There is a great need and importance of introducing CFC i.e. controlled foreign corporation legislation in Indian tax law, as it is one of the biggest measures to avoid payment of income tax in India by the resident persons of India. In the current scenario, there are no such provisions existing in income tax act, 1961 but the same has been introduced in Direct tax code in lines with the Action Plan 3 of OCED tax avoidance model.
Tax avoidance has been accepted as an area of concern in international tax arena, which is the reason why several countries have been legislating anti-avoidance measures. Taxation of foreign passive income is at heart of CFC regulations.
CFC’s are corporate entities incorporated in an overseas low tax jurisdiction and controlled directly or indirectly by residents of a higher tax jurisdiction (Parent State). Since each corporate entity is treated as a separate legal entity, the profits earned by such CFC’s are not taxed at the owner level until they are distributed. CFCs tend to earn passive income; such income is not distributed, thereby resulting in tax deferral in the parent state.
Detailed analysis of above mentioned definition:
CFC’s are those corporate entities which are incorporated in low tax jurisdictions like Tax Haven Countries say Bermuda, Singapore and many more with a intention to evade and avoid payment of tax in high tax jurisdiction by diverting the income accrued or earned to low tax jurisdiction by creating or incorporating companies or any other form of entities in that jurisdictions which is ultimately controlled by person resident in high tax jurisdiction. This lead to tax evasion which is completely unlawful and bad in the eyes of law and also the high tax jurisdictions like India suffered huge loss of tax revenues which ultimately results in unfair tax collection from honest taxpayers. Such income can only be taxed in India after it has been repatriate to India in the form of distributable profits like dividend, which is usually not done so as to avoid tax liability.
After, considering the above mentioned facts and unfair practices of tax evasion and avoidance, there is a great need of introducing CFC’s legislation in India.