India is expected to adopt new accounting standards to tax income from technologies that are developed in this country but registered in tax havens across the world. Dozens of multinationals that have R&D centres in India as well as Indian companies in the pharmaceuticals and information technology sectors could be affected.
Companies generally earn incomes from newly developed or upgraded technologies over several years. This income, usually in the form of royalty, currently accrues to the subsidiary that owns the patent. The parent company avoids taxes on this royalty income by registering these subsidiaries in tax havens such as Mauritius, Ireland, Switzerland and other such countries.
This, in effect, is an accounting jugglery facilitated by loopholes in the laws of various countries and amounts to the misuse of double taxation avoidance treaties that many countries have signed with other countries. The International Monetary Fund estimates that countries in which these technologies were developed lose taxes valued at up to 1.75 per cent of GDP as a result of such accounting practices.
The OECD has proposed a new standard called Base Erosion and Profit Shifting guidelines to take care of this issue. India is expected to adopt these norms in next year’s Budget, said a senior government official.
If it does, the incomes generated from the use of technologies developed or upgraded in India – common sectors such as engineering, pharmaceuticals, computer sciences, analytics and aerospace, among others – could become liable to taxation in India.
Though there are no estimates on how much tax revenue India loses every year as a result of such “offshoring” of patents, IMF’s estimates point to a figure of about $35 billion per year. Even if the figure is lower, it is likely to be substantial, the official said.
Experts feared that the adoption of the new OECD accounting standards could lead to an increase in tax disputes with multinationals but other said in this case, unlike in the case of the legacy tax disputes that authorities here are grappling with, India would be on very firm ground as these same norms would apply in the home countries of the multinationals concerned.Tagged: Investment, Digital India