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Profit attribution to PE: CBDT invites public comments on report
April, 19th 2019

The Central Board of Direct Taxes (CBDT) has invited stakeholders’ comments on a draft committee report on attribution of profits in case of a permanent establishment (PE).

Suggestions and comments on the 85-page report — which has been made public — will have to be furnished electronically within 30 days from the date of its publication on the department’s website, the CBDT has said.

Commenting on the draft report, Sandeep Jhunjhunwala, Director, Nangia Advisors (Andersen Global), said: “The report submitted by the committee is an exhaustive report, which provides insights into the economic basis for allocation of taxing rights in respect of business profits by looking at how economies contribute to business profits of multinational enterprises and also documents various international practices for profit attribution”.

“Overall, the report looks detailed and is a move in the right direction to sort out the contentious issue of profit attribution in case of PE constitution. An active participation from the industry in the reason-governed deliberation process would ensure that the final rules are fair in all ways,” Jhunjhunwala said.

Amit Maheshwari, Partner, Ashok Maheshwary & Associates, said that the draft report by the CBDT committee on profit attribution to PE deems 2 percent of revenue derived from India as profit attributable to Indian operations inspite of having losses on a global level.

This will impact several PE especially of infrastructure projects which have been into chronic losses lately, he said. Assuming that if MNEs are continuing with Indian operations inspite of losses, there has to be higher profits is not correct, Maheshwari said.

The subjectivity of Rule 10 and the resultant litigation will go away once the recommendations find way into the Act/Rules, he added

Other issues
Jhunjhunwala said that the report also highlights the predominant usage of mixed or balanced approach (vis-à-vis pure supply and demand approach) that allocates profits between the jurisdiction where consumers are located and the jurisdiction where production is located and where supply side activities are undertaken.

On the profit attribution method, the report postulates that the profits derived from India need to be defined objectively, and that the same could be arrived at by multiplying the revenue derived from India with the global operational profit margin. A deeming global operational profit of 2 percent has also been acknowledged by the Committee, he said.

For business models in which users contribute significantly to the profits of the enterprise, 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 percent have been assigned to the user base. The Committee has recommended that profits derived from Indian operations should be higher of - (a) amount arrived at by multiplying the revenue derived from India multiplied with global operational profit margin, and (b) Two percent of the revenue derived from India.

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