India cracks down on taxation of transfers within foreign firms

Sun Feb 17, 2013 5:17pm EST
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By Sumeet Chatterjee

MUMBAI (Reuters) - India is aggressively pursuing tax claims against multinational firms operating in the country as the government seeks to rein in its budget deficit, taking particular aim at IT and back-office functions, tax officials say.

It has targeted several multinational companies in recent years for tax audits on transfer-pricing, but over the past 12 months has widened the scope of the investigations, tax officials said.

Authorities are now checking deals involving more than three dozen companies, focusing on transactions worth at least 250 million rupees ($4.7 million), officials said. Having just issued claims for the financial year to March 2009, it has shifted focus to 2009/2010.

Transfer pricing is the value at which companies trade products, services or assets between units across borders, a regular part of doing business for a multinational.

Revenue authorities in many countries including Britain, France, Germany and the United States are increasingly challenging efforts of companies to minimize tax liabilities by moving taxable income from higher-taxing jurisdictions to lower-tax ones.

In India's case, critics worry overly aggressive tax authorities could undermine foreign investment although tax officials say they have been working overtime as Finance Minister P. Chidambaram looks to make up a revenue shortfall and head off the threat of a credit rating downgrade.

"On some days we had to work through the night to meet the deadline," said one official. "There are so many cases that are coming to us but we don't have an adequate number of people."

At least 1,500 transfer pricing disputes were in litigation in India as of February 2011, compared with fewer than six in the United States and none in Taiwan or Singapore, an Ernst & Young survey showed in August 2012. Still, Western campaigners say BRIC countries - Brazil, Russia, India and China - are tougher on corporate tax avoidance than developed countries.   Continued...

India's Finance Minister P. Chidambaram speaks during an interview with Reuters at a hotel during his visit for the G20 meeting in Mexico City November 4, 2012. REUTERS/Edgard Garrido