New tax rules on profits derived by foreign companies in the works, says report

Foreign companies

The government is set to issue a new set of rules to determine how profits derived from the country by foreign companies will be taxed, Mint has reported. The move is aimed at reducing litigation and bring more clarity to taxation.

"The new rules for attributing profits to non-resident companies with business connection in India is ready and will be brought out soon," the report quoted a source as saying.  The new rules will be framed under Section 9 of the Income Tax Act and rule 10, the source said.

Moneycontrol couldn't independently verify the report.

The new rules will reportedly set the template for tax officials to understand the extent of profits that can be taxed, taking into consideration the foreign companies' sales in India, supply side factors such as employees and assets, and more.

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The rules will also likely factor in the user base to better understand the contribution of the Indian market to a company's global profits.

The broad principles of the new rules were first outlined by the Central Board of Direct Taxes (CBDT) in a 2019 expert committee report. The CBDT Committee on Profit Attribution to Permanent Establishment (PE) in India said even when a foreign enterprise has global losses or profit margin of less than 2 percent, a minimum of 2 percent of the turnover derived from India shall be deemed as "profits derived from Indian operations" and taxed accordingly.

An MNC having a fixed place of business in India is considered as having Permanent Establishment (PE) in India and is taxed as per domestic laws.

"While Indian tax treaties, domestic law and several court decisions have upheld apportionment method for profit attribution, there is no universal and consistent approach for apportionment of profits in India. This allowed tax officers to exercise wide discretion and different methodologies in different cases, thereby leading to ad hoc percentages of profit attribution, thus causing significant uncertainty and gave rise to unnecessary litigation," said Rakesh Nangia, founder and managing partner of Nangia & Co LLP, a tax advisory firm.

The move comes as President Donald Trump has withdrawn the United States from a global corporate tax deal agreed between 140 nations in 2021.