Bank _ Letter of Credit, Bank Guarantees
This is a common set of questions from a tax department, particularly when dealing with cross-border transactions and new entities. They are trying to understand the nature of the charges and payments for tax purposes (e.g., whether it's a fee, interest, or something else) and how it flows through the entities to ensure proper tax treatment in India. General Context: Your new India entity needs a credit facility (bank line) with Citibank India to issue Bank Guarantees (BGs) t o its customers. BGs are non-fund-based facilities, meaning the bank doesn't directly lend money but provides a guarantee of payment if your India entity defaults on its obligation to the customer. This is crucial for local regulations and customer requirements in India. Tax Department Questions & Explanations: 1. How is the bank compensated for providing the bank guarantee/standby letter of credit? Is it based on a fee, or based on the payment of interest? I can see in the “Fee” section that there ...