A Budget proposal requiring companies to pay taxes on overseas subsidiaries if the management of that subsidiary is effectively in India for even a short time has caused some anxiety in corporate India. In the event the proposal is not withdrawn, companies could end up paying taxes twice on the overseas business.
Among the firms likely to be impacted is ONGC Videsh (OVL), the overseas arm of state-run Oil and Natural Gas Corporation. OVL has around 30 subsidiaries across the world through which it conducts its oil and gas business in countries like Brazil, Sudan, Russia and Vietnam.
SP Garg, director of finance at OVL, said that the company’s subsidiaries collectively pay around R2,000 crore as corporate tax around the world. “We have about one year to make the necessary structural changes in its subsidiaries to enable them to avoid paying double taxes,” Garg told FE.
R Shankar Raman, CFO, Larsen & Toubro, said that most of the company’s foreign subsidiaries were operational firms where the decision-making happens on the ground along with local partners and domain experts. “Therefore, there is a good chance that many of these meet the effective management criteria, enabling them to avoid double taxation,” Shankar Raman said. L&T has subsidiaries in West Asia, the Pacific Rim and Bangladesh, among other areas. He added that it is important to first understand the provisions before quantifying any additional tax burden.
At oil marketing company Bharat Petroleum, which has four overseas subsidiaries, P Balasubramanian, director (finance), said the matter would need to be looked into while at Bajaj Auto, finance director Kevin D’Sa said the proposal would need to be examined. Bajaj Auto has one overseas subsidiary in the Netherlands.
Seshagiri Rao, joint managing director and CFO, JSW Steel, said the provision has been imported from the Direct Taxes Code, which the government has otherwise scrapped. Rao pointed out that this has significant implications since Indian companies will have to change the way they operate.
“Many executives associated with the Indian parent company function as directors of its foreign subsidiaries. Now the power will have to be entirely delegated to an independent board abroad, only associated with the foreign entity. This may increase compliance cost for Indian companies,” he said.
The Budget has proposed the amendment of Section 6 of the Income Tax Act which alters the conditions under which a company is resident in India by including the concept of ‘place of effective management’ or POEM. Instead of the clause “during that year, the control and management of its affairs is situated wholly in India”, the new clause will read “its place of effective management, at any time in that year, is in India”.
As Rahul Garg, national direct tax leader at PwC, points out, “Even if for a short time the effective control is in India, that would make the company tax resident.” Since the government is attempting to align the provisions of the I-T Act with the double taxation avoidance agreements (DTAAs), it is possible some companies with which India has a DTAA may be spared. However, as Garg says, some jurisdictions such as the US do not provide for a resolution of tax residence except through a competent authority process.
If an Indian company has a subsidiary in another country where it has certain operations and pays taxes to the local authority there, it will have to pay tax back home in India if key decisions with respect to the foreign business are determined to have been taken in India, or if key management personnel like a director on the board of the overseas firm resides in India.
In 2013-14, OVL posted revenues of Rs 22,128 crore, with a net profit of Rs 4,432 crore and a corporate tax liability of Rs 2,557 crore. OVL has stake in 33 oil and gas projects in 16 countries with 13 producing assets.
Rao also pointed out that many overseas subsidiaries are created for the purpose of facilitating business activities like fund-raising and did not have any operations of their own, and these may be especially impacted as a consequence of the proposed amendment law.
Vikas Vasal, partner, tax, at KPMG in India, said that he expects the government to come out with clarifications on the underlying criterion for determination of the place of effective management. For instance, in the case of individuals the residential status is determined on the basis of period of stay in the country. Similarly, in the case of companies, guiding principles should be laid out that address aspects like where senior management personnel including the board of directors need to make key decisions.
The government believes the current conditions are practically inapplicable and contends they can be easily subverted by simply holding a board meeting outside India, leading to the creation of shell companies, which are incorporated outside but controlled from India.