The Securities and Exchange Commission has started an inquiry into about two dozen financial companies to determine whether they followed accounting practices similar to those recently disclosed in an investigation of Lehman Brothers.
Repurchase agreements, which are a common way that investment banks provide funds for trading activities. The commission wants to know whether other Wall Street players used tactics like those that Lehman used to mask their debt levels from investors.
This inquiry is part of its duties to review the financial filings of public companies and any irregularities will be sent to its enforcement wing to eventually bring charges on such errant companies.
As per the news item appearing in New York Times, “Since Lehman was accused of using a transaction known as Repo 105 in 2008 to hide about $50 billion in debt, analysts have said there should be a widespread inquiry of accounting on wall Street before the financial crisis.
The commission is focusing on all sorts of repurchase agreements, not just those Lehman used. The commission asked the companies if they had classified the transactions, which are often considered loans, as sales. The commission also asked whether those transactions affected data provided to investors, analysts, regulators or ratings agencies.”
See the full report here: http://www.nytimes.com/2010/03/30/business/30sec.html
Income of foreign institutional investors (FIIs) from derivatives trading will not be liable to tax in India, the Authority for Advance Rulings has said, clearing the air on taxability of the income of foreign investors trading in Indian securities.
The ruling will help FIIs undertaking similar transactions subject to the provisions of the tax treaties with their respective countries, say tax experts. The AAR’s ruling comes in response to a plea by Royal Bank of Canada, registered with market regulator Securities and Exchange Board of India as a FII, seeking clarity on whether profit or loss from trading in securities, including derivatives, will be treated as business income and be liable to tax in respect of India-Canada Double Taxation Avoidance Agreement.
“Its been a long pending debate between tax authorities and tax payers, especially foreign investors whether the income arising in respect of securities derivative transactions is in the nature of business income or capital gains…lots of cases have been filed on these issues and the current judgement clarifies, based on the facts of Royal Bank of Canada, that in the absence of a permanent establishment the income arising from such transaction will not be subject to tax,” said Vikas Vasal, partner, KPMG.
The revenue department’s contention that the income from such activities was capital gains and hence liable to tax in India was rejected by the Authority. The authority said the profit and loss was earned by the applicant out of trading activity.
Also, the Royal Bank of Canada does not have a permanent establishment or fixed place of business in India and as per the provisions of the India-Canada tax treaty its income could not be taxed here.
It may be pointed that most FIIs in India invest via Mauritius route to enjoy the capital gains tax exemption available under Indo-Mauritius tax treaty. In such a case profits and loss from such trading are treated as capital gains or loss. However, when an entity comes from any other country the provisions of the tax treaty with that country comes into play and investors usually treat income from such activity as business income which does not have to face tax if there is no PE.
Therefore facts of each case need to be examined in detail in order to determine whether the activity per se is to be treated as a business transaction or an investment transaction. In case its is determined that these are in nature of business income the next issue to be examined is whether the foreign investor has a business connection or a permanent establishment in India for taxability of the same. If it is established that there is now PE in India then generally the business income arising there from would not be subject to tax subject to provision of relevant tax treaty. If it the PE exists then profit attributed to such PE only will be subject to tax in India.
The AAR is a quasi-judicial body, set up to give opinion to guide companies on their potential tax liabilities. While rulings by the AAR are case-specific, they have a persuasive impact on tax assessment in cases of other firms under similar circumstances.
Source: Economic Times
