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Budget 2016: Budget may ease rules for offshore fund managers moving to India

Move to make it easier for funds to avail of tax exemptions

Indivjal Dhasmana  |  New Delhi 

Budget may ease rules for offshore fund managers moving to India

In a move to woo to locate in India, the for 2016-17 is likely to relax conditions for them to avail of tax exemptions.

2015 had announced some exemptions by amending the (PE) norms. The rules were changed to the extent that mere presence of a fund manager in India does not constitute PE of the offshore fund. This implies these fund managers are exempt from corporate taxation in India.
Read our full coverage on 2016


RELAXED RULES
  • for 2015-16 had amended PE conditions to provide corporate tax exemption to foreign fund managers if they moved to India
  • Govt had hoped many fund managers would shift their base to India to avail of tax relief
  • However, fund managers feel the conditions for availing of exemptions are rather tough
  • for 2016-17 is likely to ease some of these rules

"The present taxation structure has an in-built incentive for fund managers to operate from offshore locations. To encourage such to relocate to India, I propose to modify the PE norms to the effect that mere presence of a fund manager in India will not constitute PE of the offshore funds resulting in adverse tax consequences," Finance Minister had said in his speech last year.

However, these efforts have so far not been able to impress like Citi, Morgan Stanley, and others, as conditions for availing of the are rather stiff.

There are altogether 13 conditions, most contained in the Section 9 (A) of the Finance Act, 2015. One of those says that the fund has to have at least twenty-five members at the foreign institutional investor (FII) level. Most of these fund managers do not meet this condition. Besides, there are funds-of-funds that invest through one entity. These cannot be treated as just one investor.

In fact, the Securities and Exchange Board of India (Sebi) mandates that one member is enough for non-broad-based funds like pension funds, sovereign funds, university funds and insurance funds.

Consultants of recently met finance ministry officials in this regard and asked them to have parity between rules and rules for in Section 9 (A) of the Finance Act, 2015.

The finance ministry sources said they were considering the request and might incorporate this in the Budget.

The other condition, however, is that the remuneration paid by the fund to an eligible fund manager in respect of fund-management activity undertaken on its behalf must not be less than the arm's-length price of such activity.

Now, deciding an arm's-length price is subjective, say consultants. In transfer pricing, an arm's length means the parties in a transaction are independent and on an equal footing. For instance, the goods supplied by a parent to Indian subsidiaries are considered an equal to the same goods supplied to others.

Fund managers say this condition should be diluted as it is anyway dealt in transfer-pricing disputes. "Since transfer-pricing disputes are common in India, and transfer pricing in any case is not an exact science, the arm's-length condition should be removed, so that transfer-pricing disputes do not make a fund ineligible for availing of the tax exemption," says Rajesh Gandhi, partner (tax), Deloitte Haskins & Sells. There is also a condition that a member of a fund cannot have any participation interest exceeding 10 per cent in the fund. Fund managers find this condition unrealistic.

The Finance Act of 2015 provides ffshore fund managers moving to India a relief from corporate taxation, the fund managers demand a relief from personal income tax for three years, as is given to start-ups. Their contention is that personal income tax rates in the highest slab (30 per cent) in India are double those in Singapore and Hong Kong; that is why they opt for those Southeast Asian countries. Besides offshore fund managers, the government is also looking at India-based specific fund managers which could be established by non-resident Indians.

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Budget 2016: Budget may ease rules for offshore fund managers moving to India

Move to make it easier for funds to avail of tax exemptions

Move to make it easier for funds to avail of tax exemptions In a move to woo to locate in India, the for 2016-17 is likely to relax conditions for them to avail of tax exemptions.

2015 had announced some exemptions by amending the (PE) norms. The rules were changed to the extent that mere presence of a fund manager in India does not constitute PE of the offshore fund. This implies these fund managers are exempt from corporate taxation in India.
Read our full coverage on 2016


RELAXED RULES
  • for 2015-16 had amended PE conditions to provide corporate tax exemption to foreign fund managers if they moved to India
  • Govt had hoped many fund managers would shift their base to India to avail of tax relief
  • However, fund managers feel the conditions for availing of exemptions are rather tough
  • for 2016-17 is likely to ease some of these rules

"The present taxation structure has an in-built incentive for fund managers to operate from offshore locations. To encourage such to relocate to India, I propose to modify the PE norms to the effect that mere presence of a fund manager in India will not constitute PE of the offshore funds resulting in adverse tax consequences," Finance Minister had said in his speech last year.

However, these efforts have so far not been able to impress like Citi, Morgan Stanley, and others, as conditions for availing of the are rather stiff.

There are altogether 13 conditions, most contained in the Section 9 (A) of the Finance Act, 2015. One of those says that the fund has to have at least twenty-five members at the foreign institutional investor (FII) level. Most of these fund managers do not meet this condition. Besides, there are funds-of-funds that invest through one entity. These cannot be treated as just one investor.

In fact, the Securities and Exchange Board of India (Sebi) mandates that one member is enough for non-broad-based funds like pension funds, sovereign funds, university funds and insurance funds.

Consultants of recently met finance ministry officials in this regard and asked them to have parity between rules and rules for in Section 9 (A) of the Finance Act, 2015.

The finance ministry sources said they were considering the request and might incorporate this in the Budget.

The other condition, however, is that the remuneration paid by the fund to an eligible fund manager in respect of fund-management activity undertaken on its behalf must not be less than the arm's-length price of such activity.

Now, deciding an arm's-length price is subjective, say consultants. In transfer pricing, an arm's length means the parties in a transaction are independent and on an equal footing. For instance, the goods supplied by a parent to Indian subsidiaries are considered an equal to the same goods supplied to others.

Fund managers say this condition should be diluted as it is anyway dealt in transfer-pricing disputes. "Since transfer-pricing disputes are common in India, and transfer pricing in any case is not an exact science, the arm's-length condition should be removed, so that transfer-pricing disputes do not make a fund ineligible for availing of the tax exemption," says Rajesh Gandhi, partner (tax), Deloitte Haskins & Sells. There is also a condition that a member of a fund cannot have any participation interest exceeding 10 per cent in the fund. Fund managers find this condition unrealistic.

The Finance Act of 2015 provides ffshore fund managers moving to India a relief from corporate taxation, the fund managers demand a relief from personal income tax for three years, as is given to start-ups. Their contention is that personal income tax rates in the highest slab (30 per cent) in India are double those in Singapore and Hong Kong; that is why they opt for those Southeast Asian countries. Besides offshore fund managers, the government is also looking at India-based specific fund managers which could be established by non-resident Indians.
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Business Standard
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Budget 2016: Budget may ease rules for offshore fund managers moving to India

Move to make it easier for funds to avail of tax exemptions

In a move to woo to locate in India, the for 2016-17 is likely to relax conditions for them to avail of tax exemptions.

2015 had announced some exemptions by amending the (PE) norms. The rules were changed to the extent that mere presence of a fund manager in India does not constitute PE of the offshore fund. This implies these fund managers are exempt from corporate taxation in India.
Read our full coverage on 2016


RELAXED RULES
  • for 2015-16 had amended PE conditions to provide corporate tax exemption to foreign fund managers if they moved to India
  • Govt had hoped many fund managers would shift their base to India to avail of tax relief
  • However, fund managers feel the conditions for availing of exemptions are rather tough
  • for 2016-17 is likely to ease some of these rules

"The present taxation structure has an in-built incentive for fund managers to operate from offshore locations. To encourage such to relocate to India, I propose to modify the PE norms to the effect that mere presence of a fund manager in India will not constitute PE of the offshore funds resulting in adverse tax consequences," Finance Minister had said in his speech last year.

However, these efforts have so far not been able to impress like Citi, Morgan Stanley, and others, as conditions for availing of the are rather stiff.

There are altogether 13 conditions, most contained in the Section 9 (A) of the Finance Act, 2015. One of those says that the fund has to have at least twenty-five members at the foreign institutional investor (FII) level. Most of these fund managers do not meet this condition. Besides, there are funds-of-funds that invest through one entity. These cannot be treated as just one investor.

In fact, the Securities and Exchange Board of India (Sebi) mandates that one member is enough for non-broad-based funds like pension funds, sovereign funds, university funds and insurance funds.

Consultants of recently met finance ministry officials in this regard and asked them to have parity between rules and rules for in Section 9 (A) of the Finance Act, 2015.

The finance ministry sources said they were considering the request and might incorporate this in the Budget.

The other condition, however, is that the remuneration paid by the fund to an eligible fund manager in respect of fund-management activity undertaken on its behalf must not be less than the arm's-length price of such activity.

Now, deciding an arm's-length price is subjective, say consultants. In transfer pricing, an arm's length means the parties in a transaction are independent and on an equal footing. For instance, the goods supplied by a parent to Indian subsidiaries are considered an equal to the same goods supplied to others.

Fund managers say this condition should be diluted as it is anyway dealt in transfer-pricing disputes. "Since transfer-pricing disputes are common in India, and transfer pricing in any case is not an exact science, the arm's-length condition should be removed, so that transfer-pricing disputes do not make a fund ineligible for availing of the tax exemption," says Rajesh Gandhi, partner (tax), Deloitte Haskins & Sells. There is also a condition that a member of a fund cannot have any participation interest exceeding 10 per cent in the fund. Fund managers find this condition unrealistic.

The Finance Act of 2015 provides ffshore fund managers moving to India a relief from corporate taxation, the fund managers demand a relief from personal income tax for three years, as is given to start-ups. Their contention is that personal income tax rates in the highest slab (30 per cent) in India are double those in Singapore and Hong Kong; that is why they opt for those Southeast Asian countries. Besides offshore fund managers, the government is also looking at India-based specific fund managers which could be established by non-resident Indians.

image
Business Standard
177 22

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