Govt panel submits report on taxing profits of foreign companies

A Central Board of Direct Taxes (CBDT)-appointed committee has submitted a report on taxing the profits of non-residents, including multinational corporations, with a permanent establishment (PE). A PE is a fixed place of business that generally gives rise to tax liability in a particular jurisdiction.

The board has invited suggestions from stakeholders within a month. India deals with the issue under the provisions of the Income Tax Act, and the Double Taxation Avoidance Agreements (DTAAs) with individual countries. There are various ways suggested by the panel to attribute profits to companies operating in India.

On profit attribution, the report states that profits derived from India need to be defined objectively. The same could be arrived at by multiplying the revenue derived from India with the global operational profit margin, it said. A deeming global operational profit of 2 per cent has also been acknowledged by the committee for this purpose. For business models in which users contribute significantly to profits of the enterprise, the user base could be taken into account for profit attribution as the fourth factor for apportionment — in addition to sales, manpower and assets — the report said.

Weightage in the range of 10-20 per cent has been assigned to the user base. The Committee has recommended that profits derived from Indian operations should be the higher of — amount arrived at by multiplying revenue derived from India with the global operational profit margin, or 2 per cent of the revenue derived from India.

“Overall, the report looks detailed and is a move in the right direction to sort out contentious issues of profit attribution in the case of permanent establishment,” said Sandeep Jhunjhunwala, director at Nangia Advisors.