Wednesday, July 04, 2007

Tax relief on overseas losses

Corporates and banks can now use losses suffered by their ‘overseas branches’ to lower their tax outgo in India. This follows an ITAT (Income Tax Appellate Tribunal) ruling to this effect. It said that the losses incurred by the foreign operations of an Indian company have to be allowed as a deduction from its domestic profit, even though the profit earned abroad continues to remain exclusively taxable in the foreign country under the terms of the double taxation avoidance agreement.

This is a win-win situation for the corporates and results in ‘double dip of losses’ in tax parlance. That is the Indian companies will get a deduction for their overseas profits twice – once in its assessment in India and the next time when it makes profit in the foreign country.

The argument given by the tribunal was that once an income becomes taxable by a foreign government with which New Delhi has a tax treaty, India loses its right to tax the same unless the agreement has a specific provision that income can be taxed in both the countries. Therefore, when an income is taxed abroad, it can not be taxed in India.

Yet, when a company makes a loss abroad, it can be adjusted against profits in India because the provisions of DTAA cannot be thrust upon the Indian company. The tax treaty applies only when it is more beneficial to the taxpayer.


2 comments:

mayank said...

Sir,
The II-para is not clear, i.e. your statement about 'double dip of losses'.

For overseas profit, how can an Indian company get deduction, it must be taxed for it?

Please throw some light on "Indian companies will get a deduction for their overseas profits twice – once in its assessment in India and the next time when it makes profit in the foreign country"

ramkyc said...

I was pretty sure that this is bound to lead to some confusion. In fact it also left me confused. Had the statement been written as: "Indian companies will get a deduction for their overseas losses twice – once in its assessment in India and the next time when it is assessed in the foreign country", that would have made lot of sense. The assessment here in India is only with reference to the losses, as losses can be set off against the profits made back here in India, but profits could not be taxed because of the DTAA (Double Taxation Avoidance Agreement).

But all the checking and double checking that I did with reference to that did not yield me any corrections in ET. In the absence of that, I am left to presume some things and stand for correction in respect of the same:

If there is a DTAA between India and the foreign country in which the entity operates, there are two possibilities:

1. The profits can be taxed in the foreign country OR

2. They can be taxed in India.

When they are taxed in the foreign country, the losses made by the foreign entity are set off against profits made by that entity there. But because it is a foreign subsidiary of an Indian entity, when the Indian entity is being assessed to tax here in India (though the foreign profits per se are not taxed) the losses made abroad are eligible to be set off against the profits made here in India. This is what I understand as the 'double dip.'

But let us wait for two things:

1. I presume there will be a correction appearing somewhere in ET about this.

2. The more knowledgeable amongst us in this respect (with CA background etc.) could chip in with some inputs.