Income Tax department proposes new tax rules for MNCs for better management

The income tax department Thursday proposed change in the methodology for taxing multinational companies, including digital firms, having permanent establishment in India by giving weightage to factors like domestic sales, employee strength, assets and user base. The CBDT Committee on 'Profit Attribution to Permanent Establishment (PE) in India' also said MNCs that are incurring global losses or a global profit margin of less than 2 per cent and have operations in India will be deemed to have made a profit of 2 per cent of Indian revenue or turnover and will be taxed accordingly.

"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 per cent, continues with the Indian operations, which could be more profitable than its operations elsewhere. "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 per cent of revenue or turnover derived from India should be introduced," the report said.

The CBDT committee report has proposed that sales, employees (manpower and wages) and assets in India of a multinational corporations (MNCs) should be taken into account for determining domestic tax liability. In case of digital companies, the weightage will be given to an additional fourth criteria of 'user' base, the report said.

An MNC having a fixed place of business in India is considered as having Permanent Establishment (PE) in India and is taxed as per domestic laws. The Central Board of Direct Taxes (CBDT) Thursday invited comments from stakeholders on the report within 30 days.

The report suggested "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 provides different weightage for digital companies categorising them as "high" and "low or medium" user base with significant economic presence in India.

In case of 'high user intensity', the weight of users should be 20 per cent, share of assets and employees 25 per cent each and sales at 30 per cent, while for 'low and medium user intensity', users should be assigned a weight of 10 per cent while three factors would have a weight of 30 per cent each. Ashok Maheshwary & Associates LLP Partner Amit Maheshwari said the report by the CBDT committee on profit attribution to PE deems two per cent of revenue derived from India as profit attributable to Indian operations in spite of having losses on a global level.

"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 has to be higher profits in India, is not correct," Maheshwari said. The CBDT had set up the committee to bring greater clarity and predictability for taxing MNCs having permanent establishment in India.

Nangia Advisors (Andersen Global) Director Sandeep Jhunjhunwala said the committee, in its report, has observed a major deviation from generally accepted accounting principles. He added that the deviation is in cases where business profits could not be readily determined on the basis of accounts, completely ignoring the sales receipts derived from a tax jurisdiction, and attribution done on the basis of function, assets and risk (FAR) analysis.

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