MultinationalS which have liaison offices in India may have to start paying taxes soon. The government feels that many of these companies generate income in the country but have not opened branches, to avoid paying taxes.
According to official sources, the Income Tax department has already sought details of operations of many MNCs with liaison offices in India. Lloyds of UK, Bender of Germany, BBLO of Spain, Doosan of South Korea, Magna of Canada and CKD of Japan are some of the leading MNCs which operate liaison offices in the country.
Foreign entities are allowed to open liaison offices in India after approval from the Reserve Bank of India. They are not subjected to any tax on the condition that no business activity is carried out. On the other hand, profits from branches of foreign companies are taxed at the rate of 42%. (As per the Direct Taxes Code, branches are proposed to be taxed at the normal rate of 30%, in addition to 15% branch profit tax.)
A finance ministry official told FE that rules to open liaison offices will be tightened in the Direct Taxes Code (DTC) which is now being vetted by the Parliament?s standing committee on finance. ?There will be a provision in the Bill to not only examine records of liaison offices but also check other modes of operations of MNCs which result in tax evasion. This could be done by categorising all modes of income-generating operations as deemed branch operations and taxed accordingly,? the official said.
It is reckoned that many of these liaison offices earn income for their parent companies by marketing or selling products of their parent firms, which is taxable under India’s I-T rules. Besides, incentives and bonus of the employees of the liaison offices are based on their global sales.
The I-T department feels that the liaison route is widely misused by foreign companies to avoid taxes while making profits. The department now wants to treat such operations as branches and make them pay the applicable level of tax.
?In the survey by the department’s international wing, we found that many MNCs were earning income under the guise of liaison offices. We plan to tax these entities and have sought details of their Indian operations,? a finance ministry official told FE.
PricewaterhouseCoopers tax partner Rahul Garg said: ?Tightening provisions for liaison offices and bringing it under the DTC will increase the compliance burden. Unless the tax department is careful in picking up such issues, it could put strain on the limited resources of the tax department.?
Deloitte tax partner Vipul Jhaveri said that many banks and financial institutions have liaison offices in India. ?There have been instances where firms have exceeded the scope of liaison offices and so, the income tax department is watching it more closely,? he said.
Union Budget 2011-12 proposed to seek regular information from non-resident companies regarding the activities of their liaison offices in India. The Finance Act has mandated these offices to file annual information within 60 days from the end of the financial year.
