Get real about royalties

| Updated on April 29, 2014 Published on April 29, 2014

Re-imposing curbs on royalties by MNC subsidiaries is counterproductive

The Centre has reason to worry about rising royalty payments by the Indian arms of multinationals ever since it liberalised rules for such payouts in end-2009. Sums repatriated to their parents by way of royalty and technical fees have vaulted by 57 per cent in three years, leading to nearly $7 billion of outflows in 2012-13. This, on the face of it, represents a drain from a balance of payments standpoint. Further, unduly high royalty payouts are inimical to the interests of Indian shareholders in listed multinationals, as they come at the expense of profits and dividends distributable to them.

That said, any move to reverse the earlier liberalisation — by imposing higher taxes or restoring caps on these payments, going by reports — is still ill advised. Such back-tracking will only strengthen global investor perception about India’s unpredictable regulatory regime and policy flip-flops; and a country that needs to attract more foreign direct investment can ill afford this. Besides, even if curbs on royalties are reintroduced, multinationals are likely to find other ways to send money out — through transfer pricing arrangements, related party deals and reimbursement of fictitious expenses. In any case, not all royalty payments made to parent corporations need be frowned upon. In sectors such as capital goods, alternative energy, pharma and automobiles, these could well be against genuine sourcing of technology and research knowhow that help in building a domestic manufacturing base. Imposing a common cap on royalties will be counterproductive in such cases. Shareholder concerns about multinationals skimming off profits through royalty payments can be better addressed by raising the bar on disclosures. Any firm proposing to ink a royalty agreement can be asked to provide specific details on the quid pro quo for the Indian subsidiary: the nature of technology sourced, product lines that would benefit and annual cost savings resulting from the know-how being transferred. The new Companies Act already empowers minority shareholders to vote out related-party deals they perceive as being against their interests. Including royalty agreements in this list should be sufficient to take care of the minority shareholder interests.

Along with these, the Centre should consider tax tweaks that make it more attractive for multinationals to distribute their surpluses though the dividend route. Currently, all dividend payouts attract a stiff 17 per cent dividend distribution tax. In contrast, royalty payments usually enjoy exemptions under double taxation avoidance agreements, making this route vastly preferable for multinationals seeking to send profits back home. Doing away with the dividend distribution tax can reduce this anomaly. If this prompts multinationals to raise dividend payouts, that would be killing two birds with one stone. Indian shareholders would, then, get a more equitable share in the profits of multinational subsidiaries, which now accrue mainly to the foreign parent.

Published on April 29, 2014
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