New Delhi, which took the controversial view that capital receipts received by Indian companies from related parties abroad are subject to transfer pricing audits, now wants the G20 and OECD nations also to adopt the same policy. The finance ministry will soon suggest to the two groupings that this concept could be weaved into OECD's global tax reform proposals, sources told FE.
It is a global practice that prices at which goods, services and intangibles are transacted between Indian companies and their overseas associates are subjected to scrutiny under transfer pricing rules (with the intent to ensure that these deals are done on an arm's-length basis). India, however, has insisted that share transactions and the resultant capital receipts too can be audited and tax demands raised if arm's length principle is violated.
India's recent attempts to tax share subscription by groups like Vodafone and Shell in their Indian arms, treating alleged undervaluation of shares as loans to parents that bear interest income to the local subsidiaries, is being bitterly contested by the companies.
Official sources said New Delhi was working closely with the OECD on its global tax reform proposals under the (Tax) Base Erosion and Profit Shifting (BEPS) action plan aimed at tackling aggressive tax avoidance by MNCs.
If India has its way, recharacterisation of capital transactions as loans, on which interest income is to be taxed, could get wider acceptance among other major economies, all of which are now seeking ways to combat aggressive tax planning.
India's tax department recently asked a series of companies including local arms of Shell and Vodafone to pay taxes on the share subscription by their overseas parents, treating the difference between the value of the transaction and a higher armís length price attributed by the officials as loans to the overseas parents, on which, the department claims, taxable interest income would accrue to the Indian subsidiaries. The department has used this novel method to demand tax on close to 30 transactions, said industry sources.
OECD's BEPS action plan will have best practices and proposals for bridging the gaps in national tax laws as well as in tax treaties, currently exploited by companies to artificially lower their tax burden. The 34-member OECD has also said that all G20 countries, including India and China, are committed to implementing the BEPS project. The US too has listed income-shifting by companies to low tax countries as