Controlled Foreign Company Regime Case Study
Controlled Foreign Company Regime (CFC)
Introduction to the Concept
We are in the age of witnessing an exponential boom in foreign trade and a rise of giant Multi-National Corporations (MNC’s) who are trying to maximize their global presence and minimizing their tax costs. To curb one of the measures of tax avoidance by parking the profits to countries with low tax jurisdictions without actually bringing the profits to the parent company which is located in a higher tax charging country, the income tax authorities have introduced certain measures. The Controlled Foreign Company (CFC) regime aims at countering the deferral of tax payments. Under this rule, income that is shifted to the foreign subsidiaries in low tax jurisdiction which actually …show more content…
The draft also focused on designing the rules in a manner such that it caters to the issue of competitive concerns as the countries with a stringent jurisdiction will have a disadvantage against countries with zero to low tax jurisdictions like tax havens. They may also occur due to different set of rules being applied at the foreign and domestic subsidiaries. To address these points, OECD made the made the proposal that the same set of rules are applied to both domestic units, applying these rules to only those transactions which are artificial and if that CFC is involved in unscrupulous activities. The rules also need to be structured in a way such that it reduces the complexity so that business houses do not feel issues in their compliance but also removes the possibilities of loopholes for tax …show more content…
According to the “De minimis threshold approach”, a set of entities earning lower than a minimum amount of threshold income will not be treated as a CFC. This method will make compliance of rules easier. For example: a country establishes a rule under which income is not taken into account as a CFC income if it is less than 5% of the total income or INR 10 crores whichever comes lower. However, the entities can play around this rule by splitting of income of the CFC amongst various CFCs. Hence, it is necessary to provide the anti-abuse rules
Introduction to the Concept
We are in the age of witnessing an exponential boom in foreign trade and a rise of giant Multi-National Corporations (MNC’s) who are trying to maximize their global presence and minimizing their tax costs. To curb one of the measures of tax avoidance by parking the profits to countries with low tax jurisdictions without actually bringing the profits to the parent company which is located in a higher tax charging country, the income tax authorities have introduced certain measures. The Controlled Foreign Company (CFC) regime aims at countering the deferral of tax payments. Under this rule, income that is shifted to the foreign subsidiaries in low tax jurisdiction which actually …show more content…
The draft also focused on designing the rules in a manner such that it caters to the issue of competitive concerns as the countries with a stringent jurisdiction will have a disadvantage against countries with zero to low tax jurisdictions like tax havens. They may also occur due to different set of rules being applied at the foreign and domestic subsidiaries. To address these points, OECD made the made the proposal that the same set of rules are applied to both domestic units, applying these rules to only those transactions which are artificial and if that CFC is involved in unscrupulous activities. The rules also need to be structured in a way such that it reduces the complexity so that business houses do not feel issues in their compliance but also removes the possibilities of loopholes for tax …show more content…
According to the “De minimis threshold approach”, a set of entities earning lower than a minimum amount of threshold income will not be treated as a CFC. This method will make compliance of rules easier. For example: a country establishes a rule under which income is not taken into account as a CFC income if it is less than 5% of the total income or INR 10 crores whichever comes lower. However, the entities can play around this rule by splitting of income of the CFC amongst various CFCs. Hence, it is necessary to provide the anti-abuse rules