Government prepares to adopt a new regime proposed by the OECD and G20 nations
Multinationals in India will soon have to forgo to a great extent the flexibility in managing their tax outgo in the country and have to report their global operations in elaborate detail to the tax authorities here. This is because New Delhi is set to adopt a new regime to curb tax evasion as proposed by the OECD and G20 nations.
The proposed changes would deny businesses the tax advantage from certain hybrid financial instruments such as compulsorily convertible debentures (CCD) as well as prevent them from fragmenting the business chain to escape being considered a taxable business presence (called permanent establishment). CCD is generally used to bring in debt into India because the interest outgo on it is a deductible expense here, but is treated as dividend in certain countries, giving it the status of a tax planning instrument.
Also, the practice of lowering the tax outgo here by paying royalty — a deductible expense while calculating taxable income — to the owner of intellectual property rights incorporated in a low-tax jurisdiction would be restricted. The idea is to ensure that legal ownership of intangibles like patents held by a foreign entity does not entitle it with the full right to the income arising from exploiting it here. Royalty payment is a common way many Indian units of MNCs send back part of profits to the parent at a concessional rate of withholding tax specified in tax treaties.
Finance ministry sources said the multilateral agreement on preventing the corporate practice of shifting profits away from the country of economic activity to a low-tax jurisdiction would be ready by December 2017 and that as part of G20 nations, India is committed to implementing its provisions. India is an active partner in the global anti-tax evasion regime being prepared by OECD and G20 nations called the “base erosion and profit shifting” (BEPS) project.
Officials, however, added that considering the legacy of tax disputes India had, especially relating to cross-border transactions, field officers would be advised to be judicious in invoking the potent anti-tax evasion tools of the new regime. “Tax officers have to groom themselves to using these provisions with utmost care considering that global understanding of these issues is evolving,” said an official.
Tax experts said that field officers need to implement the BEPS provisions in the spirit the principles are laid down. “For example, the country by country reporting of operations mandated by the BEPS project is to be used only for accurate selection of transactions for audit. It is not meant for making any ad hoc income adjustments,” said Neeru Ahuja, partner, Deloitte in India.
The BEPS project also proposes controlled foreign corporation (CFC) rules to tax the un-repatriated profits kept abroad by MNCs. New Delhi too considered this option earlier as part of a Direct Taxes Code, but subsequently introduced a set of place of effective management (POEM) rules that addresses the requirement for CFC rules. POEM brings the worldwide income of India-managed overseas companies to tax in India.
“There are a lot of provisions in the BEPS project that require simultaneous implementation by all countries for it to be a success,” said Amit Maheshwari, partner, Ashok Maheshwary & Associates.