MNCs Under Fire From Income Tax Department

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MNCsIndia is aggressively pursuing tax compliance and challenging the claims -deductions & exemption – by multinational firms operating inside the country .The move is because of the pressure from Finance Ministry on CBDT for achieving the budget collection target.

The I.T department has been taking scrutiny of activities in particular to t IT and back-office functions on account of certain favourable judgment from High courts on very complex subjects like royalty and technical fees taxation in India .

The move is actually even elsewhere in the world as revenue authorities in lots of countries including Britain, France, Germany and america are increasingly challenging efforts of businesses to minimise tax liabilities by moving taxable income from higher-taxing jurisdictions to lower-tax ones.

Indian I.T authorities have, likewise,  targeted several multinational companies lately for tax audits on transfer-pricing, but over the last year has widened the scope of the investigations, tax officials said.Authorities at the moment are checking deals involving greater than three dozen companies, that specialize in transactions worth a minimum of 250 million rupees, officials said. Having just issued claims for the financial year to March 2009, it has shifted focus to 2009/2010.

Transfer pricing is the worth at which companies trade products, services or assets between units across borders, a typical portion of doing business for a multinational. It is reported that at least 1,500 transfer pricing disputes were in litigation in India as of February 2011, compared with fewer than six within the United States  and none in Taiwan or Singapore, as per an Ernst & Young survey in August 2012.

Indian It authorities are actually giving attention to transfer of assets by lower valuation of shares .This is after the huge controversy regarding Vodafone case .One company -Shell India’s case in point , where the IT department has served notice on it for the issueing 870 million shares to parent Shell Gas BV at 10 rupees apiece in 2009 whereas the value as per the  tax authorities is at 183 rupees each. Shell reacts the move ny IT authorities  on an “incorrect interpretation” of tax rules and “bad in law”. In simple words ,  India is demanding the tax at the interest Shell would have earned at the $2.8 billion, within the largest ever claim in an Indian transfer pricing case, tax officials said.

Likewise  affected are South Korea’s LG Electronics Inc (066570.KS), Singapore property group Ascendas, French IT services firm Capgemini (CAPP.PA) and chocolate maker Cadbury,due to transfer pricing disputes in India.

Information Technology & MNC dispute

The major source of dispute is on account of interpretation by Karanataka High Court judgement in Samsung Case on the question of royalty and technical fee in case of software. THe other reason is the perception of the I.T department , and rightly so , that in information technology and business process outsourcing (BPO), many business entities  are making huge profit on account of  low costs in India to develop high-end, patented products or services which are exported as low-value routine work.

These sectors are expected to account for greater than half the complete claims in transfer pricing deals within the fiscal year 2008/09, one of several officials said, up from about one-third earlier.

Outsourcing makes up greater than $100 billion of India’s economy with companies similar to Accenture (ACN.N), Bank of America Merrill Lynch (BAC.N), and Microsoft Corp (MSFT.O) employing thousands in functions corresponding to customer support, risk and fraud management and finance and accounting.

Media reports quote of a spokeswoman for the National Association of Software and Services Companies ” the Indian outsourcing lobby group was concerned tax authorities were making “inconsistent and extremely aggressive adjustments.” “

MNCs :  Valuation a Vexed Issue

It is not uncommon that difference of opinion about valuation of shares o properties arise between tax authorities and MNCs as  valuing an internal transaction is mostly a matter of opinion .For example in LG Electronics’ case,  the company’s Indian unit was deemed to be promoting the LG brand owned by its parent, which must have compensated the local unit, thereby generating taxable income. As per tax authorities claim , the surplus expenditure amounted to a transfer pricing adjustment of one.61 billion rupees.