Tax residency tweak may hit Indian firms with overseas operations
Foreign subsidiaries may now have to pay tax both in India and the country of their operations
At present, a company incorporated outside India is considered a tax resident only if the control and management of its affairs is situated wholly in India. Photo: Pradeep Gaur/Mint
New Delhi: A budget provision changing the definition of place of effective management of companies to be treated as Indian tax residents is likely to impact many big Indian corporate groups that have foreign subsidiaries. These foreign subsidiaries may now be subject to double taxation as they may now have to pay tax both in India and the country of their operations.
In the budget, the government changed the provision defining effective management to include even those companies incorporated outside India whose place of effective management “at any time” in that year is in India. Also, the place of effective management was defined as a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole, are, in substance, made.
Analysts point out that most of the big Indian business houses take decisions regarding their overseas subsidiaries from India. Also, the language of the amendment is such that even if a big multinational entity decides to hold its board meeting in India on one day, it shall be deemed to be a tax resident of India and its worldwide income for that year shall become chargeable to tax in India.
At present, a company incorporated outside India is considered a tax resident only if the control and management of its affairs is situated wholly in India.
Rahul Garg, leader of direct tax practice at consulting firm PricewaterhouseCoopers (PwC), said that it will adversely impact all Indian companies with overseas subsidiaries.
“Most of the big business houses in India have overseas subsidiaries, which they control from India even though the subsidiaries are incorporated outside India. At present, such subsidiaries pay tax in the foreign country and the income is not taxable in India unless it is brought into India by way of dividend in which case a dividend distribution tax of 15% is levied,” he said. “But now, such income may be taxable at 30% in India, in addition to the tax paid in the overseas country.”
The amendment, to be effective from 2015-16, has been brought in to align the criterion of tax residency of companies with international standards, but may lead to increased litigation.
Explaining the government’s rationale to bring in the amendments, the memorandum accompanying the budget documents says that the present definition aids a company to easily avoid becoming a resident. “The modification in the condition of residence in respect of company by including the concept of effective management would align the provisions of the Act with the Double Taxation Avoidance Agreements (DTAAs) entered into by India with other countries and would also be in line with international standards. It would also be a measure to deal with cases of creation of shell companies outside India but being controlled and managed from India,” it said. Khaitan and Co., in a post-budget note dated 1 March, said the amendment could lead to unintended consequences and result in a situation where foreign companies with legitimate business operations outside India would end up being treated as Indian tax residents and consequently, be subjected to tax in India on their global income.
“This could occur if, for example, a board member of the foreign company is present in India and participates in the decision-making process from India only in that single board meeting.This anomalous situation will result in double taxation of income which may not be mitigated by tax treaties as both countries (viz. India and the country of incorporation) will seek to tax the global income of the foreign company,” the note added.
