By, Hariram Gilda July, 2010

2. Page 2 Direct Tax Code - International Taxation

3. Page 3 Background Direct Tax Code - International Taxation

4. Page 4 Residency test Direct Tax Code - International Taxation

5. Page 5 Residency test � Direct Tax Code - International Taxation

6. Page 6 CFC Provisions Direct Tax Code - International Taxation

7. Page 7 Concept of CFC Direct Tax Code - International Taxation

8. Page 8 Concept of CFC Direct Tax Code - International Taxation

9. CFC Regulations � US & UK

10. CFC Regulations � US & UK �

11. Page 11 CFC provisions Direct Tax Code - International Taxation

12. CFC � Illustrative Issues Direct Tax Code - International Taxation Page 12

13. Direct Tax Code - International Taxation Page 13 Branch Profit Tax Proposed provisions Additional levy of Branch Profit Tax (BPT) @ 15% The same is to be levied on the total income for the financial year as reduced by the amount of income tax thereon Foreign Companies liable to pay branch profit tax (PBT) on total Income reduced by corporate tax Effective tax rate for foreign companies is 36.25%

14. Direct Tax Code - International Taxation Page 14 Branch Profit Tax � Definition of Branch No definition and hence it should be defined to include branches and PE All LO to be excluded except if it is assessed as PE Issues Tax on branch profits, even if undistributed BP tax is part of Second Schedule (C) and not referred in Section 2 (Liability to tax income-tax), hence issue arises about tax credit in foreign country Way-forward To be in line with repatriation profit tax and not additional tax The term �branch� is to be defined

15. Direct Tax Code - International Taxation Page 15 Transfer Pricing - Definition of Associated Enterprises (AE) The threshold limits for determination of AE proposed to be reduced Modifications to AE definition General definition of AE i.e. direct or indirect participation in management, control or capital is omitted Changes in the threshold limits are tabulated below:

16. Direct Tax Code - International Taxation Page 16 Safe Harbour Arm�s Length Price: Determination of arm�s length price will be subject to safe harbour rules as may be framed by the Board. Safe harbor rules may not be applicable across all industries/transaction types Selection of transfer pricing cases for scrutiny is to be based on a risk management strategy as may be framed by the Board The strategy will not be disclosed to the taxpayer or any member of the public Safe Harbour Provides a measure of relief to taxpayers If the safe harbor provisions are set up at inordinately high levels or ranges, then taxpayers would continue to face litigation The global losses and financial crunch faced by the Group as such at present would also need consideration whilst exploring adherence with the safe harbor regulations

17. Direct Tax Code - International Taxation Page 17 Advanced Pricing Agreement (APA) Key features Arm�s length price to be determined by the Board under any of the prescribed methods Board empowered to make further adjustments as necessary/expedient APA sought is binding on the taxpayer and the Income-tax authorities APA is valid for maximum of 5 consecutive financial years APA shall not be binding in case of change in law (facts of the case) Subject to timely disposal, APAs are expected to considerably reduce uncertainty regarding arm's length pricing Types: Unilateral, Bilateral, Multilateral Other issues The APA provisions provide that it would not be applicable in case of a �change in law�, which needs to be amended to a �change in facts�

18. GAAR � Proposals The Direct Taxes Code Bill, 2009 (DTC) proposes to introduce GAAR in India to curtail tax avoidance GAAR to be invoked on satisfaction of prescribed conditions: an arrangement to obtain a tax benefit transactions not at arm�s length misuse or abuse of the provisions of DTC Lacking commercial substance defined to include situations where there is a: Significant tax benefits without significant effect upon business risk or net cash flows Legal substance or effect differs from legal form It involves or includes: - Round trip financing - Any accommodating or tax indifferent party

19. Direct Tax Code - International Taxation Page 19 GAAR � Powers given to revenue authorities to disregard, combine or re-characterise any part or whole of a transaction / arrangement GAAR further supported by specific anti-abuse rules (SAAR) in circumstances such as payment to associated persons in respect of expenditure, international transaction not at arm�s length, transactions resulting in transfer of income to non-residents and avoidance of tax in certain transactions in securities GAAR to override the provisions of the tax treaties Onus is on the taxpayer to prove that a tax benefit was not the main purpose of the arrangement

20. GAAR �

21. Page 21 GAAR � Direct Tax Code - International Taxation

22. Direct Tax Code - International Taxation Page 22 Definition of Income Deemed to accrue or arise in India Existing Provision Income deemed to accrue or arise in India directly or indirectly Includes Income arising from a transfer of a Capital Asset situated in India � Proposed Provisions Income deemed to accrue or arise in India directly or indirectly Through or from transfer directly or indirectly of Capital Asset situated in India Intention of the proposed legislation Tax the transfer of shares of the overseas holding company which is intended to be transferred Shares of the Indian company. But the intention seems to have far-reaching implications Taxing the genuine transfer or genuine corporate reorganization

23. Direct Tax Code - International Taxation Page 23 Definition of Income Deemed to accrue or arise in India � Implications Indirect transfer of a Capital Asset situated in India has a wider meaning It may tax the transactions which have taken place outside India between two nonresidents. It may tax the transactions relating to Global reorganization though the transactions may not have any impact in India Way-forward Existing provisions to be maintained. Definition of the term indirectly to ensure that genuine transfers are not brought to tax Strengthen Limitation of Benefits clause (LOB) in the respective treaties to overcome treaty shopping

24. Page 24 Treaty Override Direct Tax Code - International Taxation As the DTC is later in point of time and as such existing DTAA could be rendered otious. This would result in higher rate of taxation on royalty, FTS which are taxed in source country at concessional rate. It has been represented that such general treaty override is against the spirit of Vienna convention. The Vienna Convention on the laws of treaties has noted in its preamble that the principle of PACTA SUNT SERVANDA is universally recognized. It is a legal maxim which is mentioned in Article 26 of Vienna Convention which means � Every treaty is binding upon the parties to it and it must be performed in good faith�. As the DTC is later in point of time and as such existing DTAA could be rendered otious. This would result in higher rate of taxation on royalty, FTS which are taxed in source country at concessional rate. It has been represented that such general treaty override is against the spirit of Vienna convention. The Vienna Convention on the laws of treaties has noted in its preamble that the principle of PACTA SUNT SERVANDA is universally recognized. It is a legal maxim which is mentioned in Article 26 of Vienna Convention which means � Every treaty is binding upon the parties to it and it must be performed in good faith�.

25. Page 25 Characterization of Income of FII Income arising from sale of securities shall be deemed to be Capital gain Capital gain shall not be subject to TDS Advance tax payable Direct Tax Code - International Taxation

26. Page 26 Taxation of Royalty/FTS Direct Tax Code - International Taxation

27. Capital Gains