Top tax issues MNCs face in cross-border transactions
September, 25th 2008
While there has been an upsurge in general level of cross-border transactions, both inbound as well as outbound, the tax law dealing with the same has not kept pace with the increase in the complexity and growth in the level of sophistication of such transactions, bemoans Ms Shefali Goradia, a partner with BMR Advisors (www.bmradvisors.com).
As a result of the mismatch between the law on the one side and the business realities on the other, there has been an increased level of uncertainty and litigation arising out of international tax issues in India, adds Ms Goradia.
In my experience, the tax directors of most multinationals are not perturbed by high level of taxes, she observes, in the course of a recent email interaction with Business Line. However, they are extremely concerned about the uncertainty in the tax regime and the time involved in the litigation process in India.
Recognised as among the eight best Indian tax advisors by Legal 500 and the Tax Directors Handbook 2009, Ms Goradia was, till recently, leader of the international tax practice at Nishith Desai Associates where she worked for over 14 years. She has advised a number of domestic and multinational corporations in areas ranging from designing efficient global holding and operating structures, structuring inbound and outbound investments and advising on cross-border mergers, acquisitions and other corporate reorganisations.
Though the potential for growth in the Indian economy holds a lot of promises for the multinationals, India still has a long way to go in terms of modernising its tax law and more importantly, the practice, opines Ms Goradia.
According to her, the top issues in international taxation that bother multinationals the most, especially in cross-border transactions, are: Structuring inbound investments, characterisation of payments, attribution of profits, unending litigation, and structuring outbound investments. The mindset of the Revenue needs to change to be more taxpayer-friendly and to work along with the multinationals to provide a more certain and steady tax regime, advises Ms Goradia.
Excerpts from the interview.
On the structuring of inbound investments.
India does not offer many of the structuring options that are available to the multinationals overseas. We have limited options available in terms of the type of entity that can be set up or the financial instrument that can be used.
Many multinationals are concerned that they are not able to tax-effectively leverage their investment in the Indian operations. They are not able to push debt down due to exchange control restrictions.
In view of this, they have to service the debt out of post-tax profits generated from Indian operations, which have already suffered the corporate tax as well as the dividend distribution tax.
On the characterisation of payments.
Taxation of off-the-shelf software is one issue where there is an age-old dispute on characterisation.
There have been many cases where the tax officers at the assessment level have alleged the payment to be in the nature of royalty and sought to collect a withholding tax.
The tax Tribunals have in most cases ruled in favour of the software companies, however, the issue is not resolved, as there are appeals pending against the Tribunal rulings, with the High Courts.
In the absence of any clarification from the Ministry of Finance on the tax treatment, the controversy and litigation prevail.
On the attribution of profits.
It is perceived that the Indian tax officers are more inclined towards making over-pitched assessments. Their general approach is to attribute unreasonably high profits to Indian operations, though it is consistently observed that, at the appellate levels, the attribution is reduced to a much more reasonable level.
Absence of detailed rules and guidelines leaves a lot of discretion with the tax officers to attribute higher profits and collect a large amount of tax from the multinationals.
On the unending litigation.
Another common complaint of many of the multinationals is that India is a country of never-ending litigation. There is an unwritten code which seems to be followed by the Revenue Department to appeal against any unfavourable order or a ruling, right up to the highest appellate authority.
This is the fate of most of the large cases where the stakes involved are high, despite the fact that there may be rulings from higher appellate authorities in favour of the taxpayer.
There is generally a reluctance to forego the right to appeal, even in view of the merits of the case. An advance ruling, which is offered as a binding ruling to the foreign residents doing business in India, also suffers from the same fate.
India still follows the adversarial approach where, on most questions, the Revenue feels compelled to take an adverse position. As a consequence, if there is a negative ruling, in most cases, it gets appealed against, either at the Supreme Court or the High Court.
On the structuring of outbound investments.
Indian companies making outbound investments have their own wish-list. Today they are not able to claim the deduction for expenses incurred in their foreign subsidiaries or offset the tax paid by their subsidiaries in foreign countries.
As is a common practice in most of the developed countries, a choice should be offered to them so that they are able to claim a deduction against their Indian income and offset the taxes paid overseas.