The rules for attributing profits to multinational enterprises having a permanent establishment (PE) or business connection in India are set to significantly change if the draft report issued on Thursday night by a committee — appointed by the Central Board of Direct Taxes (CBDT) — is adopted.
According to tax experts, MNCs carrying offshore operations in India, which also have sales revenue from the country, may find that higher profits that are attributed to Indian operations — under the prescribed formula-driven approach — will result in a higher tax outgo.
If a foreign enterprise has a PE in India (in generalNSE -2.97 %, it refers to a fixed place of business and is defined in tax treaties), then India can tax the business profits of the entity. However, tax can be imposed only on the profits ‘attributed’ to the operations carried out in India.
Where detailed accounts are not available to determine this attribution, rule 10 empowers the income tax (I-T) officer to do so by indirect apportionment — say, a percentage of the turnover. However, lack of uniformity in this approach results in litigation.
In its report, the CBDT-appointed committee states that it is not appropriate to attribute profits to the PE exclusively on the basis of functions, assets and risks (FAR) alone.
“This is a game changer. The panel’s report outlines a formula for calculating profits attributed to operations in India, giving equal weightage assigned to sales, manpower and assets. This three-factor approach will be a challenge where there is significant manpower deployed in India and sales revenue is also generated from here. A lot of offshore centres in India, which provide technical servicesNSE -0.97 % to their overseas head office and group companies, could be adversely impacted as it could result in a higher tax outgo,” says Girish Vanvari, founder of a boutique advisory firm TransactionSquare.
However, the report adds that profits derived from Indian operations that have already been subjected to tax in India — say, in the hands of a subsidiary — should be deducted from the apportioned profits .
A floor rate for profits derived from India has been set to protect revenue interests. The committee further suggests a minimum 2% of the turnover derived from here as deemed ‘profits derived from India’ in certain circumstances — say, when the foreign enterprise is incurring global losses. It also provides that where no sale has taken place in India and the profits that can be apportioned to the supply activities are already taxed in the hands of an Indian subsidiary, there may be no further taxes payable by the foreign enterprise.
The panel has also considered emerging business models. “For business models in which users contribute significantly to the profits of the foreign enterprise, the user base could be taken into account for the purpose of profit attribution as the fourth factor for apportionment, in addition to sales, manpower and assets. Weightage in the range of 10-20% has been assigned to the user base,” points out Nangia Advisors director Sandeep Jhunjhunwala.
Source : Financial Express