Income Tax department proposes new standards for taxing MNCs in India

Income Tax department proposes new standards for taxing MNCs in India

The income tax department on Thursday suggests changing the strategies to taxing multinational companies (MNCs), this also includes digital firms which give weightage to the factors like employee strength, domestic sales, assets and user base, and, with these factors, these firms would have a permanent establishment (PE) in India.

The CBDT Committee on ‘Profit Attribution to PE (Permanent Establishment) in India’ also said that Multinational Companies having global profit margin of less than 2 percent and have operations in India or are suffering global losses will be deemed to have made a profit of 2 percent of Indian revenue or turnover and then they will be taxed accordingly.

According to the Central Board of Direct Taxes (CBDT) report “The committee noted the need to protect India’s revenue interests in cases where an enterprise having global losses or a global profit margin of less than 2 percent, continues with the Indian operations, which could be more profitable than its operations elsewhere.”

Along with this it further added that the Indian operations having higher profitability, 2 percent of revenue derived from India should be established.

“The continuation of Indian operations justifies the presumption of higher profitability of Indian operations, and in such cases, a deeming provision that deems profits of Indian operations at 2 percent of revenue or turnover derived from India should be introduced.”

The Central Board of Direct Taxes committee has also introduced, that the sales, employees (manpower and wages) and assets of multinational corporations (MNCs) in India should be considered for determining domestic tax liability.

According to the CBDT report, In the case of digital companies, the weightage will be given to additional fourth criteria of ‘user’ base. An MNC having a fixed and permanent place of business in India is considered as having Permanent Establishment (PE) in the country and it is taxed as per domestic laws.

The Central Board of Direct Taxes (CBDT) on Thursday invited all the comments from stakeholders on the report within 30 days.

The report also proposed “amendments to Rule 10 of income tax rules to provide that in the case of an assessee who is not a resident of India, has a business connection in India and derives sales revenue from India… the income from such business that is attributable to the operations carried out in India and deemed to accrue or arise in India shall be determined by apportioning the profits derived from India by a three equally weighted factors of sales, employees (manpower & wages) and assets.”

The report offers different factors for digital organizations categorizing them as “high” and “low or medium” user base with their significant economic presence in India.

In case of ‘high user intensity’, the proportion of users should be 20 percent, share of assets and employees 25 percent each and sales at 30 percent, Along with this for ‘low and medium user intensity’, users should be allocated a proportion of 10 percent while the other three factors would have 30 percent each.

Ashok Maheshwary & Amit Maheshwari the Associates LLP Partner said that the CBDT committee report on profit attribution to Permanent Establishment deems 2 percent of earning turnover derived from India as profit attributable to Indian operations instead of having losses on a global level.

The Associates LLP Partner, Amit Maheshwari also said that “This will impact several loss-making PEs especially in infrastructure projects which have been into chronic losses lately. Assuming that if MNCs are continuing with Indian operations in spite of losses, there have to be higher profits in India, is not correct.”

The CBDT had set up the committee to bring greater clarity, predictability, and intelligibility for taxing MNCs which have a permanent establishment in India.

Sandeep Jhunjhunwala, Director of Nangia Advisors (Andersen Global) said the committee, in its report, has observed a major deviation from generally accepted accounting terms and conditions.

Further added by him, that the deviation is in cases where business higher revenue could not be readily measured on the basis of accounts are completely get ignoring the sales receipts acquired from a tax jurisdiction, and attribution is done on the basis of function, assets, and risk (FAR) analysis.

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