The US Court of Appeals for the Fifth Circuit in container Corporation v. Commissioner of Internal Revenue decision dated 2.5.2011 held that guarantee fees paid to a foreign parent corporation is not subject to US withholding tax for the following reasons:
1) that such fees were compensation for the parent company’s promise to pay only in the event of any default by the subsidiary without any present risks or exposure at the time of signing the guarantee;
2) that the service was sourced or performed outside US.
There is every good reason not to withhold tax on the same premise in the context of Indian legislation and DTAAs.
On the other hand in the context of TP procedure the Economic Times dated 31st October –Mumbai edition quote Director-General (Transfer Pricing) commenting that the Government has identified corporate guarantee given to associated enterprises for acquiring companies abroad for TP assessment. So far it is considered as a loophole.
Thus even though it may get out of tax withholding yet it is likely to get into the ambit of TP assessment. It may thus be wise to build in a charge for issue of corporate guarantee close to the bank rate for issue of bank guarantee.
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