This year while presenting the Budget, the Indian Finance Minister observed that the Tax Residency Certificate (TRC) certifies that an entity is a resident but it does not certify that it is a beneficial owner. Beneficial ownership is a question of fact, he mentioned. This remark has, lead to speculation that the Indian tax authorities could now examine beneficial ownership aspect in greater details, when Tax Treaty (Treaty) relief is sought in case of passive incomes. It is pertinent to note that in case of incomes such as interest, royalty, fees for technical services and dividend, requirement of beneficial ownership is an important inbuilt criterion, which has to be fulfilled to avail Treaty benefit. So far, this has not been a focus area of examination by the Indian tax authorities. No clear definition Problem arises as, currently neither the Indian Income-tax Act nor the Treaties contain a definition of beneficial ownership. Even OECD is seeking to give it a more precise form. One may also note, that in the recent past there has been significant rise in controversy around the world centered on beneficial ownership test due lack of clear understanding on what it denotes. It has been debated as to what extent this concept can be used as a general anti avoidance tool, whether it is right to apply any country's domestic law meaning to this term or would a general Treaty based meaning suffice. In this backdrop it is likely that seekers of Treaty benefit in India may face several problems. OECD Guidance As per the existing guidance by OECD, beneficial ownership should not be used in narrow technical sense but rather should be understood in context of object and purpose of the Convention. Further, agent, nominee, conduit company acting in fiduciary capacity or administrator, are not to be considered beneficial owners. Rationale being, that they are obliged because of contractual, fiduciary or other duty to pass the payment to another person. OECD has also, in the recent past released two discussion drafts for public comments on this issue. It has proposed that the recipient of the dividend, interest or royalty should be taken to be the beneficial owner of the subject payment where he has theright to use and enjoy such income. This right should be unconstrained by a contractual or legal obligation to pass on the payment received to another person. Further, such an obligation must relate to the payment received. Structures at risk In the Indian...
Likely Focus Area Beneficial Ownership
|Author:||Mr Ajay Kumar and Richa R.S Sawhney|
|Profession:||Danta Transaction Services|
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