What MNCs can expect on tax front

The evolving tax and regulatory framework give MNCs in India an opportunity to recalibrate their tax strategies. It is widely anticipated that the upcoming Budget will provide better certainty with respect to India’s concerns on the legislative front to give MNCs increased ability to estimate tax costs for carrying out business in India and effectively address dispute resolution. Currently, the tax world is in a complex state with various legislative changes across the globe having major impact on taxation of MNCs.

Also, worldwide governments are becoming increasingly vigilant and aggressive to discourage tax evasions through complex structures. The country is also keeping pace with all such developments. It has already introduced General Anti Avoidance Rules (GAAR) and has accepted to implement Base Erosion & Profit Shifting Rules (BEPS). GAAR has been made effective with FY2017-18. Before its introduction, commendable efforts were made to invite comments from the public and consider the same while implementation of GAAR given that it was a novel subject for India.

Given the changes in tax and regulatory landscape globally, it is now a right time to provide a clearer picture to MNCs on how India wants to go about implementing various action plans agreed among various countries.

India has done a fair job by stating its views (including reservations) on various points in the updated OECD Model Convention.

Some of the notable ones are on the subject of Permanent Establishment (PE). As per one of India’s reservations, an unrelated third-party agent, working exclusively for a foreign enterprise might get considered as a dependent agent PE.

India has also expressed that treatment of a foreign enterprise for indirect tax purposes would be a relevant factor for determining existence of a PE. Suitable guidance on the above will be welcome to bring more clarity.

On Transfer Pricing (TP), the government has already issued final rules regarding preparation of the Master file and Country-by-Country report (CbCR) as a result of BEPS Action Plan 13.

The way tax audits would be conducted with availability of lot of information concerning MNC group activities will throw more challenges unless there is utmost clarity of how a taxpayer should deal with new topics like BEPS.

Sunil Kapadia - Tax partner, EY India
(Ankit Kochar, senior tax professional, EY, also contributed to this article)