SKP Tax Alert
Volume 9 Issue 10 |
CBDT notifies Foreign Tax Credit Rules

The Central Board of Direct Taxes (CBDT) has notified the final Foreign Tax Credit (FTC) Rules which will enable resident taxpayers to claim deduction or credit for taxes paid in foreign jurisdictions. The government had put out the draft rules in April inviting feedback from various stakeholders and the general public, which it has now finalised incorporating some of the key suggestions (For more information on the draft rules for FTC, click here). Rule 128 has been inserted to amend the Income Tax Rules, 1962. The rule will come into force on 1 April 2017 and would apply accordingly.

Some of the key changes incorporated by the CBDT over the draft rules are given below:
  • The notified rules specifically provide for the claiming of the proportionate tax credit in more than one year where the corresponding income is offered to tax in different years.
  • Under the draft rules, FTC was not allowed where the amount of tax was disputed. This had raised the following concerns:
    • Whether credit would be allowed on that part of tax which is not disputed
    • How credit would be allowed on the actual settlement of the dispute
      • The notified rules have provided clarity on the above. The credit shall be restricted only with respect to the amount under dispute.
      • Furthermore, once the dispute is settled, the credit shall be allowed in the year in which the income is taxed in India. To avail of such credit, the taxpayer will have to furnish evidence of settlement of the dispute and evidence of payment of the foreign tax within six months from the end of the month of settlement of the dispute. The taxpayer is also required to provide an undertaking that no refund of such tax, directly or indirectly, has been/shall be claimed.
  • It also provides that where the foreign tax paid exceeds the amount of tax payable in accordance with the provisions of the Double Taxation Avoidance Agreement (DTAA), such excess shall be ignored for calculating FTC. This provision was not present in the draft rules.
  • For determining the FTC, conversion of the currency of payment of foreign tax and the telegraphic transfer buying rate on the last day of the month immediately preceding the month in which such tax has been paid or deducted shall be considered. The draft rules provided for the conversion on the date on which such taxes have been paid or deducted.
  • Taxpayers claiming FTC will now be required to file the following documents for claiming the FTC:
    • A Statement of Income in Form 67 reporting the income from a foreign country with details of taxes paid. This was not proposed earlier.
    • A certificate or statement specifying the nature of income and tax paid/withheld from:
      • The tax authority of the country/specified territory outside India; or
      • Person responsible for deducting such tax; or
      • Signed by the assessee (along with proof of tax paid/deducted).
  • The earlier draft rules required a certificate from the tax authority of a foreign country. This requirement created concern amongst stakeholders as to whether the foreign tax authorities would entertain any applications in this regard. Taking this into consideration, the CBDT relaxed this requirement by providing for self-declaration along with Form 67. Along with this form, the withholding tax certificate or statement from the tax authority is required to be furnished before the due date of furnishing the return.
  • Certain jurisdictions have provisions which allow carry back of losses. Thus, taxpayers may claim credit for foreign taxes in the year of payment, and the same may become eligible for refund due to the provisions of carry back of losses. Thus, there could be a situation of loss to the Indian treasury. To cover such situations, the notified rules require Form 67 to be furnished even in cases of refund situations arising on account of the carry back of losses.
SKP's comments
The CBDT has addressed most of the issues/concerns arising in the draft rules and has certainly tried to consider all aspects. However, the following points merit consideration:
  • Since the credit for tax paid/withheld above the rates specified in the DTAA would not be allowed, it is of utmost significance that the withholding/payment of tax in foreign countries is done in accordance with the provisions of the DTAA and that the beneficial rates available under DTAA, if any, are rightly applied.
  • Availability of FTC would be difficult in certain cases where tax disputes are not resolved within the time available for revising the tax return or completion of assessment.
  • FTC being allowed in the hands of partnership firms, which are treated as fiscally transparent entities in foreign jurisdictions (i.e. taxes are paid in the source country by the partners), has not been clarified.
  • No clarification on allowing credit for foreign state level taxes.
  • The rules are also silent on FTC with respect to distribution taxes paid by a foreign branch.
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