International Tax Panorama

The following article got published on Indian Journal of Tax Law [3 (2) IJTL (2017)]. The article aims to analyse the impact of implicit Corporate guarantee under the garb of Thin Capitalisation rule in India 

ABSTRACT

– Srishti Singh

The Budget of 2017 made a significant change by introducing Thin Capitalisation provision to align Transfer pricing (TP) provisions with international best practices in order to counter cross-border shifting of profit through excessive interest payments. Amongst the various issues arising out of newly proposed thin capitalisation rule under section 94B of Income Tax Act (ITA) 1961, the main focus of this article is towards the deeming rule on implicit guarantees. Under such rule it has been provided that the interest on third-party borrowings where a related party has provided an “implicit” guarantee to the lender would be deemed to be related party interest subject to the interest deduction restriction. With lack of clear guidance in the definition of implicit guarantee, it would be an onerous task for the taxpayers and tax authorities to determine existence of an implicit guarantee.

The main objective of this article is to outline the nature of corporate guarantee with special focus on implicit guarantee in Indian context. At first the article tries to capture the nature of corporate guarantee. Then the author tries to gauge the nature of implicit guarantee through references from OECD guidelines and international rulings. Then the author goes on to analyse the whole issues of implicit guarantee in India. The author concludes that the judicial approach and relevant Indian Transfer pricing regulations provide least guidance on implicit guarantee. Thus there is an urgent need to have robust, well conceptualised TP policies and comprehensive analysis towards intra-group guarantee arrangements to avoid any significant hardship for the taxpayers during interest deduction restrictions of implicit guarantee.