Tax Evasion By Indian IT Subsidiaries

Posted in Finance Articles, Total Reads: 4462 , Published on December 20, 2011

Under the grab of transfer pricing, the Indian IT subsidiaries of MNCs under reported the company revenues in 2010-11 by 22,800 Cr. Under transfer pricing, a subsidiary of parent IT company provides solution to related party i.e. parent company at a very cheaper price as compared to non-related party i.e. actual clients. Expenses in both the cases remains the same for the subsidiary and so they try to maximize the related party transactions and hence under-report the profits. It helps them to save tax from the local govt.

Tax evasion

Accenture’s Indian IT subsidiary has 5,270 Crore revenue with 92% related party transactions. Its net profit is 855 Crore and number of employees is 59,100 which gives the net profit per employee to be around 1.44 lacs. On the other hand, Indian IT giant like TCS has 30,000 crore as revenue, 7569 crore as profit and around 190000 employees giving net profit per employee to be around 4 lacs. How can company with similar clients and projects show significant difference in net profit per employee? So, one can observe from the above facts that the IT subsidiaries of MNC under-reports the revenues by providing the IT solutions to the parent companies or its other subsidiaries situated in countries which are tax-heavens. By under-reporting the revenues these companies are giving less tax to Indian govt. The parent companies or subsidiaries on the other hand, can be registered in Tax heavens countries. For E.g. Accenture’s parent company is registered in Ireland a low-tax heaven country and Accenture India sells the IT product to Accenture’s parent company which in turns sell it to the client at premium and saving tax in that country. Some parent companies which are headquartered in US take the profit back to US and give declarations to US tax authorities to not repatriate non-US profits hence avoiding tax in their home countries.

To check these tax evasions, India’s Tax department every year forces these Indian arms of the foreign IT companies to increase their revenues and hence provide additional tax. For the past few years this trend is on rise as shown by the pie-chart shown below.

 Adjustment in Revenues

 Source: Finance Ministry

Normally, the Indian arms of MNCs can appeal against the adjustment of revenues but they have to pay 50% of the demand raised by the IT dept and for rest of the revenues generally the dispute goes on for 7-10 years. The foreign subsidiaries argue that they should not be compared to the Indian IT companies as both follow the different business models and also comparison should be done with the IT industry average profit margins which is around 15-16% and not with the best in the basket. They also argue that they comply with international standards of transfer pricings.

In other words, MNC avoids tax by “transfer pricing” transactions among subsidiaries that allow for allocating expenses to high-tax countries like India and profits to tax heavens like US, Ireland. Other methods of tax evasions are round tipping, and investing in Indian equity markets through counties like Mauritius.

This article has been authored by Mayank Goel from NMIMS, Mumbai.

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