales offices such as branch

       

       

       

       

       

      　　Major difference between branches and a representative office is that income is generated through the business in case of a branch where it will be taxed as per the Income Tax of India. For the activities in branches of India the occurrence of the profits will be based on the Indian Law and the taxation will be carried out as a “foreign corporation” and the corporate tax rate will be charged.

       

      < Add tax and run tax rate on foreign corporation (fiscal year 2014-15 fiscal) >

       

      Taxable Income Amount (Rs.)

      Additional Tax

      Run Tax Rate

      0-10,000,000

      0%

      41.20%

      10,000,001-100,000,000

      2%

      42.02%

      10,000,001 Over rupees

      5%

      43.26%

       

       

       

      Formula of the Corporate Tax Rate has a taxable income amount as an assumption within 1,000 million rupees 100 billion rupees.

       

      In addition, in case of the generated representative office for profit and loss in the branch which is incorporated with the income of Japan headquarters in Japan, they have the advantage of avoiding deficit risk in operating activities in India.

       

      However, in case of the income tax as a foreign corporation in India on income generated from the branches performing operational activities, and the profits of the branches are added together and the calculation of the Corporate Income Tax is done in Japan. For the profit part of all the branches, be it in India or in Japan they will be taxed double for the same income.

       

      In such cases, by applying the provisions of the “Foreign Tax Credit (for more information described in P.569)” at the time of tax return in the countries having head office and for per tax income part that is the double taxation, the necessary adjustments will be made. 

       

       

      Performing activities by providing a local corporation 

       

       

       

       

      If you have established a subsidiary in India to become a domestic corporation of the subsidiary then it will not only be India’s domestic source income but for the income generated by all other countries other than India the result will be worldwide taxation.

       

      In case of domestic corporations of India, corporate income tax rate implied in India is as follows. 

       

       < The corporate tax rate for domestic corporations >

      -       Taxable income of 1,000 million rupees following parts basic tax rate 30% * (1 + education cess of 3%)

      = Effective Tax Rate 30.9%

       

      -       Taxable income in excess of 10 million rupees part

      Basic tax rate of 30% + (1 + added tax 5%) + (1 + education cess of 3%)

      = Effective tax rate 32.445%

      1+

       

      < Add tax and run tax rate on domestic corporations (fiscal year 2014-15 fiscal)> 

       

      Taxable Income Amount (Rs.)

      Additional Tax

      Run Tax Rate

      0-10,000,000

      0%

      30.90%

      10,000,001-100,000,000

      5%

      32.45%

      10,000,001rupees or more

      10%

      33.99%

      　

       

       The calculation of the formula of the corporate tax rate has a taxable income amount as an assumption within 1,000 million rupees ultra 100 million rupees.

    • International Financial Strategy and International Tax

      ■ Financial Strategy related to funds reflux

      In recent years India foray by Japanese companies is getting more popular. Indian market is projecting significant economic growth which is very attractive. But problems may also have to be faced when it comes to entering the market. For fund management especially in the financial and planning sector, business plan will be required in depth.

       

      Flow of investment funds.

       

       

       

       

       

      Procurement of methods of funds

       

      If you think about the funding in India then they will be of two types, one is “self-funding” and the other is “procurement from outside.”

      ·         The procurement.............capital increases self-fund, funding within the group.

      ·         And procurement................borrowings from financial institutions or third party from outside.

       

      If trading in Japan then it is an easy surface to perform funding functions. And that when it comes to India then there are many cases where free financing cannot be done due to restrictions on foreign investment.

       

      While performing financing in the local country side, the funds are to be paid to guarantee the act of the parent company to carry out financing. If funding from affiliated countries, then it is important to determine the interest rate at the time of procurement. This is because if the balance of money in the local country is not calculated at the proper rate then the risk of receiving an application of “transfer pricing” in each country is generated.

       

      Funds reflux of surplus funds

       

      Also for the funds reflux when surplus funds have been created in the local country, unlike Japan, the Companies Act for reflux from India will be subject to as many as restrictions tax law. Japanese companies expanded in India and if the profit is generated through activities in India, or to reserve or re-invest this benefit it is to be considered that whether to reflux into the parent company or not.

       

      If there are retained earnings or re-investment in India, that does not cause any tax problem. If you want to reflux the profit to the head office or parent company in Japan tax handling by the method of reflux will be different.

       

      ■ Profit reflux from the branch to headquarters

      If the profit reflux is to be done from the branch in India to Japan head quarters, it usually becomes a remittance to branches after tax-profit. This remittance does not have any effect on profit and loss of the head office. It is only the transfer of funds between the head office and branches.

       

      There are again cases where tax is levied by the local country to remittance of branch profits. But there is no such regulation in India.

       

      In addition there are cases that require the presentation of financial statement for the year during the time of remittance. In that case you need to check the details on local accountant

       

      ■ Profit reflux from the subsidiary to the parent company

      If a subsidiary in India has been established and if the profit generated in the local is to be refluxed to the parent company in Japan then there are two methods which are considered to be followed.

       

      How to reflux the dividend to the parent company (capital transactions).

      ·        How to reflux to the parent company through transactions (profit and loss transactions).

       

      Profit reflux in subsidiary form

       

       

       It becomes possible to avoid the extra tax burden by simulating the final profit reflux depending on whether to choose any of the methods depending on the resulting effect on the profit and loss of the subsidiaries and the parent company because the tax payment of both countries varies.

      [How to reflux to the parent company by dividend]

      When you pay the profit generated in India as dividends to the parent company then you must be aware of the following points.

      ·        Recipient of the taxation (Japan side)

      ·        Payment of the dividend and dividend taxation (India side)

       

      In many cases withholding tax based on certain rate for total payment will be taxed at the time of payment of dividends. In India as they will be on the payment side of the dividend (i.e. with respect to the act of dividend) taxation will be done.

       

      Not that the shareholders receives dividends, Dividend Distribution Tax (DDT) is levied against the company which is as per the Income Tax Law of India, and which falls under the taxable dividend income tax.

      Dividend distribution tax (19.9941%) = Basic Tax Rate (17.64706%) * {1 + added tax (10%)} * {1 + educational purposes tax (3%)}

       

       

       

      During the applicable

      During the distribution of Tax

      Additional Tax

      Education Tax

      Run Tax Rate

      April 1, 2011

      March 31, 2013

      15

      5

      3

      16.2225%

      April 1, 2013 –September 30, 2014

      15

      10

      3

      16.9950%

      October 1, 2014

      17.64706

      10

      3

      19.9941%
        

       
       
       

       

       

       

       

       

       

       

       

       

       

       

       

      For Dividend Distribution Tax that India subsidiary has paid, tax would be bearable for the Indian subsidiary. The application of the foreign tax credit will not be receivable in the parent company of Japan.

      　

      In addition, for the Japanese parent company side it becomes an exemption of the dividend for them based on the calculation of the corporation tax under the provision of “exemption of dividend income such as foreign subsidiary.”

       

      [How to reflux through transactions with the parent company]

      Considering the use of management from Indian subsidiary to the parent company like guidance fees and system, the companies might want to pay royalties etc, through transactions between the parent company and the subsidiary by refluxing profit from subsidiary to the parent company which will result in a cracked form.

       

      In order to be eligible for the “transfer pricing” of transactions between parent companies internationally, they should be able to prove the validation of the transaction price to the tax authorities in advance and they should must align the material accordingly.

       

    • Considerations in Funds Collected

      ■ Comparison of local subsidiaries and branch

       In India, different corporate tax rate are applied to subsidiaries and branches. Also for the dividends of the subsidiaries, income taxes will be charged separately as per the Dividend Distribution Tax (DDT) and the amount will be the same amount that will vary between the actual amounts. Establishment of the branch office instead of capital does not require the installation cost, only some points which are listed below should be taken care of.

      ·         Income Tax with a foreign corporation with high tax rate.

      ·         Head office country and double taxation problem

      ·         Through the trading price of the headquarters, transfer pricing issues (details in next chapter)

       

         Following details will give a brief explanation of the matter. Firstly in the case of corporate overseas branch, tax would be treated as per the rules for the foreign corporation branch in India compared with India domestic corporations and a high tax rate differentiates between the local subsidiaries and branch.

       

      [Compare Rates]

      If the taxable income amount to 2,000 million rupees,

       

       

       

       

       

       

      Domestic Corporation (subsidiary)

      -Taxable income is less than 1,000 million rupees part

       
       

      Basic tax rate 30% * (1 + education cess of 3%)

       
       

      = Effective tax rate 30.9%
       

       

      		  
         

      -Taxable income in excess of 10 million rupees part

      		  

       

      		  
         

      Basic tax rate of 30%+(1+added tax 5%)+(1+education cess3%)

      		  
         

      = Effective tax rate 32.445%

      		  

       

       

       

       

       

       

       

      Foreign Corporation branch

      -Taxable income in excess of 10 million rupees part

       
       

      Basic tax rate 40% * (1+added tax 2%)*(1+education cess of 3%)
       

      = Effective tax rate 41.2%

       
       

      -Taxable income in excess of 10 million rupees part

      		  
         

      Basic tax rate 40% * (1+added tax 2%)*(1+education cess of 3%)

      		  

      =Effective tax rate 42.024%

      		  
       
       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       In other words there will be difference of 1,987,900 rupees due to the difference of this tax rate which is generated as transaction cost on investment in India from Japan. This portrays to us that subsidiaries might be advantageous by the tax rate difference. When the reflux of retained profits is taken into consideration then there is also a case that cannot be said to be unconditionally advantageous. For example in the case of branch form, the funds can be carried out and refluxed to the head office.

       

      However, in the subsidiary form if all of the profit after tax was refluxed to the parent company by the dividend as and when the Dividend Distribution Tax is levied then it becomes that amount or that balance which comes after deducting and which is re-circulated in Japan.

       

      Tax Rate of Dividend Distribution Tax

      The basic rate of 17.64706% * (10% 1+added tax) * (1+education tax 3%) = 19.9941%

       

      Another comparison form of money transfer.

       

       

       

       

      Premise of the calculation (the same is explained in the following calculation)

      ·        Unit is assumed as yen value

      ·        Prior to the branch tax profit (profit before tax) assuming 40,000,000 and 20,000,000, a head branch profit totals before income tax.

      ·        The effective tax rate for the Japanese side has been calculated as 42%.

      ·        The calculation of income and tax-base of pre-tax is assumed to match.

       

       

       

      In the Japanese side if the funds have been received as dividend amount, so that 5% of the dividend amount is recognized as income (actual 95% of the dividend income is exempted). These are all based on the above calculations which determine that it is ultimately beneficial or not.

       

      ■ From branch of remittance to the head office

      The remittances to the Japanese head office are the profits of all branches. Regardless of whether to transfer or not to transfer to Japan the branch profits and head office profit will be charged in a combined way. In this case since the problem of double taxation occurs so the double taxation part is to be adjusted by the foreign tax credit.

       

      [Remittance of branch profit]

       

       

       

      [Flow of tax calculation in the Indian side]

       

      a.       Calculation of taxable income that is subject to Income Tax and will calculate the taxable income in the branch of the tax year.

      b.       Calculation of corporation tax by multiplying the corporate tax rate to taxable income which can be obtained by calculating the tax

       

       

       

       

       

       

       

       

       

      [Flow of tax calculation in Japan side]

       

      a. Calculated the combined taxable income amount that is subject to income tax.

       The after-tax transferred to the head office will be taxed at the head office. This will be a worldwide taxable income as it will be a national income for the Japan head office and foreign source income for the Indian office.

       

       

       

       

       

       

       

       

       

       

      b.Calculate the tax for the combined taxable income amount which is multiplied by the tax rate on income amount which is obtained by calculating the tax

      60,000,000×42%(effective tax rate of Japan)＝25,200,000

       

      c.       Deduction of tax paid in India has become a double taxation because the foreign tax credit calculated in the deduction calculation of point no.(b) which is against India’s income tax worldwide eliminates double taxation.

       

      For calculation, first calculate the “deduction limit” i.e. first calculate the maximum amount of deduction, compare the amount of foreign taxes and deduction limits and then deduct any amount to be paid.

       

      In other words out of the corporate tax imposed in Japan, they cannot only be the deductible part of the tax corresponding to the foreign income tax amount.

      As a side note for foreign tax credit range of tax credit of Japan, it is the “amount of foreign corporation tax”. It is not applicable to the target of the tax credit which is “amount of foreign corporation tax” for educational purposes. Therefore the calculation of the deduction tax will be the amount deducted from that amount of money that does not include this.

       

      Tax corresponding to Japan’s corporate tax, tax imposed on income of corporate taxation as standard by foreign or local governments based on the laws and regulations of a foreign state (Corporate Tax Law Article69, Corporation Tax, Enforcement Order 141)

       5,200,000×20,000,000／60,000,000＝8,400,000＞8,080,000（※）

       

      In India for foreign corporation tax which is deductible is less than or equal to the deduction limit, it becomes fully deductible.

       

      In India according to Corporate Income Tax, education cess will be deducted from the tax that was calculated by the Indian side which do not qualify the deduction.

       

      　10,000,000×40％＝4,000,000

      10,000,000×40.8％＝4,080,000

      合計8,080,000

       

      The effective tax rate (excluding education cess): basic tax rate 40% × (1+ added tax 2%) = 40.8% deductible become foreign corporation tax: 10,000,000 × 40% = 4,000,000

      10,000,000 × 40.8% = 4,080,000

      Total 8,080,000

       

      d. Determination of payment tax

       25,200,000－8,080,000＝17,120,000

       

      Profit in the case of a branch form

       

      ■ The funds collected by dividends from subsidiaries

      The funds collected by dividends from subsidiaries could be reflux by dividends or trading for recovering funds from the subsidiaries.

      Following example will verify the reflux by dividend (the unit is assumed to be translated into yen)

       

      Case of dividends from subsidiaries (case of 100% dividend)

       

       

       

        [Subsidiary side with the flow of tax calculation]

       

      a.       Calculate the corporate tax of subsidiary.

       

      10,000,000×    30.9％＝3,090,000

      10,000,000×32.445％＝3,244,500

      Total 6,334,500

       

      b.       Assume the full amount of income i.e. the dividend to the parent company. In case of Dividend distribution Tax (DDT) calculation = amount + DDT dividend to 13,665,500 for the calculation.

      Ⅹ(Total cash dividends）＋（Ⅹ×19.9941%）＝13,665,500

      1.199941Ⅹ＝13,665,500

      Ⅹ＝11,388,477

      （Rounding less than point）

       

      c.       The calculation of profit of the parent company side.

       

      40,000,000＋11,388,477＝51,388,477

       

      d.       Calculation of corporation tax of the parent company.

       

      Income amount – specific gross revenue of dividends received from foreign subsidiaries excluding the income amount = income amount 

      ※51,388,477－10,819,053(Note)＝40,569,424

      (Note) 1 1,388,477－（11,388,477×5％）＝10,819,053

       

      Income Amount * Tax Rate = Paid Tax.

       

      40,569,424×42%(Effective tax rate of Japan）＝17,039,158

       

      The case to return profits produced by commentary subsidiary as a dividend reduced to 100% to the parent company will be validated. Firstly since after-tax profit of subsidiary is 675,550 yen dividend amount including the Dividend Distribution Tax after doing the calculation will yield to the same amount of money. If the dividend has been made to Japan then the dividend will be recognized in the parent company side of the non-operating income as the “dividend income”. However this dividend amount does not mean that the full amount is taxed for, it becomes that the calculation defined by the income amount of “gross revenue inclusion of dividends received from certain foreign subsidiaries”, a certain portion is deducted from the company’s income.

       

      ■ Exemption of dividend income such as specific foreign subsidiary.

      Once in the Corporation Tax Act of Japan, the provisions of “indirect foreign tax credit” had been defined as dividends received from the affiliates. However in practice it is difficult to grasp the income calculation of overseas subsidiaries from that paperwork which is very complicated since there is a risk that inhibits with the foreign company since April1,2009. That foreign tax instead of the deduction of “exemption of dividends of such foreign subsidiary” was used to calculate the dividend amount itself. 

       

      Among the Corporate Tax imposed on subsidiary in local country, how to deduct from the amount of tax to pay the tax portion which is corresponding to dividend out of Income Tax, that the parent company has received to pay in Japan.

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       


      ■ Applicable for.

      According to the application of this technique, a domestic corporation (Japanese parent company) is 25% or more of the outstanding shares, etc. of foreign corporation (India subsidiary) and before June the payment obligation of dividends is determined. Corresponding to this if the payments are done directly to the holdings then it is a foreign corporation (CFC,etc.).


      No particular limitation is imposed on certain foreign subsidiaries, and if they meet the above requirements even in dividends from certain foreign subsidiaries in tax havens system, then there will be exemption (but located in tax havens countries for foreign subsidiaries, there are certain restrictions which apply).

       

      ■ Method of Calculation

      Non-taxable amount is the amount equivalent to 5% of the dividend and the amount corresponding to the costs pertaining to the dividend etc. (hereinafter referred to as “deemed cost”) obtained by subtracting.

       

      Domestic dividends received for the deemed cost which is a cost that was spending in order to receive the dividend etc. It has become a form to be deducted from the exemption amount of dividend and also for dividends from overseas in consideration of the administrative burden etc. of calculation and has become a form of 5% which has been estimated.

       

      In conclusion if you have made a reflux of 100% profit, then remittances from branch will be slightly high and the case for reflux for all actual profits which have occurred will be rare.

       

      Return of deducting the reinvestment amount in the field, because if the falling refluxes ratio will reduce burden on Dividend Distribution Tax on subsidiary, it will be advantageous for the subsidiary units.

       

      ■ Case of Dividends from subsidiaries (80% of dividend cases)

       

       

      [Subsidiary side of the flow of tax calculation]

      a.       Calculate the Corporation Tax of the subsidiary

      10,000,000×    30.9％＝3,090,000

      10,000,000×32.445％＝3,244,500

      Total 6,334,500

       b.       80% of the profit on the assumption that the dividend to the parent, and calculate the Dividend Distribution Tax

       

      13,665,500×80％＝10,932,400


      Dividend amount + DDT to 10,932, 400, in inverse calculations 

      Ⅹ（when equipped with the amount of）＋（Ⅹ×19.9941%）＝10,932,400

      1.199941Ⅹ＝10,932,400

      Ⅹ＝9,110,781

      （Rounding less than point）

      40,000,000＋9,110,781＝49,110,781

      Calculation of Corporation Tax of the Parent company

       

      Income amount – specific gross revenue of dividends received from foreign subsidiaries not including the income amount = Income amount

      49,110,781－8,655,242（Note）＝40,455,539

      （Note）9,110,781－（9,110,781×5%）＝8,655,242

      Income Amount × Tax Rate = Paid Tax

       

      40,455,539×42%（Japan of effective tax rate）＝16,991,326

      Profit sum of parent companies

       

      2,733,100＋32,119,455＝34,852,555

       

    • Investment Scheme Through a Third Country.

      Verification of investment scheme through Mauritius.

       

      [India-Mauritius tax treaty]

      India and Mauritius has a historical relationship and has a several defined favorable provisions in bilateral investment. India-Mauritius treaty has some of the favorable terms which have been specified in the following.

      ·         Dividends received by the corporation of Mauritius by investment in India through royalties and income arising from interest after deducting a certain amount which has been spent at the highest of 1.5% from income amounts is subject to taxation in Mauritius. Also if you pay a dividend to shareholders in Mauritius Corporation then withholding tax is not imposed in Mauritius.

      ·         Indian companies pay to Mauritius companies the withholding tax rate on patent rights which is reduced from 20% to 15%.

      ·         Mauritius Corporate and Income Tax on capital gains in India are exempt. In other words, in Mauritius, capital gains taxation in accordance with the Indian investment is not performed.

       

      The above specifications explain that in particular the dividend benefit to India generates source to Mauritius to become tax free in the tax treaty and for overseas investors it will substantially reduce the tax burden.

       

       [Double Taxation Treaty between India and Mauritius]

      On 24th August, 2002 agreement for the purpose of avoidance and tax evasion prevention of double taxation on income and capital gains tax (DTAA: Double Taxation Avoidance Agreement) was signed between India and Mauritius. As indicated by the name, the purpose of agreement is to prevent the evasion of tax and avoidance of double taxation to promote trade and commerce between the two countries.The agreement will be applied to the taxation of Income Tax and additional tax based on the Indian Law, and against taxation of Income Tax based on Mauritius Law.

       

      In addition, it also applies to "tax with the same or similar nature" which was introduced after the agreement was enforced. Therefore, the agreement also covers all of the additional tax and other taxes such as India educational purposes tax.

       

      [ Investment relations between Japan, India and Mauritius.]

      This point explains the tax relationship between India and Mauritius. If an investment has to be made to Mauritius from Japan and if that is done via India then India comes in the relationship as a third country.

       

       

       

       

       

       Firstly if a subsidiary is established in India from Japan then it will establish more subsidiaries in Mauritius (Grandson Company) from its Indian subsidiaries. For direct reflux from India to Japan it will be in the same manner as described above.

       

      In this case for the dividend sent to Indian subsidiaries from Mauritius Grandson Company, the tax burden will be reduced by the tax treaty which has been described above.

       

      However, since this reduce is on the income arising from the investment and if the investment from India to Mauritius is considered as “business” then it means that the revenues are taxed as income from business.

       

      If an investment is made from Japan to India, then it should be verified that if it has been done through Mauritius as a third country or not.

       

       

      In this case it is almost the same as the above scheme. However as there is no capital tax gains in Mauritius for the capital gains from the investments in Indian corporation, it becomes that it is not subject to tax in Mauritius.

       

      For dividends received from Mauritius subsidiary to the parent company in Japan, if the investment rate is fixed percentage and is above the provisions of the exemption of dividends received from foreign subsidiary then dividends will be an exemption. However, if the foreign subsidiary has been regarded as the no paper company in reality then it becomes possible to receive the application of the “gross revenue inclusion of the taxed amount of retained income of certain foreign subsidiaries (tax haven system) in the Japanese side.

       

      In this way if investment via Mauritius vs investment in India benefits through tax treaties etc. then on the other hand accepted tax evasion from tax authorities of the scheme itself will require prior validation.

       

      ■ Verification of Investment Schemes through Singapore.

      [Double Taxation Avoidance Agreement]

      　On May 27, 1994, India has signed a double taxation avoidance agreement between Singapore. In DTAA, according to the agreement between India and Mauritius the following points have been explained as favorable terms in bilateral investment.

      ·         With respect to dividends paid to residents of a Contracting State B from companies located in Parties A, it is possible to be taxable only in the Contracting State B. However, if dividends can be taxed by the Parties A against the law of the Parties A, (if the beneficiary holds a stock of more than 25% of companies) then10% of the total dividend will be taxed or shall not exceed 15% (otherwise).

      ·         Capital gains generated from property transfer in Parties B by residents of a Contracting State A (capital gains) is taxed only in the Contracting State A.

       

       

      [Capital Gain Tax] 

       

       

       

       

       

       

      In addition Singapore and India signed a comprehensive economic cooperation agreement on double taxation avoidance treaty. The main purpose of this agreement is to promote investment and economic co-operation of both the countries. According to the implementation of this agreement, in August 2005 Singapore and India has signed a valid supplemental agreement to revise the double taxation avoidance agreement.

       

       The current situation depicts that because of this revision on double taxation avoidance agreement between Singapore and India, a degree of treaty of abusive measures is incorporated which offers benefits which is similar to the effect caused by the double taxation avoidance agreement between India and Mauritius.

       

      　Singapore corporations are exempt from capital gains taxation in India about the profit obtained from the sale of securities held by the investment companies of India under certain conditions such as the following.　

      ·         This applies only to the exemption from the tax on the gain on the transfer of shares in Singapore which is not the income arising from the transfer of shares in Singapore as business income and capital gains. Unable to apply provisions for capital gain will be recognized as business income and capital gain which is the financial company’s main business brokerage(gain on transfer of shares etc.)

      ·         Company cannot be subjected to incentive provisions of the tax treaty purposes as set by the policy of the company.

      ·         Non-economic realities, such as shell company does not apply an exemption under the Convention.  However if companies fit in one of the following criteria like not considered as a fictitious company or a tunnel company or registered with the Securities and Exchange of 
      Singapore certification within the 24 months prior to the capital gains or consuming 2,000,000 Singapore dollar as annual expenses then exemptions are applied for them.

      　

      These provisions have been incorporated in the tax treaty with an intention to prevent the abuse and tax avoidance.

       

      In the above example, foreign tax burden on Japanese companies is as follows.

      ·         For Singapore subsidiary, for a dividend to be paid from the investment company, the Withholding tax(TDS) are not taxable. However, the dividends paid from the investment company is subject to income tax in Singapore.

      ·         Dividends paid to Singapore subsidiaries from the investment company be deducted as per the income calculation of Singapore subsidiary on the basis of certain conditions.

      ·         The withholding tax is applied on the dividends which are given to the parent company in Japan by the Singapore subsidiary.

      ·         Based on the Singapore Double Taxation Avoidance Agreement and as per the condition which is mentioned there, for India the Capital gain tax does not apply if it does not conflict with the treaty abuse prevention provision for the stock of transfer in the investee company by Singapore subsidiary.

      ·         If you move the Japanese company or the company’s Stock to Singapore subsidiary in Singapore, then it is not taxed for the capital gains under the control of a Japanese company. Thus in the above example tax liability in Singapore side of Japanese company will not nearly occur. However in the Japanese side, capital based on the Japanese tax laws gain will be taxed on income again.

       

      Singapore is getting investment benefits because of the double Taxation Prevention Treaty which has been signed between Singapore and Mauritius and between many more countries and Japan is also included within it. And thus making the tax efficiency of good investment scheme between Japan and Singapore.

       

      In the white list countries, for nine out of twelve incorporates, the new standards are published for those countries who have not signed the necessary international agreement monitoring enhancements in Singapore as the OECD agreed to improve the transparency although grey listing has been specified by the OECD taxation on international agreement signed by the generally adopted international standards 2010 which has been classified.

    • International Tax individual issues- Tax Treaty

      ■ Overview of Tax Treaty

      The tax treaty is for the purpose of double taxation and tax evasion which eliminates the two big points or drawbacks of the State(the Convention). As per this treaty its application will be to override the domestic law that stipulates each country for conventions in the nation. In other words, where there is a tax exempt in the tax treaty then it will be treaty as a tax free even if it is a tax in the domestic law.

       

      However by applying the treaty if it becomes disadvantageous from the national legislation side then it becomes possible to apply the provisions of national law and this is known as the “Preservation Closed”.

       

       

       

       

      Also in various treaties other than the tax treaty treatment on certain tax items in Japan and residents of other countries as well which is also provided separately.

       

      Japan has entered into tax treaties with the following countries and Japan is also one of them

       

      [Countries that has signed the Indian tax treaties]

      Area

       
       

      Country Name

       

       

       

      Europe

       

      Austria, Belgium, Belarus, Bulgaria, Cyprus,

      Czech Republic, Slovakia, Denmark, Finland, France,

      Germany, Greece, Hungary, Italy, Malta, the Netherlands,

      Norway, Poland, Romania, Spain, Sweden,

      Switzerland, Turkey, the United Kingdom, Russia, Albania, Armenia, Iceland, Ireland, Lithuania, Bulgaria, Estonia, Guru, Anatolia, Luxembourg, Montenegro, Poland, Portugal, Serbia, Slovenia, Ukraine

       

       

       

       

       

       

      Asia

      Japan, Bangladesh, China, Indonesia, Kazakhstan,

      Malaysia, Mongolia, Nepal, the Philippines, Singapore,

      South Korea, Thailand, Turkmenistan, Uzbekistan, Vietnam, Bhutan, Fiji, Kyrgyzstan, Lebanon, Maldives, Myanmar, Pakistan, Yemen, Sri Lanka, Tajikistan, Taiwan,

       

       

       

      Middle East

      Israel,, Oman, Qatar, Syria, United Arab Emirates, UAR, Jordan, Israel, Kuwait, Qatar, Saudi Arabia,

      North America and Latin America

      Brazil, Canada, the United States, Colombia, Uruguay, Trinitrate Dart Tobago, Mexico,

       

      Other regions

      Australia, Kenya, Libya, Namibia, New Zealand, South Africa, Tanzania, Zambia, Mauritius, Botswana

      Ethiopia, Libya, Morocco, Mozambique, Namibia, Sudan, Tanzania, Egypt, Uganda,

         

      Tax treaties which has been done between India and each country has been done including Japan as per the “OECD Model Convention.”

       

      ■ OECD Model Treaty

      Organization for economic Co-operation and Development(OECD: Organization for Economic Co-operation and Development) It is headquartered in Paris, France. Through OECD the free exchange of ideas and information exchange is done between developed countries. It is an organization established to achieve the economic growth, trade liberalization through developing countries.

      After the Second World War, Marshall Secretary of State of the United States proposed that each European country in economic shambles should be bailing out and announcing the Marshall plan, but in the 4th month of 1948, 16 European Organization for European Economic Co-operation (OEEC- Organization for European Co-operation) was established. This is the predecessor of OECD. 

       

      Thus in September 1961 due to the reconstruction of the European economy, United States and Canada who were the members of the newly launched OEEC joined OECD. Japan became the OECD member country in 1964. The following example is that of a country who is a member of the OECD.

       

      [Example of OECD member countries] 

      Area

      Country Name

       

      Western Europe

      Netherlands, United Kingdom, France, Portugal, Greece, Italy, Spain, Switzerland, etc.

      Central Europe and Eastern Europe

      Estonia, the Slovak Republic, etc.

      Asia

      Japan, South Korea, etc.

      Africa and the Middle East

      Israel, etc.

      North America and South America

      United States, Canada, Mexico, Chile, etc.

       

      If an existing tax treaty is revised or a new treaty is signed between the two countries and non-member country then OECD suggests recruitment for the Member States and the OECD convention model agrees with the policy of Member States and also with the model of the Income Tax treaty. 

       

      Future globalization of corporate Japan will be established as across Japan except for foreign subsidiaries and a subsidiary of India’s trade a direct transaction will be established with the parent company in Japan.

       

      In that case Japan is not only a tax treaty that has entered into India there are other countries as well, so there is a need to consider the contents of the tax treaties that have been signed between the countries of its overseas subsidiaries and supplier country.

       

      ■ Over view of Tax Treaty of Japan and India

       

      The following contents explain the Tax Treaty between India and Japan (Japan-India tax treaty)

      ·         Definition of PE.

      ·         The definition of habitability.

      ·         The definition of attributable income.

      ·         The tax rate on dividends in mutual.

      ·         Tax rate applied on the collection of interest in mutual.

      ·         The short-term residents exemption in mutual.

      ·         Arrangement for the double taxation exclusion (mutual consultation).

       

      The following is the tax rate, which is defined in the tax treaty that has been signed between Japan and India in the form of “limit tax rate” which is not exceeding the scope of these tax rates. It will be taxable while performing certain international transaction.

       

      [India Tax Treaty Tax list (abstract)]

      Content Tax Rate
      Dividend 10%
      Interest
      Loyalty

       

      ■ Verification by trading case. 

      [Japan-India inter-commission trading]

       

       

       

       

       

       

       

       

       

       

       

       

      In transaction between India and Japan the “necessary existence of withholding” is becoming a common problem on a recurring basis.

       

      Sales offices have been established in India and then they examine the sales activities. Companies doing sales activities in Japan has established a subsidiary in India for overseas trade expansion.

       

      Indian subsidiaries conduct business in India for domestic customers delegated from the parent company in India. The subsidiaries will receive a commission from the parent company according to the orders.

       

      As per the sales contract, if the subsidiaries in India take orders in India then those are undertaken directly between customers of parent company in Japan and India. In this case, does the withholding tax in Japan will be charged on the Commission as it pays to the parent company for its subsidiaries?

       

      For the determination of the presence or absence of withholding tax, first the judgement of livability is required. Since the subsidiary is not located in Japan so the tax in Japan will be treated as a foreign corporation.

       

      So, which is the generation source of this commission? If it is considered that the commission provides the sales activities and the actual operating activities are being carried out in India, then the source of income will be considered to be from India. Thus it becomes India’s domestic source of income and will be considered as a foreign source of income in Japan.

       

      Therefore, since in Japan taxation is only on the domestic source of income, so withholding tax for the commission is not required in Japan.

       

      [Software transaction in India]

       

       

       

       

       

       

       

       

       examination of Withholding Tax through software development deal.

       

      In the Tax Treaty between Japan and India the provision for the “compensation for services provided to the technology” has been established.

       

      It will be taxed in their respective countries in the case of performing technical services provided in the Japan-India bilateral relationship. Because of this, the withholding tax in Company B is taxable for domestic income in India as per the India Corporation. But the provision of this treaty is applicable as long as there is trading partners in India.

       

      According to the definition, these technical services has tax treaty provisions regarding under which transaction it falls or must carry out on under what case.

       

      [International withholding tax technology services provide transactions through tripartite]

       

      [Japan and US software trading in between Mikuni in India]

       

       

       

       

       

       

      This will be subjected to withholding tax in India when the withholding tax is levied on the country to which payment is made. This is the first case from Japan and United States to outsource software development and to outsource development to India from the United States.

       

      Because when we look at the tax on the handling of each transaction then firstly regarding the trade of India and across the United States, the provision of the “technical services offer is not defined in the tax treaty between Japan and US-India” and the withholding tax is not charged.

       

      In addition since the provision of the ”technical services provided” is not in the treaty then it also does not become a source object between Japan and the United States.

       

      It becomes a problem if such transactions between a capital affiliated companies have been performed.

       

      There is a provision of “technical services provided” in the tax treaty between Japan and India. Without direct trade between Japan and India it will be possible to escape the withholding tax by passing through the third country.

       

      However, it has been pointed out by the International Tax Avoidance and Tax Authorities that caution is required for each transaction even if there is no legal problem for intent of tax avoidance through a series of transaction.

       

      [Interest on Withholding Tax and the Tax Treaty]

       

       

       

       

       

      The Corporation is headquartered from India, and for the market of Japan the Japan branch has been located in India. For activity funds it will be deposited with the financial institutions. For depositing funds, interest will be paid after a certain period of time. Regarding this paid interest 20% would normally incur on Domestic Corporation of Japan (15% Withholding Tax, 5% Local Tax Interest Percentage) after it has been withheld and tax implications would then complete.

       

      However, between Japan and India, in the “Japan-India Tax Treaty” it have been concluded that interest on the Withholding Tax between Japan and India will be in the range of 10% for each country.

       

      It is not applied, as the provision of this treaty overrides the normal Domestic Law (in Japan’s Corporate Tax Law, Tax Law etc.). In this case 10% withholding tax is levied. This is an example of trading interest but fits for other similar arrangements also.

       

      　It is to be noted that the tax has been withheld; pursuant to the provision of the foreign tax credit will be able to deduct the tax paid from the tax to be paid.

       

      Finally the representative office would like to consider a case that has received the services provided by the local accounting firm. This may need services from the local Accounting Office which is the representative office from the Japan side but the invoice amount which has been withheld has to be paid from the Japan side. In this case a representative office is considered as a foreign corporation because there is Japanese Corporation receiving all the services. Withholding tax rate can be reduced from 20% to 10% by submitting a report on the tax treaty from the Japanese side. 

    • PE Certification Taxation

      ■ PE and the Certification Taxation

       Normally in the case of performing business activities by providing a Permanent Establishment in India (PE), the tax liability will occur in India. If the PE is present in India then it is the principle that tax liability does not occur in India.

       

      Investments such as domestic law of each country and India Tax Treaty etc are some rough examples of PE.

       

      However even if it does not have the legal PE and if the income in India is considered to have occurred in reality then it means that taxation of income occurs from the Indian side. This is called the “PE Certification Taxation.”

      　

      Risk of PE certification taxation is that if you are doing a tax return etc. for a company under recognized situation where there is no income generation and if the PE certification taxation has been made from the authorities then the problem of double taxation always occur.

       

      According to the definition of this PE it should be provided specifically and clearly regarding the scope of its application. Based on the decision of the Tax Authorities in the worst case certified as PE on the India side even though not certified as PE on the Japan side cannot adjust the double taxation which may need attention.

       

      ■ PE Examples of Certification Taxation

      PE Examples of Certification Taxation.

       

      Not only the domestic law but the definition of PE has also been discussed in detail in the Tax Treaty.

    • Foreign Tax Credit

      ■ Overview of foreign Tax Credit

      [Elimination of Double Taxation]

      If trade across international is done among the international people and goods then the international tax is generated and it will be a tax relationship between international.

       

      Each country has defined the tax law on the basis of their own thinking. The Tax Authorities are doing the taxation on the basis of the tax law. In some cases taxation is applied on each transaction and in some cases tax is imposed twice which is a case of Double Taxation.

       

       In order to eliminate such Double Taxation, the Tax Law of each country has the provision of the “Foreign Tax Credit.”

       

       

       

      It is a system that has been defined as a method for adjusting the double taxation of international income. The foreign Tax Credit is obtained by deducting from the tax of the country of residence tax that was paid for income obtained abroad.

       

      [Time application of the Foreign Tax Credit]

      For Foreign Tax Credit relating to India foray when Japanese companies foray in India in a branch form then the withholding tax of India is applied to the transaction.

       

      In this case, to adjust the double taxation by Foreign Tax Credit from the Japan side, the principle foreign tax credits are applied by the Japan Corporation in the fiscal year, to pay for foreign taxes.

       

      The determination of the confirmation of payment, will be based on the local laws, but it is unclear to determine it according to the provision of the general laws, which is as follows -

      ·         Tax Return Tax Scheme...........Date of submission of a declaration.

      ·         Pay-as-you-go Tax System.........Date of the notification of the imposition.

      ·         Withholding Tax System.........Date of payment was subject to withholding and compensation, etc.

       

      [India Foreign Tax Credit System]

       “Foreign Tax Credit” in the Income Tax Act is only applicable for residents and resident corporation (Domestic Corporation) in India.

       

      Caution is required since double taxation adjustment can’t be made, even if India has the branch and project offices including a Permanent Establishment for foreign corporation. These income taxes are imposed on the income in the location of the country’s head quarter location, and outside tax like that is usually applicable to Foreign Tax Credit in India.

       

      Difference between Japan’s Foreign Tax Credit and India’s Foreign Tax Credit is regarding the adoption tax credit methods (how to tax which have been paid outside of direct deduction than the domestic payment tax).

    • Tax Haven System

      ■ Tax system of Tax Haven

      The remarkable economic growth in Asia is increasing year by year because Japanese companies were entering the market of Asia at a rapid rate. They supervise their international subsidiary companies in Asian countries in more than one country rather than only in certain countries like Singapore, Hong Kong and S.A.R. equipped regional headquarters (RHQ: Regional Head Quarters).

       

      In recent years many cases can be noticed in investing in India rather than a direct investment from Japan which are to be managed by the sub-subsidiaries of the parent company through the regional head-quarters.

       

      Profit was summarized from each subsidiary to set up headquarters in Singapore, Hong Kong and S.A.R to reserve the maximum tax advantage.

       

      　However, for this regional head-quarter where it is certified by the tax authorities as “no paper company of reality” in the Japanese side, the benefits have been reserved at the regional head-quarter by summing up the Japanese side income and the Corporate Tax in Japan is taxed. This is called the “foreign subsidiary sum tax(Tax Haven system).

       

      ■ Overview of Tax Haven system

      Japan with the Tax Haven system according to the Corporation Tax Act, if a domestic corporation etc. has a specific foreign subsidiary (foreign affiliates located in low tax countries) then the profit reserve will amount to the portion corresponding to the ownership percentage of the subsidiary shares of the domestic corporation. This is regarded as the revenue of the domestic corporation that sums to taxation in Japan.

       

      In other words, despite not being recognized as accounting on “income” in Japan, by recognizing the tax “gross revenue”, it is a system for taxation in Japan for the reserves of overseas income.

       

      [Schematic diagram of a Tax Haven taxation]

       

       

       

       

       

       

       If it is a domestic corporation or resident who held shares directly and indirectly more than 10% of the “specific foreign subsidiary, etc” then each reserve income amount of the “specific foreign subsidiary, etc.” becomes applicable.

       

      The following points refer to the company to “certain foreign subsidiaries etc.”

      ·         Japan residents, or 50% of its shares is held directly or indirectly by a domestic corporation of the company (voting rights, dividend decision also used together only excluding the number of stock of rights).

      ·         There is no tax to be imposed on the income of the corporation or company tax burden percentage of the income of the business year which exists in the countries and the region of less than 20% shares.

      For the determination of the 20% rate, rather than the corporate tax rate that have been defined in the local country which make the decision obtained by the percentage of the following equation.

       

       

       

       

       

       

       

       

       

       

       

       

       

       

      However, corresponding to the above requirements, the company is not subject to all the tax, by performing the summation tax, in order to avoid the normal foreign investment activities of companies which are inhibited. The following requirement application will be excluded if the requirements are met.

      ·         Entity basis........office, store, that they a fixed facilities such as factories.

       

      If certain requirements are judged then in this case two or more of the head-quarters is performing the overall business without the violation of the business criteria as it will be exempted from the Tax Haven system. In addition transaction with headquarters to headquarters is not treated as related party transaction which is exempted from the Tax Haven system.

       

      　However even as an overseas subsidiary meets the exemption requirement of Tax Haven, then, the capital gains that occur when the ownership ratio has sold less than 10% of the shares, is the case of the receipt of the dividend by holding the shares. This results to dividend income summing up to the income of the parent company.

       

      In other words in order to avoid the application of the same tax system before being pointed out by the tax authorities, there is a need to develop the actual activity in regional headquarters.


      In recent year the Japanese Tax Authorities Corporation with regional headquarters in Singapore and Hong Kong are applying to the sum taxation increasing the cases to develop into litigation. When performing the investment through Tax Haven countries a sufficient consideration needs to be superimposed.

    • The international taxation relief proceedings in India.

      ■ Features of the Indian Tax investigation

      With regard to the Tax Administration of India, India is said to be very aggressive in tax audit and taxation have been made after receiving a correction disposal etc.. Most of the companies filed a lawsuit in India and many of the taxpayers have won in this case. This original Tax Authorities of India is considered a reason that overturned risk if accustomed to court which is performing the equivalent irrational and aggressive taxation that is high.

       

      ■ Dispute Resolution Mechanism

       [New dispute resolution mechanism]

      In India a relatively high economic growth continues in recent years and the multinational system has multiple taxation on international trade such as transfer pricing taxation and PE taxation for companies. In every hundred years of simply transfer pricing taxation has been a corrected taxation. Many taxpayers have filed a lawsuit without consent to taxation disposal, tax litigation matters faced by the courts.

       

      Such a state has overcome as a mean to relieve the taxpayer who is not dependent on litigation, tax authorities and is direct to Central Tax Authorities of India (CBDT: Central Board of Direct Taxes) that was founded in November 2009. The Dispute Resolution Mechanism (DRP: Dispute Resolution Panel) is a system which is installed in Delhi in eight major cities such as Mumbai,but will be appointed by the panelists of three in each dispute resolution mechanism among which one also concurrently serves as the income tax directory of the country.

       

      Tax payers after receiving the rehabilitation plan from the Tax Authorities through a tax audit, protested to the Dispute Resolution Mechanism before accepting the tax assessments. Dispute Resolution Mechanism, concluded from rehabilitation proposal receipt of the taxpayer within nine months based on the determination of the final tax assessments from the Tax Inspector.

       

      [Problems of Dispute Resolution Mechanism]

      The officials have pointed out a problem that Dispute Resolution Mechanism is facing mainly the following two points.

      ·         Originality and fairness

      All three panelist of Dispute Resolution Mechanism is occupied by the Income Tax director and there is a growing criticism of the authorities closer to institutions that lack independence and fairness.

      ·         Panelists of dispute problem solving skills

      To deal with the transfer pricing taxation that became due for installation, this Dispute Resolution Mechanism is necessary to specialize knowledge and experience on the validity of prices and profit margins related to international trade.

       

      However the majority of the local tax director to be appointed in the panelists does not have such professional experience which has been pointed out and that is not suitable to human resources as a panelist. In addition, panelists will serve to be concurrently with the original work as Income Tax director, must be issued within nine months to applicants project of more than 1000. Therefore most of them is issued while the final conclusion of the rehabilitation plan with no new developments.

      In future in order to dispute resolution mechanism to gain confidence as a dispute resolution institution, it is said that necessary measures such as appointing the panelists of fairness with professional competence

       

      ■ Tax related dispute settlement

      There is a system called Alternative Dispute Resolution Procedure (ADR: Alternative Dispute Resolution). ADR target in India corporation is surveyed through foreign corporation and transfer pricing.

       

      　On the other hand if there is objection against companies ADR ruling, national tax appellate court (ITAT: Income TaxAppellateTribunal) is possible to appeal.

       

    • Babiliography

      [1] USA International Business Publications "IndiaTaxGuide"IntlBusinessPubnsUSA

      [2] NeilB. and E.Baillie "The Land Tax of India"GeneralBooks

      [3] Tax Corporation Pricewaterhouse Coopers ed., “International Tax Handbook” Chuokeizaisha.