1. TAXPERT Professionals Private Limited
New Delhi – Mumbai - Chandigarh
Impact of Revised Direct
Tax Code on International
Taxation
20th June, 2010
TAXPERT Professionals Private Limited

2. The Direct Tax Code Bill, 2009 (“DTC”) was released by the government of India on 12th August, 2009 for
public comments along with a discussion paper. On 15th June, 2010 a revised discussion paper is released. It
is meant to respond to the major concerns of stakeholders.
This article highlights key provisions that would affect Residence Rules & Scope of Taxation of
companies, and primarily companies engaging in cross-border transactions.
Original DTC Draft Provisions Revised Discussion Paper Existing Provision as per the
Proposed Provisions Income Tax Act, 1961
TEST OF RESIDENCE IN CASE OF FOREIGN COMPANIES
Under the DTC, a foreign The "place of effective
1. company would be deemed to be management" is used as the The test of residence for
resident in India if the test for determining whether a foreign companies is the
management and control of its company incorporated outside “place of effective
affairs are situated “wholly or India is resident in India. management” or “place of
partly” in India at any time
central control and
during the financial year. “Place of effective
management” for these management”.
The inclusion of the word purposes would be defined to
“partly” sets a very low threshold mean:
for regarding a foreign company At the same time, it is noted
as resident in India. • The place where the board
that the existing definition of
of directors of the company
or its Executive directors, as residence of a company in the
the case may be, make their Income Tax Act, 1961 based
decisions; on the control and
management of its affairs
Or being situated wholly in India
is too high a threshold.
If the board of directors
routinely approves the
commercial and strategic
decisions made by the executive
directors or officers of the
company, the place where such
executive directors or officers
of the company perform their
functions.
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3. CONTROLLED FOREIGN CORPORATIONS (CFC)
Under these provisions, if A provision introducing the
‘passive income earned’ by a taxation of CFC income as an
foreign company controlled anti-avoidance measure is
directly or indirectly by a proposed for the first time.
resident in India, and such
income is not distributed to There is no existence in
shareholders resulting in present situation of such
deferral of taxes, then it will be proposal in the current
deemed to have been distributed provision of the Income Tax
in the hands of resident Act, 1961.
shareholders as ‘dividends
received’ from the foreign
company.
TREATY VIS A VIS DOMESTIC TAX LAW
The draft DTC contains a The domestic law or the
provision that the “later in time” relevant tax treaty, whichever is The current provisions of the
doctrine would apply in the event more beneficial to the tax payer, Income-tax Act provide that
of a conflict between the to be applied. between the domestic law
provisions of a tax treaty and the and relevant DTAA, the one
provisions of the DTC. The revised Discussion Paper
which is more beneficial to
indicates that the DTC would be
amended to provide for a the taxpayer will apply.
limited tax treaty override in
the following circumstances:-
• when the General Anti
Avoidance Rule is invoked,
or ;
• when Controlled Foreign
Corporation provisions are
invoked, or;
• when Branch Profits Tax is
levied.
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4. GENERAL ANTI AVOIDANCE RULES (“GAAR”)
The provisions of GAAR was While the government has There is no existence in
introduced in DTC to deal with decided to retain the proposed present situation of such
specific instances where a GAAR in its existing form, it proposal in the current
taxpayer enters into an has clarified that not every provision of the Income Tax
arrangement, the main purpose of arrangement that would Act, 1961.
which is to obtain a tax benefit mitigate tax liability would be
and the arrangement is entered classified as an impermissible
into or carried on in a manner not avoidance agreement.
normally employed for bona fide
business purposes, is not at arm’s GAAR would be invoked only
length, abuses the provisions of if the arrangement besides
the DTC or lacks economic obtaining a tax benefit for the
substance. taxpayer is also covered by one
of the following four conditions
It represents misuses to abuse of
the provisions of the code
It lacks commercial substance
It is entered or carried on in a
manner not normally employed
for bona fide business purposes
It is not at an arms length.
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