Foreign companies may soon be spared of getting taxed twice on their operations in India. The revenue department is planning negotiations with its counterparts in major trading partner countries so that firms could be given credit in their home country for tax paid here.
Currently, Indian tax authorities at times ask these companies to pay tax on an income higher than what they have shown initially. This is on the basis of the extra incomes which the authorities think have been made by these MNCs from their Indian operations. The extra income is also called attributable income. Since India’s Double Taxation Avoidance Agreements (DTAAs) with other countries don’t offset the tax on attributable income paid by the MNCs in India, these companies have no option but to bear the burden.
The move would help multinational corporations operating out of advanced economies such as the UK, Germany, Netherlands and Australia. These entities would be spared of the problem of double taxation on income that is attributable to them in India for revenues generated in other markets.
Many countries tax their resident based on their global income while Indian tax authorities deduct tax from foreign companies on their profit they make here. To avoid burden of double taxation, the DTAAs that India has signed with many countries provide for credit to these companies in their country for tax paid in India.
However, the bone of contention between Indian tax authorities and the foreign companies are ?attributable income? that is supposedly generated from Indian operations of MNCs but included in global income. The revenue department argues that many kinds of incomes generated by these companies globally are based on their operations in India and so,they should be taxed here.
Now, India would hold talks with tax authorities of such countries under mutual agreement procedure (MAP) route so that MNCs could be freed from the burden of double taxation. Under it, the revenue department of both the countries would meet at regular intervals in an year and take up matters to decide the appropriate authority to tax such MNCs’ attributable incomes.
The MAP route is there in the DTAAs that India has signed with almost all countries but the procedure has not been properly laid, except in the case of the US, where both the countries hold regular interactions and take up tax matters of MNCs. Both the countries have appointed designated authorities to deal with such cases at regular intervals. ?We plan to appoint designated authorities for other countries too so that litigation could be avoided and there is no burden of double taxation for MNCs of foreign countries operating in India,? the official added.
The issue of attributable income of MNCs was also highlighted in recently held international tax conference in Paris, where India was represented by CBDT chairman MC Joshi, among others.
Profits from branches of foreign companies are taxed at the rate of 42%. (As per the Direct Taxes Code introduced in Parliament, branches are proposed to be taxed at the normal rate of 30%, in addition to 15% branch profit tax.).
According to Deloitte?s Vipul Jhaveri, the DTAAs have provisions for settling tax dispute under MAP route but the procedure is not laid properly, ?India should designate competent authority for major trading partner countries so that it would help in resolving the tax dispute between revenue authorities and MNCs. The MAP route is helpful in dealing with cross border tax issues on fast track basis as the cases are addressed on mutual agreement basis,? he said.
India has signed DTAAs with around 65 countries and has also renegotiated treaties with 40 nations for sharing banking and other tax-related information.