The forthcoming budget may contain provisions for taxing the undistributed dividend of foreign corporations that are controlled or owned by Indian companies. Controlled Foreign Corporations (CFCs) laws enable the authorities to tax the income of a resident derived from a foreign corporation. This is irrespective of whether the profit/dividend of the foreign entity is transferred to India or not.
Countries adopt CFC laws mainly for checking the probable loss of revenue arising from the transfer of profit of foreign corporations to offshore havens, such as the Isle of Man and Cayman Islands.
CFC laws are in force in at least 25 countries with varying rules and regulations. In the US, for instance, 50 per cent of the voting rights or 50 per cent of the value of shares constitutes a CFC.
The Indian tax authorities think it is time India had a law that will tax the profits of foreign corporations that are controlled by Indian companies. Since the cross-border acquisitions by Indian companies have been on the rise in the recent past, the government may find it difficult to ignore the demand of the tax authorities.
Bala Rajaraman, tax partner at Deloitte India, told , “CFC laws have been in force in the US since the 1960s. The US laws require the corporations to pay tax in the US on the profit of its foreign corporations, irrespective of whether the foreign corporations have distributed dividends or not. It is not clear if India is ready for such a law.”
He pointed out that the US Government is proposing to strengthen its CFC laws to ensure that profits of the foreign corporations controlled by the US do not escape the US tax net.
TP Ostwal, a senior chartered accountant said, “It is still premature to think of CFC laws because India is still in need of all the foreign flows into the country.”
