India: Minimum alternate tax on foreign companies
The Indian tax law (ITL) requires a minimum alternate tax (MAT) to be paid by companies on the basis of profits disclosed in its financial statements ('book profits'). MAT applies if the tax payable by the company on its total income, as normally computed under the ITL, is less than 18.5% of company's book profit. In such case, MAT is payable at the rate of 18.5% (plus surcharges and cess as applicable) of the book profits. Whether foreign companies are outside the purview of MAT has been a subject matter under litigation in India and is now sub judice before the Indian Supreme Court. Foreign companies have been taking a position that MAT should not be applicable to them, in cases where such companies do not have a business presence in India or where tax liability is protected by treaty provisions.
To mitigate the impact of MAT for foreign companies, the Finance Bill 2015 (FB 2015) proposed to exclude certain class of capital gains earned by foreign institutional investors (FIIs) from the purview of MAT from tax year 2015-2016 onwards. This proposal generated considerable debate on whether the foreign companies (other than FIIs) and income of FIIs from sources other than capital gains will continue to be governed by MAT in the future years.
To clarify the dilemma on the applicability of MAT to foreign companies, amendments are made to the proposals of FB 2015. The amended provisions exclude the following incomes of all foreign companies from the purview of MAT from tax year 2015-2016 onwards:
Capital gains arising on transactions in securities, if such income is credited to profit and loss account (P&L Account); and
Interest, royalty or fees for technical services chargeable to tax, if such income is credited to the P&L Account.
Consequently, corresponding expenses for earning said income are also proposed to be excluded while computing MAT. The above proposal will be enacted in the ITL on completion of the parliamentary approval process.
It is clarified that assessments for past years will be concluded as per the outcome of the Indian judicial process. A committee will be set up to look into the issue of MAT on foreign companies. In view of this, the Indian tax administration has issued a communication on May 11 2015, stating that no coercive action should be undertaken for the recovery of demands already raised by invoking the MAT provisions against foreign companies.
The above developments intend to provide clarity and relief to foreign companies from the levy of MAT (on a going forward basis), though the proposed provisions may still contain some uncertainty. Nevertheless, the basic question of applicability of MAT to foreign companies that do not have a place of business in India appears to have been implicitly dealt with.
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