Education

Tax challenges for foreign enterprises in India

Updated on: May 06, 2012
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Foreign deputation arrangements create tax challenges for home corporations as well as expatriates in India.

Liberalisation of the Indian economy in recent years has led to a significant increase in cross-border mobility of expatriates owing to multinational corporations (MNCs) setting up operations in the country. One of the biggest challenges faced by MNCs in India during the set-up stage and in the initial years of operation is the shortage of trained manpower.

To overcome this hurdle, most MNCs depute trained personnel from their home corporations to oversee and run the Indian operations on a short-term or long-term basis. Such deputation arrangements create several tax challenges for the home corporations as well as the expatriates that are deputed to India.

Permanent establishment

The primary tax challenge for corporates is the creation of a taxable presence (permanent establishment or PE) of the MNC in India. The Supreme Court in the Morgan Stanley ruling held that back office operations like R&D centres or BPOs do not necessarily create a PE of the MNC. However, the deputed employees engaged in running the daily functions of the Indian subsidiary would create a service PE. In that case, the MNC was responsible for the services of the deputed employees, it had a right to secure these services, and the employees were getting paid from overseas.

Appropriate secondment arrangements through localisation or otherwise help to mitigate the risk of creating the PE. Additionally, if the subsidiary company to which the employee is deputed is remunerated at arm's length, no further profit can be attributed to the MNC.

One needs to be mindful also of employees' personal tax challenges. Persons coming to India on short visits should not exceed a total stay of 90 days in an Indian fiscal year (for non-treaty countries and generally 183 days for countries which have a tax treaty with India). Otherwise, the employee would be taxable on his salary income in India. This would also trigger tax withholding obligations for the employer. First-time expatriates in India are generally treated as non-resident/not ordinarily resident in the first two to three years of their stay in India. Once they become ordinarily resident, they are liable to Indian tax on their global income. Their exit/completion of assignment should be planned keeping this in mind, else they may end up paying taxes in India on their overseas income even after they leave.

An added requirement in the past few years is the need to comply with the Indian provident/pension fund contributions for persons coming from a country with which India does not have a totalisation agreement (India still needs to enter into such agreements with countries such as the US, the UK and Australia). This scales up the deputation cost by over 24 per cent.

Budget 2012 requires residents holding foreign bank accounts to file tax returns in India even if there is no income that accrues or arises in India. Accompanying family members may be obligated to file tax returns in India.

Indians abroad

India's talent pool, especially in the technology sector, has led to large number of Indian employees being deputed for projects overseas. Credit of foreign taxes (FTC) is available against the Indian taxes payable on salary income. However, the position in claiming such credit at the stage of withholding tax requires more clarity, though it is a fair interpretation to claim such credit at the stage of withholding tax itself.

The lack of clarity has led many employers to withhold tax without granting FTC, requiring employees to claim the credit in their tax return. This leads to serious cash-flow issues, given the track record of tax refunds in India.

Cross-border deputations are an essential part of conducting business globally. However, proper planning of taxes could mitigate undue hardships.

Kaushik Mukherjee is Executive Director, Tax and Regulatory Services, PwC India. (With inputs from Ravi Jain, Associate Director)

Published on November 15, 2017

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