International Business Taxation - Tax planning assignment

International Business Taxation - Tax planning assignment

International Business Taxation

Term 2, 2020

Tax Planning Assignment

Company – Pyramid (Australian Company)

 

 

 

Synopsis

Pyramid is an Australian conglomerate having its headquarters in Western part of the continent, majorly dealing in the Australian as well as the New Zealand’s chemical, retail mining and retail sector. In the year 2016, the company has gained its revenues with an aggregate of AU$65.98 billion and gained its rank in the Australian market. With a total of 120,000 employees, Pyramid is the one of the largest privately owned company of Australia which is providing a good rate of employment in the country. The company is operating in the market since last two decades and serving the region since then. Being a conglomerate group, Pyramid is constantly redesigning its business operations and innovations so that they can enhance their market and have their more established market. The company Pyramid has a very strong and a huge network.

Pyramid Shareholders

The company has a good equity distribution channel and this has given a huge network of shareholders to the company. Pyramid has the institutional ownership and they acquire the 25% of the company’s shares (Xu and Lee, 2020). The company has also focused on the insider ownership that has resulted in having the stronger decision and taking the key decisions based on the majority that is also derived from the company’s side (Skaar, 2020). Pyramid has opened its shareholding for the public and has 73% stake in the shareholding. Not just the public, even the privately owned companies had made their investment and have owned the equity. These private companies have owned a very less share and hence these have not made any of the significant effect over the decisions of the company and thus not have many consequences.

Pyramid is a listed company and is listed on the Australian Stock Exchange and has also invited a large number of public to make investment in it. The company was listed in the year 2008 and hence has acquired a very huge market and gained their brand name and reputation (Xu and Lee, 2020).

Chosen Jurisdiction- India

The company Pyramid is trying to gain their market in the Asian country- India. India is one of the developing nations, that is developing with a quite good rate and hence majority of the companies are trying to set up their unit and business operations in this country so that they can gain better advantages as the developing countries offers more taxation and other benefits to the companies as compared to the developed nations. Pyramid has also focused on all these points and taken the decision of business expansion in India. The company also had another reason behind choosing this jurisdiction as they found that India has a good amount of skilled labor at very affordable costs and with more efficiency (Skaar, 2020).

Tax Objective of Pyramid

The company has a major tax objective in which it focuses over having the satisfactory returns to its shareholders as well as the internal stakeholders. the company has also focused on having the least taxation and better return so that a good amount of tax can be paid as well as a higher return can be gained by the stakeholders so that they can have more integrity in the company’s operations and decisions (Cherunilam, 2020). Financial discipline is another deep response that the company Pyramid desires to have.

Treaty between Australia and India

India and Australia are the two countries that have a treaty of trade amongst them that is both the countries have mutually agreed over some of the common points and objectives that the companies and the businesses of these countries can have in their respective counties as well as the alternate country amongst these two (Chow and Schoenbaum, 2020).

Tax issues of Pyramid in India

Australian companies sometimes face serious concerns with the Indian as well as Australian authorities regarding the taxation policies. The major issue that can be noted with the taxation in the country is that the country can only impose taxation on the on shore activities and not on the activities that are not conducted within (Bahoo, et. al., 2020).

 

 

 

 

Introduction

As an advisor of the company Pyramid, I would give the certain specifications to the company for their further expansion in the foreign jurisdiction and offering the best jurisdiction that would give the maximum gains to the company so that they can make the taxation with the least issues as well as with the minimal problems (Chow and Schoenbaum, 2020). The entire report focuses on having the taxation obligations over that the client company Pyramid would face while moving their business towards the foreign jurisdiction of India as to eliminate the taxation issues and fulfilling the tax objectives by getting the maximum taxation benefits along with expansion and enhanced business operations.

India is continually focusing on developing the country in economic as well as social terms and this is the reason why country has focused on making the treaties with other developed nations so that they enhance their investment and working operations in the developing nation. The authority of India of Advance ruling announced that the income of any of the Australian company operating in India will be charged as the income earned form the business and would be applied with that rates rather than treating it as the part and income from royalties (Cacioppe, et. al., 2020). This treaty has not just focused on the income rather it has also resulted in having various taxation benefits and gains that the company can have while operating in any of the two alternate nations (Chow and Schoenbaum, 2020). The following benefits could be seen by the company- Pyramid for making their business investment and expansion in the foreign jurisdiction of India.

Below mentioned are some of the taxation benefits that the company is focusing to achieve and trying to fulfill their tax objective by making their operations in the Indian subcontinent.

Double Taxation Avoidance Agreement

Double Taxation is referred to as the amount on which a double tax is imposed over the income; this is done majorly because the company has headquarters in a specific country and conducting its operations at other principal place of business (Chow and Schoenbaum, 2020). This is a burden over the companies that are trying to operate in more than one nation, to eliminate this burden and enhance the concept of globalization the countries have signed the treaties and agreements and avoiding the double taxation concept for the companies (UTYUZH, et. al., 2020).  

This agreement is majorly applied to the people who are residents in any of the nations amongst the agreement. In India any of the Australian company that would conduct its operations will be liable to pay the tax only in the country India as its major interest of business lies in India only. The company would not just solely be liable to pay the tax rather it has to pay the amount of applicable surcharges and additional surtax amounts (UTYUZH, et. al., 2020).

Article 2 of DTAA states that the authorities of the contract i.e. the government of republic India as well as the government of Australia should notify one another that they have agreed to the taxation policies of each other and if any changes are applied that the notification of same would be provided to the other one (Cooper and Nguyen, 2020). It is stated in the agreement that the profit that would be gained by the business in any of the contracting countries will be taxable only in the nation where the operations are carried out and the only at the place of interest (Cacioppe, et. al., 2020).

Pyramid being an Australian company can focus on its business expansion in India as it would help the company to have the taxation only in the country where it is operating and not paying the tax on the same amount in the home nation where the headquarters are situated of the company- Pyramid (UTYUZH, et. al., 2020).

The agreement of free trades amongst the countries and this is helpful for the companies to operate freely in the country India (Bahoo, et. al., 2020). The economic relations of the country Australia has been strengthened and a new competitive edge to the businesses is been offered. DTAA is not just concerned for the primary objective of avoidance of double tax rather it is also helpful in estimating the TDS, credits for the tax paid, and also helpful in exempting the taxation over certain point too (Cherunilam, 2020). The tax credits are also offered by India to Pyramid in India itself as it is helpful in taking the taxation credit in the source country only where they are performing their operations.

Pyramid would get the benefits of reduction of the evasions of the taxation amount in both the countries that is Australia as well as in India. This is also helpful for the Pyramid investors as well as the shareholders of Pyramid to make the investment in the foreign jurisdiction of India. Section 90(2) of the Income Tax Act of India, as it is stated that the allowances can be assessed by the choice of governance by the DTAA that is agreed by the nations, in which the company is headquartered as well as with its operations in India (Cherunilam, 2020).

Bilateral relief- As India and Australia have an agreement as DTAA, which is agreed for safeguarding and protecting the citizens and the companies from the framework of double taxation by taking certain mutual decision (Cooper and Nguyen, 2020). Pyramid could have more organized and efficient operation in India with the maximum benefits of the taxation as a company.

Pyramid has to focus completely over its taxation policies and carry their operation efficiently and effectively in India as no much tax issue would be faced by the company in country because of the DTAA amongst the two nations that has given better opportunities of expansion.

Withholding taxes in the company Pyramid

India is considered as a federal republic and hence no other business is affected by considering itself in India. And for the purpose of business, the taxes and the prices of the items are controlled and handled by the government of India and considered under the central as well as state government (Skaar, 2020). These governments handle the production, supply, price and distribution of various products which leads to tax generation.

The withholding tax is the tax deducted at source, especially for the companies who are from outside the country and investing in other country. In this, the company name Pyramid is being engaged in investing in India for the purpose of expanding its business in various countries so that the profit generation would be maximized and hence operate in different parts of the world (Chow and Schoenbaum, 2020). But this investment in the country like India leads to various other provision related to tax. The company needs to pay corporate tax under the Act of tax named as Income tax act in India (UTYUZH, et. al., 2020). Each and every company is liable to pay tax under such act only. This means the investment and the income earned by the company in India is liable for the tax in India and none other income is liable for tax payment.

This investment is considered as FDI i.e. Foreign Direct Investment and hence it is under the government. The budget of the year 2018 is liable for an exemption of withholding tax such as royalties and fees for the services that are technical in nature to be paid off. The withholding tax includes dividends, interest, royalties and fees for technical services, branch remittance tax, foreign contractors tax, purchase of immovable property, equalization levy etc.

The tax benefit is reduced at the rate of 5% on the interest on external commercial borrowings and hence the foreign company is having a tax levy reduced 5%. This option is available to some or the other companies who are having a certificate in relation to this effect. This tax must be deposited before the return filing due date and if it is not yet submitted then the company is disallowed to the extent of 30% of their expenses payable to the resident (Skaar, 2020). And if this tax is being paid and deposited at the time mentioned i.e. the last date of filing the return then the expenses that are paid to the residents are allowed for the deduction.

For the purpose of withholding tax, the company i.e. Pyramid is under the Income tax act of the India is liable to acquire or furnish a PAN to the employee that is working in the organization from the payment being paid to them. If in case the PAN is not available, then the tax payable as withholding tax is at a higher rate (Bahoo, et. al., 2020). This rate is the rate higher than the applicable rate because of the unavailability of PAN. The below mentioned are the following criteria where the taxation benefits can be gained by the company Pyramid.

  • Dividends: The withholding tax on dividends is not levied on companies in India but the company must have to pay DDT at the rate of 15%. This DDT is Dividend Distribution tax i.e. levied on the dividend distributed to shareholders. This 15% includes 12% of surcharge and 3% of CESS. The amount of dividend includes the paid as well as the declared dividend also (KALAISELVI, 2020). And hence the Pyramid will have to pay Dividend distribution tax but not the withholding tax on dividends. This is helpful for the company in saving the taxation amount by eliminating withhold taxation and making the workings as ell as the earnings more enhanced.
  • Interest: Interest paid to the residents is in relation to 20% of the withholding tax on the interest. But it also has to pay the surcharge and cess in addition to the tax on interest. But if the conditions provided by the Income tax act in relation to the withholding tax on interest paid to non- resident are not followed up to certain conditions then the company must have to pay the withholding tax at the rate of 30% (Cherunilam, 2020). This rate is applicable for individuals but if this is a foreign company who is going to invest in India then the tax rate will be 40%. This means that the Pyramid need to pay 40% as withholding tax in interest.
  • Royalties: The withholding tax paid on royalties and on other technical services to a non- resident is for about 10% and it is always excluded from the surcharge and cess. If the treaty i.e. the government or the tax in charge does not reduce the amount of tax. But the effective rate of interest on the withholding tax is 10.3% in case of the income or profit generated would be less than or equal to 10 million in Indian Rupees (Anbarasan, 2020). The rate of interest of 10.506% in case when the income or profit generated is more than 10 million but less than 100 million in Indian rupees. And the rate of interest is 10.815% in case of the total income exceeds 100 million in Indian rupees. These are the rate for the royalties in terms of withholding tax (Skaar, 2020). Therefore, if the Pyramid invests the money in India so that to earn profit then the above requirements related to taxation would incur on the company.

Before the treaty was signed, it was commonly observed in the country’s taxation policy that majority of the income was treated as the royalty amount and therefore the taxation provisions in regards of this were imposed thus not treating it as the business income (). This was necessary to eliminate this so more and more business firms can enter the market with the better taxation policies and benefits. Therefore, Indian Taxation Authorities have focused on this point and enhanced their agreements and treaties with the countries.

  • Branch remittance tax: In case of the country like India, the tax in relation to branch remittance is not applied to any of the companies. Therefore no company is obliged to pay the amount and rather can have more earnings and lesser payments of tax (Anbarasan, 2020). This is another benefit that the foreign companies gain, so Pyramid would have to pay no tax in this regard rater just have to start their operations in the country.
  • Wage tax or social security contributions: In the country like India, no one is required to pay the tax in relation to wages i.e. the employer as well as the employee is not required to pay the wage tax but they have to contribute to social security (Chow and Schoenbaum, 2020). This tax paid in terms of social welfare is about 12% of the employer’s basic salary. This fund is to be contributed in the provident fund of the employee.

 

 

 

Transfer pricing in India for Australian companies

The line of transfer pricing regulations in India is similar to the international transfer pricing regulations and for this purpose the pricing documentations are to be prepared that needs to be filled in terms of taxation at or before the due date of filing the return i.e. on 30 November (KALAISELVI, 2020). Transfer pricing in easier terms can be regarded as the amount that the company charges within its own division and business operations, the Indian Taxation Authority has tried to eliminate the issues of transfer pricing tax within the division and making the enhanced earnings within the departments of the company Pyramid (Anbarasan, 2020).

The earlier or the existing provisions regarding the same where applicable for the period of 5 years namely the accounting year 2013- 2014 to Accounting year 2017- 2018 for certain sectors. This was revised for further period of the Accounting year 2017- 2018 to 2019- 2020 (Anbarasan, 2020.). For this purpose, the intra group services in relation to the value addition have also introduced.

For the taxation system, the benefits regarding the APA program has been introduced. This APA program is named as Advanced Pricing Agreement program. This was initiated and controlled and operated from 1 July 2012. This program is for the period of 5 years and hence is very effective for the purpose of taxation under the transfer pricing (Chow and Schoenbaum, 2020).

The amount of sale, purchase, lease or any other type of activity that happen between the organizations of one country to the other country of same establishment is known as transfer pricing, Therefore the Pyramid have a system of transfer pricing in Australia and in the India (UTYUZH, et. al., 2020).

In this the transfer pricing in relation to domestic provisions will apply to the company name Pyramid. This type of provision will only be attained to the company only when the total value of Specified Domestic Transactions will exceed the amount of 20 crores in Indian rupees during the year. The people or the organizations that have already claimed some exemptions in their tax are allowed to apply such provisions in their company and this will be beneficial for their organizations (Skaar, 2020). Therefore is the company Pyramid will allow themselves to exempt some amount of tax then they are liable for transfer pricing. And this will be a restriction on the same.

The range has been taken into consideration while aligning the domestic transfer pricing system to that of the international transfer pricing system. These are the practices that are to be taken into consideration while transfer pricing. Also these mandatory transactions need to be updated all time in order to achieve a growth in the organization. This is helpful in eliminating the internal taxation of the companies and reducing their tax obligations internally therefore enhancing the incomes.

The above provided adjustments are the primary adjustments made in the transfer pricing. But there are various secondary adjustments also that need to be taken into consideration while transfer pricing. For such various provisions were taken into consideration that were introduced and commenced in 2017 and also applicable in the primary transfer pricing system and is for the various subsequent years (KALAISELVI, 2020).

For this the scrutiny assessments in relation to transfer pricing is selected for the purpose of value based and therefore the Indian tax authorities have taken care of and for the same the risk based approach have been taken into consideration (Macneil, et. al., 2020). Transfer pricing has great risk associated with it and the higher authorities of the country has tried on focusing and eliminating these risks of transfer pricing. Taxation authorities of the country are constantly working in having more effective and efficient provisions of transfer pricing, this is the reason why it is beneficial for Pyramid to expand its operations in the Indian jurisdiction so that betterment would be updated with the continuous time period (KALAISELVI, 2020).

Also in response to the same, if it is considered as failure then there would be stringent penalty in regards to various provisions (Skaar, 2020). This is in response with Master file and CBCR documentation requirements.

 

 

 

Conclusion

Being an Advisor of the company Pyramid, the suggestion that I would give to them is that they should operate and expand their operations to the country India as this expansion would be overall beneficial to the company as no much taxation issues would be faced by the company in the country because of the DTAA benefits and the provisions. Taxation gains can be gained by the company on a large scale by expanding to the nation such as India. Republic of India is inviting the outside companies to make investment in the nation and enhancing their approach on the global level. India is a country where the companies are readily investing as the potential of the market it quite high as well as the taxation benefits and gains offered are also quite good. Pyramid is an Australian company that is constantly restructuring its operations to enhance and expand their business on the global scale and making constant growth in majority of the sectors it is operating in. 

 

 

 

 

 

 

 

 

 

 

 

 

References

  • Anbarasan, S., 2020. An Analysis of Growth and Development of Retail Industry in India. Studies in Indian Place Names40(71), pp.118-122.
  • Bahoo, S., Alon, I. and Paltrinieri, A., 2020. Corruption in international business: A review and research agenda. International Business Review29(4), p.101660.
  • Cacioppe, R., Forster, N. and Fox, M., 2020. A survey of manager’s perceptions of corporate ethics and social responsibility and their actions that may affect organisational success.
  • Cherunilam, F., 2020. International business. PHI Learning Pvt. Ltd..
  • Chow, D.C. and Schoenbaum, T.J., 2020. International business transactions: problems, cases, and materials. Wolters Kluwer Law & Business.
  • Cooper, M. and Nguyen, Q.T., 2020. Multinational enterprises and corporate tax planning: A review of literature and suggestions for a future research agenda. International Business Review, p.101692.
  • KALAISELVI, P., 2020. TAX PAYERS’PERCEPTION ON GOODS AND SERVICES TAX IN CHIDAMBARAM TOWN.
  • Macneil, J., Bray, M. and Spiess, L., 2020. Unions and collective bargaining in Australia in 2019. Journal of Industrial Relations62(3), pp.380-402.
  • Skaar, A.A., 2020. Permanent establishment: erosion of a tax treaty principle. Kluwer Law International BV.
  • UTYUZH, A.S., GLYZINA, M.P., PONOMAREV, E.E., Nikitochkina, Y.V., ZHADOBINA, N.N. and GRIGORIEVA, O.G., 2020. Influence of excise taxation on ecological policy of the state: Experience studies for education process. Journal of Talent Development and Excellence12(3s), pp.568-575.
  • Xu, E. and Lee, T., 2020. Supermarket magazines and foodscape mediation in Australia. Communication Research and Practice6(2), pp.111-124.

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