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Are Multinationals Being Treated Unfairly?

India
13 Feb 2013
"The administrative actions must be reflective of the Government's wider policy framework, and dispel a feeling that multinationals are soft targets."

Last fortnight, the Finance Minister led several meetings with the investor community in key global financial centres - Hong Kong, Singapore, Frankfurt and London - as a precursor to presenting Budget 2013-14. A consistent message in his interactions suggested an unstinted endeavour to woo foreign investors by reiterating his Government's commitment to reform and revitalise an economy suffering its worst quarterly performance in a decade. The Finance Minister's visit could not have been better timed, given the February economic calendar and a spate of recent announcements to accelerate the Goods and Services Tax and the deferral of the draconian General Anti-Avoidance Rules, besides being committed to a non-adversarial tax administration.

Regrettably, the euphoria of his well-intentioned statements doesn't seem to translate into actions, since the administration back home continues to slam multinationals and their Indian arms with allegations of tax evasion and high-pitched tax demands. It is true the finance ministry team is not leaving any stone unturned to meet fiscal deficit targets, but the regressive approach in doing so is causing the country irreparable damage. Take the January 2013 notification of the Central Board of Excise and Customs to collect outstanding demands, disregarding taxpayers' right to seek a stay of demand. At least 4 high courts in a fortnight have granted stays on that notification. I wonder how tax collection targets can be met when the target-setting was predicated on a growth rate of 7.6%. Data suggests that tax collections have consistently outpaced growth in the past decade.

Last week, a multinational was greeted by a tax notice claiming that it miscalculated the pricing of share issue for infusing additional foreign investment (in its own 100% subsidiary). Under the pretext of transfer-pricing regulations, the revenue department has proposed a multi-billion dollar tax adjustment on the valuation of share issuance. In another instance, an information technology (IT) major was coerced to pay $100 million in tax claims, though the matter is sub judice on the pretext that a stay of demand could result in "financial hardship and irreparable injury to the exchequer".

These examples suggest a huge disconnect between India's approach to foreign direct investment (FDI) and tax policy and the administration's approach to tax collection, besides a breakdown of established processes in the income tax department. Should such un-concerted actions continue, the Finance Minister could be cornered to either rethink his strategy and/or demand greater accountability, if his efforts to attract FDI will come to nought. Employment is India's biggest challenge and India needs investments to bridge the gap. In the present global environment, investors can be fickle-minded, and if India's short-term approach is adversarial, global boards will be forced to review investment plans. The Economist feature "Doing Business in 2013" chose to skip India and include China, Sri Lanka, Nigeria and Indonesia in its listing of favoured nations. Isn't that a wake-up call?

The growth in cross-border and transfer-pricing disputes has forced us to implement an Advance Pricing Agreement programme; it's now imperative on the administration's part to respond to policy objectives by treading the path of rapid bilateral and multilateral pricing agreements. India's treaty policy requires an approach to embrace a mandatory arbitration clause in tax treaties for definitive resolution. This is borne out from a recent criticism by the US' competent authority, which should ring an alarm bell for India to align its approach to the international environment of dispute settlement. This came on the back of representations made by the Silicon Valley Tax Directors Group, representing the world's leading IT giants present in India, seeking commitments from the Indian and the US governments that they would not be subjected to unrelieved international double taxation, unanticipated tax demands and an unstable legal environment.


Your Taxand contact for further queries is:
Mukesh Butani
T. +91 124 339 5010
E. mukesh.butani@bmradvisors.com

First published in the Business Standard, 12 February 2013

Taxand's Take

The need of the hour is to ensure that the actions of administration are a manifestation of the Government's wider policy framework, dispelling a feeling that multinationals are soft targets that would succumb to the pressure of paying such tax demands owing to their aversion to pursuing protracted litigation in Indian courts. With a fortnight left for the Budget, it's time the Finance Minister and his team introspects and not retrospects.

Taxand's Take Author

Mukesh Butani
Taxand Board member
India