MNC Esops to Indian staff face tax scrutiny : 31-01-2020

Employee stock options (Esops) that multinationals such as Microsoft, HP and Oracle grant their employees in India have come under the tax department’s lens, said people with knowledge of the matter. It has sent notices questioning the valuation of such Esops and how parent companies cross charge the cost of Esops with their Indian arms, they said.

The department’s stand could lead to companies having to pay more tax, experts said. Microsoft refused to comment, while HP and Oracle did not respond to ET’s queries.

Many multinationals give Esops to their Indian employees and then cross charge the cost to their Indian arm. The department is questioning the valuation of Esops for the purposes of domestic and international taxation, said the persons cited above. Cross charges involve sharing of expenses between the offices of a company. Given that one of the parties is located overseas, such transactions have to be at arm’s length.

“Substantiate how the Esop expenditure cross charged by the holding company is (an) expediency for the assessee company (the Indian arm),” said one such notice that ET has seen.

When a multinational gives Esops to its Indian employees, the Indian arm is cross charged the cost. The Indian arm then has to reimburse the cost to the parent.


The Indian arm can either record the exact cost at which it was offered or add a markup. For instance, an Indian employee might get an Esop for 10 cents and the Indian arm will be charged $1, which is then remitted to the parent.

Other companies might charge the same amount–10 cents. The price that’s charged could impact transfer pricing adjustments, experts said.

The tax department is questioning the basis of Esop valuation.

“Overseas parent first raises a debt note and the India entity then raises cost plus markup. This is quite a circular cost and the question is should the markup be recovered on this,” said a person with direct knowledge of the matter.

In such cases, the tax department typically seeks to assess whether the markup represents a notional cost, said another person aware of the matter.

“One issue which is quite prone to litigation is in respect of cases involving the Indian companies granting Esops to their employees and claiming deduction of the Esop cost (as determined by accounting standards or regulatory guidelines),” said Himanshu Parekh, head, corporate and international tax, KPMG. “There are several companies that have faced disallowance of this cost on the ground that it is a notional cost, thereby leading to protracted litigation.”

Industry insiders point out that the tax department’s scrutiny also includes several captives in India. Some startups that are registered outside the country are under the taxman’s lens, said the people cited above. Most of the notices have been issued to companies based in Bengaluru, said insiders.

Source : Financial Express

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