Rules soon for MNCs on foreign operations

By: | Published: February 24, 2015 1:32 AM

The government is set to make changes in the income tax rules to seek overseas operational details of multinational...

The government is set to make changes in the income tax rules to seek overseas operational details of multinational businesses that have a turnover of over R5,000 crore in India in order to decide which companies should be audited for income suppression, reports Gireesh Chandra Prasad in New Delhi. The I-T department had last year dropped the practice of auditing every MNC in India that had a cross-border transaction of R15 crore with a foreign associate and adopted a more selective approach in auditing MNCs.

The department’s move to access details of MNCs’ overseas operations is in line with the global effort of G20 and OECD nations for greater transparency in the worldwide operations of MNCs to prevent artificial recognition of income by subsidiaries in low tax countries which have no nexus with the economic activity there.

India is committed to signing a multilateral agreement with over 40 nations later this year on a new tax framework for multinational companies. OECD has set a time frame for implementing the new framework regarding intra-group transactions of MNCs (transfer pricing) from a financial year starting on or after January 1, 2016.

The Income Tax department proposes to bring its new rules and amended formats for reporting global operations of MNCs, in a few weeks. These do not require any change in the Income Tax Act.

The details reported by MNCs would be used for analysing the risk of tax evasion and to decide whether a transfer pricing audit was required or not.

An analysis of details such as employee count and assets including intellectual property rights would show if there is a prima facie mismatch between the economic activity and the reported turnover or revenue of an enterprise in a particular country, explained Neeru Ahuja, Partner, Deloitte. Ahuja said if the reported details are used solely for risk analysis by the tax authorities, it could help in reducing the number of transfer pricing audits.

Sources in the tax department said they are fine tuning their selection of cases for audit based on risk of revenue leakage. The department has instructed field officers to ensure that principles of natural justice are followed while making any adjustments to the reported taxable income of companies.

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