At the very outset, a disclaimer is in order. This article to be sure has been triggered by the survey being carried out by the Indian income tax department on British Broadcasting Corporation (BBC) but will not sit in judgement over the correctness or otherwise of the stands taken by the supporters or opponents of the exercise. That would be settled by the judicial process.
In other words, this article steers clear both of the politics and polemics around the BBC activities in and on India.
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Having said that it needs to be pointed out that BBC World Services India Private Limited having been incorporated in India on 6th September 2007 is into manufacture of paper & Paper products, publishing, printing and reproduction of recorded media business for last 16 years. It is a subsidiary of the UK British Broadcasting Corporation and in that capacity is amenable to the rigours of transfer pricing rules enshrined in section 92, 92A, 92B, 92C, 92D, 92E and 92F as an associated enterprise.
These rules seek to deny international groups the wiggle or elbow room to minimise their global tax liability through dubious accounting and trade practices.
If family elders are wary of incest, tax sleuths are chary of wink-wink nudge-nudge dealings among group companies transcending borders. For example a Multinational company (MNC) with world wide presence would like to reduce its global tax bill given the fact that the entire universe is its oyster. So, what it does is asking its Indian arm to ship the materials to its arm in a tax haven say British Channel Island at cost and from there bill its arm at say Canada for full profits.
In tax parlance, British Channel Island outfit of the MNC has positioned itself as a reinvoicing centre secure in the knowledge that there is no tax in that country whereas India has a fairly high corporate tax rate. The MNC has achieved its objective----reduction in overall tax bill. It is not as if goods would be unloaded in the reinvoicing center. The world has for long lived with what is known as high-seas sales, in this instance the British Channel Island promptly selling the same goods to the Canadian outfit after the goods have left the Indian territory and before they reach it. This is just one example. MNCs have a formidable arsenal of tax tricks at their disposal to hoodwink and shortchange originating nations.
It is common knowledge that MNCs doing business in India persuade (there is absolutely no need for arm-twisting) their Indian subsidiaries to disguise dividend as royalty for the simple reason that there is a tax arbitrage----much softer tax on royalty vis-à-vis tax on dividend on foreign companies. India alone hasn’t been at the receiving end of the MNC tax manoeuvres and shenanigans. Even the mighty USA has been. A sweetheart deal between Apple Computers and Ireland allowed Apple to shift up to two-thirds of its global profits through a handful of Irish-registered companies that routinely paid less than 1 percent tax much to the consternation of the US government which was denied of its just share of taxes on profits made by Apple, a company listed in the US. The point is the practice of tax avoidance by MNCs is as universal as Covid 19 was, calling for OECD initiative in curbing MNC shenanigans consisting in base erosion and profit shifting.
The Indian income tax law vide section 92C seeks to substitute the arm’s length price for the actual transfer price in an international transaction with an Indian company by a non-resident usually a foreign company. Arm’s length price is the fair price between two unrelated parties arrived at purely on the basis of market quotations and uninfluenced by the cozy relationship they enjoy with each other. Such substitution is not arbitrarily done but by the transfer pricing officer transparently and scientifically under section 92CA.
Lest there is a mushrooming pile up of such references to the transfer pricing officer, section 92CB allows the Central Board of Direct Taxes (CBDT) to make safe harbour rules within which MNCs have the latitude to tailor their transfer prices with an Indian outfit of theirs. And as per section 92CC, the CBDT can enter into an advance transfer pricing agreement with an MNC with the approval of the central government especially if there are going to be repetitive transactions between the non-resident and its Indian arm.
MNCs have a vice-like grip on the world. MNCs and their foreign affiliates account for one third of world output and GDP and two-thirds of international trade. MNE’s contribution to world GDP was estimated at 32 percent in 2016, of which roughly one third was by foreign affiliates abroad and two thirds by MNE headquarters and domestic affiliates in the home country. While their world-wide presence has translated into more business for them and on the flipside other nations getting to savour their superior products and services, nation states are at their wits’ end in reining in their tax shenanigans.
—The author, S Murlidharan, is a CA by qualification, and writes on economic issues, fiscal and commercial laws. The views expressed are personal.
Read his previous articles here
(Edited by : C H Unnikrishnan)
First Published: Feb 17, 2023 9:24 AM IST
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