Tax relief likely for India units of global IT majors

Written by Kirtika Suneja | Gireesh Chandra Prasad | Gireesh Chandra Prasad | New Delhi | Updated: Oct 1 2012, 05:14am hrs
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Global information technology majors may get substantial tax relief in India as the government is set to adopt a new norm accepting that the profitability of their Indian units is much less than what is currently attributed.

The finance ministry is planning to scale down its estimate of profitability for captive units of multinational IT companies like Microsoft, Accenture, Cognizant and Yahoo! from roughly 30-35% now for taxation purposes to about 15-18% in a new safe harbour norm. This means a corresponding reduction in the income tax liability of these captive units in India.

The move is aimed at encouraging outsourcing of IT work by multinationals to their captive units in India. The higher profit margin estimate currently used enables the tax authorities to make upward adjustments in the value of the service rendered by the captive unit to its overseas parent, leading to a higher tax outgo for the Indian unit. This area of taxation dealing with trade between different arms of MNCs with an India presence (called transfer pricing) accounts for most of the litigation between businesses and the tax department.

A final view will be taken after seeking comments from stakeholders on the Rangachari panels recommendations on safe-harbour norms and the approach to taxation for the IT sector, sources privy to the development said. The panels report is yet to be made public.

Under the safe harbour mechanism, the tax authorities accept the quoted value of transactions between local firms and their related parties abroad without any scrutiny. Under the norms, if the declared value of a service is not below the mark-up prescribed under the cost-plus method, it won't be questioned by the tax authorities. If it is less than the stipulated safe harbour profit margin, then the tax authorities would go for an audit.

Tax officials and the industry differ in their estimates of profitability in the sector. The authorities tend to allege a higher profit margin on companies by making upward adjustments in the value of the services given by the Indian captive unit to its foreign parent, apparently to guard against profits taxable in India being shifted to another country. The industry says the economic slowdown and competition from other emerging IT hubs have depressed their profit margins way below the government's present estimate.

We have suggested to the committee a safe-harbour mark-up of 10-14% over costs for captive units, said industry body Nasscom's president Som Mittal. The cost-plus method is one of the five ways recommended by OECD to calculate the arm's length price of transactions between different units of multinational companies for tax purposes.

Transfer pricing adjustments in India lead to double taxation of the global IT firm outsourcing business to Indian subsidiaries. Tax authorities in the country where the MNC parent is located often allow deduction of business expenditure on the outsourced work only at the value of the transaction claimed by the Indian captive unit, not at the value upwardly adjusted by the Indian tax authority, explained SP Singh, senior director, Deloitte Haskins & Sells. The amount adjusted by the Indian tax department gets taxed twice.

India recently offered global companies the option of getting into bilateral and multilateral advance pricing agreements with the tax authorities in India and in the other jurisdictions where they do business so that tax authorities could mutually agree on the arm's length price of a transaction and prevent double taxation.

I-t sops for it

* Finmin planning to scale down estimate of profitability for captive units of multinational IT companies like Microsoft, Accenture, Cognizant and Yahoo!

* Reduction in estimate of profitability from 30-35% to about 15-18% to lessen income tax liability in India

* Move aimed at encouraging outsourcing of IT work by multinationals to their captive units in the country