CFC or Controlled Foreign Corporation is a concept that has been proposed to be included in the Direct Tax Code in India. The concept was originally seeded in order to prevent enterprises from parking their earnings in off-shore tax havens and thereby avoid paying taxes in their home countries. Today, USA, most of the EU countries, Japan, and even countries like Brazil have CFC provision in place; with USA being the first country to have introduced it back in 1962. Now the hot question is whether India should be the next country to join the CFC club!
In India CFC was first proposed back in 2003 by the Vijay Mathur working group on Non-Resident taxation. However, the concept never came to pass until June, 2010 when the proposal for inclusion of CFC in the Direct Tax Code re-surfaced. The debate is on-going and, as one can imagine, most of corporate India is positioned staunchly anti-CFC. However, the concept cannot be brushed aside so easily and should at least be considered, with some exemptions.
Before we disregard the concept, it is important to note the very eminent reasons why the talks of Controlled Foreign Corporation have re-surfaced. From January to May 2007 alone, there were 102 cross-country M&As in India with a total valuation of US $28.19 billion. Sure, with the recent recession there might have been a dip in the M&A activity but the general trend is undoubtedly on the rise. With such speedy globalization of Indian companies, the question does arise as to whether India as a country will lose out on well-deserved tax income from Indian resident enterprises with subsidiaries abroad. Another more obvious concern is whether some of these companies might try to escape paying taxes by diverting their investments to other low tax-paying regimes. Therefore, the concept of Controlled Foreign Corporation is most certainly relevant for India and worth some consideration.
However, it is also true that the concept does come with certain glitches if implemented as it is and these could be problematic to say the least. For instance, if a company with foreign subsidiary is already paying taxes in its land of operation, then implementing CFC will lead to double taxation which, apart from being grossly unfair, will act as a disincentive for companies to expand in the global world that we live in today. There is also an alternate view that, given the current tax code already has many practical issues, the concept of CFC might still be a bit premature for India. We might do a lot better to simplify the entire idea by imposing group taxation for holding companies with multiple entities. This would increase transparency through the group and allow the group to take on consolidated tax planning thereby leaving more room for re-investments.
The planning committee could consider either imposing group taxation or implementing the CFC with certain exemptions. For instance, one way to avoid double taxation through CFC could be to impose CFC only on those companies that own overseas subsidiaries in jurisdictions with either no income taxes or lower rates for taxation than those in India. It may be possible to come up with an exhaustive list of countries for which Indian government would allow tax exemptions under CFC. This is just one of the many ways to make this concept more palpable for corporate India as well as the Indian treasury. As with most things, creating a win-win situation for both parties has to be the most sustainable way to go in the long-run.
In India CFC was first proposed back in 2003 by the Vijay Mathur working group on Non-Resident taxation. However, the concept never came to pass until June, 2010 when the proposal for inclusion of CFC in the Direct Tax Code re-surfaced. The debate is on-going and, as one can imagine, most of corporate India is positioned staunchly anti-CFC. However, the concept cannot be brushed aside so easily and should at least be considered, with some exemptions.
Before we disregard the concept, it is important to note the very eminent reasons why the talks of Controlled Foreign Corporation have re-surfaced. From January to May 2007 alone, there were 102 cross-country M&As in India with a total valuation of US $28.19 billion. Sure, with the recent recession there might have been a dip in the M&A activity but the general trend is undoubtedly on the rise. With such speedy globalization of Indian companies, the question does arise as to whether India as a country will lose out on well-deserved tax income from Indian resident enterprises with subsidiaries abroad. Another more obvious concern is whether some of these companies might try to escape paying taxes by diverting their investments to other low tax-paying regimes. Therefore, the concept of Controlled Foreign Corporation is most certainly relevant for India and worth some consideration.
However, it is also true that the concept does come with certain glitches if implemented as it is and these could be problematic to say the least. For instance, if a company with foreign subsidiary is already paying taxes in its land of operation, then implementing CFC will lead to double taxation which, apart from being grossly unfair, will act as a disincentive for companies to expand in the global world that we live in today. There is also an alternate view that, given the current tax code already has many practical issues, the concept of CFC might still be a bit premature for India. We might do a lot better to simplify the entire idea by imposing group taxation for holding companies with multiple entities. This would increase transparency through the group and allow the group to take on consolidated tax planning thereby leaving more room for re-investments.
The planning committee could consider either imposing group taxation or implementing the CFC with certain exemptions. For instance, one way to avoid double taxation through CFC could be to impose CFC only on those companies that own overseas subsidiaries in jurisdictions with either no income taxes or lower rates for taxation than those in India. It may be possible to come up with an exhaustive list of countries for which Indian government would allow tax exemptions under CFC. This is just one of the many ways to make this concept more palpable for corporate India as well as the Indian treasury. As with most things, creating a win-win situation for both parties has to be the most sustainable way to go in the long-run.
