Obama's tax googly!

Nifty BSE | NSE 25/05/12 Are Mutual Funds betting on Nifty?

There is more tax angst this week - this time it is President Obama's new tax policy for American corporations. This one is a lethal combination of rising taxes, growing protectionism and dieing globalisation.

President Obama hopes to raise USD 210 billion over 10-years via a new tax policy that includes: 

• Limited deductibility of foreign expenses.
• Prevention of 'Foreign Tax Credit abuse
• Eliminating loopholes in 'Check The Box' rules
• Curbing use of tax havens   

Dinesh Kanabar, Head-Tax at PwC said US multinationals particularly multinationals had been looking outbound. They had been making investments which until now allowed to retain funds overseas and go on reinvesting them without repatriating them to the USA. So as long as the moneys were not repatriated into USA, there was no tax liability in USA. Tax treaties globally have been structured on UN model Organization for Economic Cooperation and Development (OECD), none of which have been followed by USA, which has its own US model treaties.

Here is a verbatim transcript of the exclusive interview with Dinesh Kanabar on CNBC-TV18. Also watch the accompanying video.
Q: To me this new policy spells three important things that tax rates on individuals and corporations are on the rise across the world as governments try to shore up tax revenues that protectionism is here to stay and that globalisation is on a holiday. What do you make of this new tax policy?
A: Firstly we must remember that these are the proposals. These have yet to be going through the Congress, these are yet to be approved. There is a lot of debate and discussion going on and I am not too sure whether the proposals will go through in the form and shape which they have been put up. But just look at it broadly as what is it being said. It is being said here that there are regulations which United Sates (US) has, which allows certain loopholes and those loopholes are now proposed to be plugged.
So the first loophole for example is in relation to expenses. In India for example under the domestic law we have a Section 14 (A) where if you earn income and that income is exempt from tax then expenditure in relation that too is not allowed as a deduction. There was no such regulation in USA . What is now proposed is slightly of course different from what India has which is to say that if you have got investment overseas and there is expenditure in relation there too, then until you get the moneys, income, and that income is subjected to tax - the allowance of the expenditure will get deferred. So it is trying to match the income and the expenditure.
The second proposal which relates to foreign tax credit, US has and again I am being very simplistic about it and has got a concept of basket of tax credit where what you do is, you take all your foreign income, take all your foreign tax credits and set them off. So in theory what could happen is that you could derive income from one jurisdiction which is at a very high rate. You can take income from another jurisdiction which is at a lower rate and if the average rate of tax matches with the US rate of tax then you might not end up paying any taxes in US at all. The proposal now is to separate the baskets and probably ensure that tax credits relates only to the income in respect of which credit is claimed and therefore if you get income from low tax jurisdiction you will end up paying taxes in US.
The third is on 'Check The Box' regulations where US has a concept that if you check the box on an entity overseas then that entity is not treated like a separate corporation. But like a branch and what is now sought to be done is that there are certain abuses in relation there too which are sought to be now take away.
Finally of course, is the vigilance on tax havens which is the order of the day today and which is something which got debated at G20, which is what everybody is looking at. You are aware of the litigation which is currently before the Supreme Court of India - to provide here that if there is a market intermediary who is in USA then that market intermediary if it is an overseas intermediary will be subject to same disclosure requirements as a domestic financial institution whereby a tax haven related entity will be obliged to make disclosures for all the accounts etc and individuals will not be allowed to test the wealth overseas. So these are the four basic proposals.
Continued on next page ...