MNC tax implications
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This document discusses various tax concepts related to multinational corporations (MNCs). It defines tax neutrality as tax provisions that conform to an ideal tax system without favoring certain economic activities. It also discusses tax equity incentives some governments provide for certain projects. It notes the US provides tax equity for solar power projects through tax credits and depreciation policies. It outlines the tax implications of dividend remittance from foreign affiliates to Indian companies. It defines controlled foreign corporations and explains they are commonly used structures for foreign operations, allowing profits to reinvest abroad without domestic tax until repatriated. It compares CFCs to foreign branches and their different tax and liability implications. Finally, it discusses transfer pricing and its role in
MNC tax implications
- 1. MNC Tax Implications DR RAJU INDUKOORI
- 2. Tax Neutrality In its most common usage, tax neutrality refers to tax provisions that conform to an ideal tax system. A tax provision that is consistent with such an ideal system is described as neutral. Tax that does not cause individuals or firms to shift their economic choices, such as to choose among different goods, inputs, locations, etc. It doesn’t favor certain kind of economic activity over others 2
- 3. Tax Equity • Some government offer incentives in terms of taxes on certain projects like environment friendly, exports, priority areas, etc. • USA offers Tax Equity to Solar Power projects • Investment tax credit (ITC) • Bonus Depreciation • Accelerated Depreciation 3
- 4. Tax implications of dividend remittance by overseas affiliate dividend received by an Indian company from its foreign affiliate, would be taxed at the full rate of @ 30%. 15% on dividends received from foreign affiliates (in which Indian company holds 26% or more equity). http://tfguru.com/categories/banking/remittance-guide/866-remittance-of-dividend 4
- 5. Controlled Foreign Corporations (CFCs) • Most US based MNCs conduct their foreign operations through controlled foreign corporations (CFCs) • These are foreign corporations owned more than 50% either in market value or voting power. • CFCs are incorporated in the host country and governed by the laws of host country. • CFCs are commonly used for foreign operations. 5
- 6. Controlled Foreign Corporations (CFCs) • Operating as a foreign branch immediately exposes foreign source of income to domestic tax rates. • CFCs can reinvest abroad without having to pay domestic tax rates until they are repatriated to the parent. 6
- 7. Organizational Form of CFC CFC Foreign Branch Legal A foreign Corporation is a legal entity in host country A branch is a part of the parent for legal purposes. Tax Taxes are paid on foreign source income as it is repatriated to the parent. Tax is paid as income as earned by the branch. Disclosure Limited to the activities in the host country. Parent might be required to disclose. Liability Liability is limited to activities in the host country. Legal liability extends to the parent. 7
- 8. Transfer Pricing It refers to the internal pricing system used between related parties. It determines how much profit is reported and the tax rate to be paid. It is related to the rules and methods for pricing transactions within and between enterprises under common ownership or control. This is more relevant to accounting and taxation for MNCs. 8
- 9. Transfer Pricing in India Transfer pricing was Introduced in Sections 91, 92A, 92B and 92 Explain transfer pricing in the Income Tax Act of 1961 TP ensures that the transaction between 'related' parties is at a price that would be comparable if the transaction was occurring between unrelated parties. TP applies to both domestic and international transactions which fall above a threshold in terms of deal value 9
- 10. Transfer Pricing & Taxation Transfer Pricing Regulations were introduced in 2001. The transaction are categorized as International Transaction Deemed International Transaction Specified Domestic Transaction 10
- 11. Thank You POST YOUR QUESTIONS IN COMMENTS