International Transactions and Transfer Pricing

Introduction

Cryptocurrency, by its very nature, transcends national boundaries. A transaction can involve parties in multiple countries, be executed through exchanges in different jurisdictions, and settle on a global decentralized network. This creates significant complexity for tax authorities and taxpayers alike in determining which country has the right to tax and what compliance obligations arise.

For Indian taxpayers, international crypto transactions raise questions about residential status, source rules, Double Taxation Avoidance Agreements (DTAAs), transfer pricing for related party transactions, Foreign Exchange Management Act (FEMA) compliance, and foreign asset reporting obligations. This part examines each of these areas comprehensively.

The intersection of cryptocurrency with international tax law remains an evolving area with significant uncertainty. While the Finance Act 2022 addressed domestic VDA taxation, many cross-border aspects remain governed by general international tax principles that were not designed with digital assets in mind. Practitioners must exercise judgment in applying these principles while advocating for clearer regulatory guidance.

Residential Status and Global Income

Importance of Residential Status

Under Indian tax law, the scope of taxable income depends on the taxpayer's residential status:

Determining Residential Status

Under Section 6 of the Income Tax Act, an individual is a resident if:

• Present in India for 182 days or more during the financial year; OR
• Present in India for 60 days or more during the FY AND 365 days or more in preceding 4 years

Additional rules apply for Indian citizens, persons of Indian origin, and those with substantial Indian income.

Implications for Crypto Investors

Source Rules for VDA Income

What Determines "Source" of Crypto Income?

For non-residents and RNORs, determining the source of income is crucial. Unfortunately, there is no specific guidance on source rules for VDA income. General principles must be applied:

Potential Source Indicators:

• Location of Exchange: If transaction occurs on Indian exchange, source may be India
• Location of Counter-Party: If buyer/seller is in India
• Place of Contract: Where the sale contract is concluded
• Location of Assets: For crypto, this is conceptually challenging as assets exist on global blockchain
• Payment Receipt: Where consideration is received

The Blockchain Location Problem

Traditional source rules assume assets have a physical location. Cryptocurrency exists simultaneously on nodes distributed globally. There is no single "location" of a Bitcoin. This creates fundamental challenges in applying source rules designed for physical assets.

Practical Source Determination

Foreign Exchange Transactions

Using Foreign Crypto Exchanges

Many Indian residents use foreign exchanges like Binance, Coinbase, Kraken due to better liquidity, more token options, and sometimes lower fees. The tax implications for residents are:

Income Tax

• Gains are taxable in India regardless of exchange location
• Section 115BBH applies - 30% tax on gains
• TDS under 194S may not be deducted by foreign exchange
• Taxpayer responsible for self-assessment and advance tax

FEMA Considerations

• Transfer of funds to foreign exchange may require FEMA compliance
• LRS (Liberalized Remittance Scheme) limits may apply
• Crypto itself may face FEMA restrictions (discussed below)

Foreign Asset Reporting

• Crypto held on foreign exchange is a foreign asset
• Must be reported in Schedule FA of ITR
• Non-disclosure attracts Black Money Act penalties

Currency Conversion Issues

Transactions on foreign exchanges often occur in USD or other foreign currencies. For Indian tax purposes:

• Convert transaction values to INR at exchange rate on transaction date
• RBI reference rate or exchange TT buying/selling rate may be used
• Consistent methodology should be applied throughout the year
• Document the exchange rates used with source references

Double Taxation Avoidance Agreements

Application of DTAAs to VDA

India has DTAAs with over 90 countries to prevent double taxation. The applicability of DTAAs to cryptocurrency income depends on how such income is characterized under the treaty.

Potential DTAA Classifications

Treaty Override and Section 115BBH

Section 90(2) of the Income Tax Act provides that treaty provisions prevail if more beneficial to the taxpayer. However, the interaction between DTAAs and the specific VDA regime under Section 115BBH is unclear. Questions arise:

• Can a non-resident claim treaty protection against Indian VDA tax?
• Does the DTAA capital gains article cover VDA?
• What if DTAA provides lower rate than 30%?

Transfer Pricing for Crypto Transactions

When Does Transfer Pricing Apply?

Transfer pricing rules under Sections 92-92F apply to "international transactions" between "associated enterprises." In the crypto context, this could apply to:

• Group companies buying/selling crypto from each other
• Cross-border crypto payments for services between related parties
• Crypto used as consideration in international related-party transactions
• Crypto treasury management across group entities

Arm's Length Principle

Transfer pricing requires that transactions between associated enterprises be at "arm's length price" - i.e., the price that would have been charged between unrelated parties. For crypto:

Challenges in Determining ALP:

• Price Volatility: Crypto prices can vary significantly within minutes
• Exchange Variations: Different exchanges quote different prices simultaneously
• Timing Issues: Which moment's price constitutes arm's length?
• Illiquid Tokens: Some tokens have no reliable market price

Acceptable Methods

The following transfer pricing methods may be applicable:

Documentation Requirements

If transfer pricing applies, documentation requirements include:

• Master File (for groups with international operations)
• Local File (entity-level documentation)
• Country-by-Country Report (if applicable)
• Details of transactions, methodologies, and arm's length analysis

FEMA Compliance

Is Crypto Subject to FEMA?

The Foreign Exchange Management Act, 1999 (FEMA) regulates foreign exchange transactions by Indian residents. The applicability of FEMA to cryptocurrency is a contentious issue.

RBI Circulars and Current Position

The RBI issued a circular in April 2018 directing banks to cease providing services to crypto businesses. This was struck down by the Supreme Court in Internet and Mobile Association of India v. RBI (2020). However, the regulatory position on FEMA applicability remains unclear.

Key FEMA Considerations:

• Is cryptocurrency "foreign exchange" under Section 2(n) FEMA? Likely no, as it is not currency of any country
• Is holding crypto abroad a "foreign security"? Unclear
• Does remitting INR to buy crypto abroad constitute a capital account transaction? Possibly
• Are there LRS restrictions on crypto purchases? Not explicitly addressed

Practical Position

In the absence of clear regulation:

• Transferring INR abroad to purchase crypto may face bank resistance
• Some banks may cite informal RBI guidance to refuse such transfers
• Direct crypto purchases using UPI/card on foreign exchanges may succeed
• Holding crypto on foreign platforms is common despite regulatory uncertainty

Liberalized Remittance Scheme (LRS)

LRS Overview

LRS permits resident individuals to remit up to USD 250,000 per financial year for specified purposes including investments abroad. The question is whether LRS can be used for cryptocurrency investments.

Permitted Purposes Under LRS

• Opening foreign currency account abroad
• Investment in equity and debt abroad
• Gift/donation to close relatives abroad
• Education and medical expenses
• Travel

Is Crypto "Investment" Under LRS?

LRS permits investment in "equity and debt instruments." Cryptocurrency is neither equity nor debt. Some argue that "investment" should be interpreted broadly, but banks typically refuse LRS remittances for stated purpose of crypto purchase.

Form 15CB/15CA Requirements

Large outward remittances require Form 15CB (CA certificate) and Form 15CA (declaration). If remitting for crypto purchase, disclosure requirements and tax implications must be considered.

Tax Collected at Source (TCS)

Section 206C(1G) requires TCS at 5% on remittances under LRS exceeding Rs. 7 lakhs (20% for non-filers). If crypto purchases are routed through LRS, TCS implications arise.

Foreign Asset Reporting Requirements

Schedule FA in ITR

Resident and ordinarily resident taxpayers must disclose foreign assets in Schedule FA of their Income Tax Return. Cryptocurrency held on foreign exchanges or in foreign wallets qualifies as foreign asset.

Information Required

Challenges in Reporting

• Valuation: Determining INR value of crypto holdings
• Multiple Assets: Reporting numerous tokens with varying values
• Exchange Classification: Which country to attribute for global exchanges?
• DeFi Holdings: Assets in smart contracts across chains

Black Money Act Implications

Undisclosed Foreign Income and Assets

The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 applies to undisclosed foreign income and assets. Cryptocurrency held abroad could fall within its scope.

Penalties for Non-Disclosure

Voluntary Disclosure

Taxpayers who have failed to disclose foreign crypto holdings in past should consider voluntary disclosure through updated returns (where permitted) or approaching tax authorities. Continued non-disclosure increases risk exposure as international information exchange mechanisms expand.

Practical Scenarios and Analysis

Key Takeaways