THE second half of the “Budgets Around the World” workshop focused on international taxation in India and budgets recently presented in US, China, Hong Kong and Singapore, that contained a wealth of information and a glimpse into the economic vision and direction of these countries.

Mr D.P. Sengupta, former CCIT, spoke on the budgetary changes in international taxation with India too joining the global crusade against black money. Budget 2011 in India promises a five pronged approach to curb accumulation of black money abroad that includes changes in the legislative framework and setting up institutions for dealing with illicit funds, besides creation of a black list of countries that do not effectively exchange information with India and a different tax treatment of transactions with such countries.

Following the introduction of a new section 94A in the tax laws, all transactions with countries which could potentially be put on a black list for lack of ‘effective' exchange of information would be subjected to transfer pricing regulations. A taxpayer having transactions with entities in such a list would not be allowed any deduction on expenditure including depreciation unless backed by adequate documentation; receipts from entities in such black listed nations would be deemed to be income unless the taxpayer satisfactorily explains the source in the hands of the beneficial owner thereof. Moreover, payments made to sources in such blacklisted territories would be subject to tax deduction at source of at least 30 per cent. These measures indicate India's seriousness about tapping all sources for illicit funds.

Mr Sengupta also provided information on the impact of budgetary changes in transfer pricing, investment by non-residents in infrastructure debt funds and foreign dividends. Following Budget 2011, dividends received from the foreign subsidiaries of Indian companies would be taxed at a concessional rate of 15 per cent plus surcharge if foreign dividend were repatriated. (Section 115BBD).

Following Mr Sengupta was Mr Laurence ‘Larry' Lipsher, an American international taxation expert, practicing in nine Asian countries and settled in China. Larry, as he preferred to be addressed, presented a critique on major budgets. The Singapore Budget presented last month had an overall budgetary deficit with funds not saved for a rainy day. However, corporate were promised a bonanza.

Singapore Budget Bonanza For Corporates

For fiscal year 2011, corporates in Singapore would be able to deduct 400 per cent(!) in any of the six broad categories of investment, including jobs creation and jobs training. Companies would receive a 20 per cent corporation tax rebate up to SGD 10,000 while smaller companies would receive a cash grant amounting to five per cent of the company's revenues (not profit) up to a maximum of SGD 5000.

For global Singaporean businesses earning a larger share of their income outside Singapore, foreign tax credit pooling was introduced to encourage remittance of foreign income into Singapore. New businesses were allowed to claim tax deductions on pre-commencement expenses incurred in the year before they earned their first trade receipts – promising immediate write offs instead of amortization!

No Deficit in Hong Kong Budget

Larry also spoke at length about individual rates of tax on income and rebates provided in the budget before moving on to the Hong Kong budget presented in February 2011. There was money pouring into Hong Kong from China evidenced in the HKD 80 billion surplus in the budget due to ‘unanticipated' stamp tax revenues from property tax sales.

The budget also provided an electricity subsidy and property tax payment exemption for homeowners besides a higher exemption ceiling for taxpayers with dependent parents and a higher child allowance. Hong Kong Finance Secretary, John Tsang also proposed a direct cash hand out of HKD 6,000 to all Hong Kong permanent residents in August 2011. Mr Larry pointed out the lack of imagination in the Hong Kong budget, which had a big surplus to work with.

China's Development Budget

Speaking next on China's budget and 12 th Five Year Plan, Larry took his rapt audience through the increase in the prices of essential everyday food items in China, leading to the conclusion that inflation in China was higher than that stated in official statistics. He spoke on the preferential tax regime for outsourcing, which would bring about advancement in technology, education and training. China had also created new tax incentives zones for development. For instance, the new airport being built by Chongqing would have four runways, to start! In the Chengdu-Chongqing corridor – a new, super-highway was being built, due east, to the coast, across from Hainan Island. At the coast, a new, deep seawater port was being dredged to accommodate ocean transportation, primarily for development of shipping, to and from Africa. A regional pilot zone between China, Japan and South Korea was also under consideration. However, in spite of development with vision, bold technology and economic ventures, China did not have agricultural sufficiency while India had the expertise and knowhow that China lacked. Larry underlined the loads of trade opportunities with China available for Indian entrepreneurs. He emphasised that for world peace, it was essential to develop trust with neighbours and have regional trade. Emphasising on all that China was doing for its people, Larry said that it was the biggest misnomer in the world to call China communist. “It has a more free market than you can imagine.” Larry stated to an audience gaping at the information deluge. “After all, who cares what is the colour of the cat, that catches the mice?” Being a one party state, China was marching ahead and he urged India to ignore the political rhetoric and copy what worked.

No Privacy in US Budget

Coming to the American Budget and recent events, Larry stated that privacy and secrecy were a thing of the past. He spoke about the right to privacy, tax evasion and cross-broder private banking when Americans were encouraged to open offshore accounts without declaring the funds to the IRS.

He spoke about IRS regulations and the new law, FATCA, signed by the President on March 18, 2011 that comes down heavily on tax evasion, even targeting genuine taxpayers with implications for American citizens and even Indians settled in US as green card holders. The new law imposes a 30 per cent withholding tax on income of foreign banks or investment houses that fail to identify US accounts, their owners, their social security numbers and their assets to the IRS. A similar 30 per cent tax is also imposed on income of foreign corporations that fail to identify any US individual with at least 10 percent ownership in the corporation with effect from January 2013. A levy of 40 per cent is imposed on the amount of any understatement attributed to undisclosed foreign assets. Already, many banks have started to close down accounts of US citizens solely on the basis of their overseas addresses.

The law also makes it mandatory for shareholders in passive foreign investment companies to file tax returns as well financial firms to file withholding tax returns electronically. For inherited or gifted bank accounts with minimal account activity – or for a non-US resident who was unaware of being a US citizen or Green Card holder responsible for reporting, a penalty of 5 per cent of the highest aggregate annual value of assets between 2003-2010 would be imposed.

It is a draconian law that invited a critique from the European Banking Federation on the complete lack of preliminary guidance. Moreover, it is estimated that this legislation can probably cost the US economy more than the US $900 million that it is expected to earn as annual additional revenue.

A new IRS regulation makes it mandatory for US banks to report interest paid to all non-resident aliens. This accumulated information is meant to be turned over to foreign governments.

The US legislation received criticism from Mr Larry who however clearly advised everyone to follow it as it was the law of the land.

A vote of thanks was proposed by Mr Sengupta.