Financial Times

India’s government has unveiled reforms to curb taxation disputes that have bedevilled foreign companies with outsourced operations in the country, in a move likely to be welcomed by international investors.
The regulations concern the amount of tax an international company ought to pay in India when offering services abroad via a subsidiary in the country, a system known as
A number of major global business, including Nokia, Royal Dutch Shell and Vodafone, are fighting high-profile litigation battles with India’s tax authorities over the rules.
But several other foreign businesses have also found themselves caught up in protracted low-level transfer pricing disputes, compounding India’s image as an unwelcoming and troublesome investment destination.
“There are very few countries in the world that have safe harbour rules,” Palaniappan Chidambaram, finance minister, said of the new regulations, which are designed to provide companies with clarity on their Indian tax bills.
The rule change will be particularly significant for international technology companies that operate outsourcing or software development operations in India, from Microsoft and Google to IBM and Accenture.
Dinesh Kanabar, head of tax policy at KPMG India, said: “This is very significant, because in the recent past almost every single multinational operating in India, and that is not an exaggeration, has been stuck in some form of transfer pricing disagreements, and these things can drag on for years.”
“The government here has been talking about making its tax regime more welcoming to investment for a long, long time, but this is the first real concrete step it has taken. It is very good news.”
But the new regulations will also apply more broadly to any larger company that operates a “captive” service centre in India, for instance banks such as HSBC and JPMorgan, both of which have substantial back-office and IT operations in the country.
Under the old rules, India’s authorities would send substantial tax demands to global companies operating in the country, which the companies would then challenge, before an eventual settlement was reached.
Mukesh Butani, chairman of BMR advisers, an Indian professional services group, says that while the new rules will not resolve pre-existing disputes, they are likely to curb future litigation by allowing companies to volunteer to pay a pre-agreed level of tax.
“Let’s say you are a global company with an IT unit in India, and you are making margins of 15 per cent. What used to happen is that the authorities would come to you and say you needed to pay at 30 per cent, and so you would end up in dispute,” he says.
“Under this new system you can sign a pre-deal to pay tax at 22 per cent. It might be a bit more than you think you should be paying, but they [the tax authorities] can’t then ask for more, so you get certainty and clarity.”