A couple of months ago, we had discussed
the corporate governance issues that emerge when Indian subsidiaries of
multinational companies pay substantial amounts to their parents in royalty.
the corporate governance issues that emerge when Indian subsidiaries of
multinational companies pay substantial amounts to their parents in royalty.
While we will have a chance to discuss
the taxation issues in the Budget in greater detail, the proposal to increase
taxation on such royalty payments stands out. The Finance Minister’s speech
notes:
the taxation issues in the Budget in greater detail, the proposal to increase
taxation on such royalty payments stands out. The Finance Minister’s speech
notes:
147. Another
case is the distribution of profits by a subsidiary to a foreign parent company
in the form of royalty. Besides, the rate of tax on royalty in the Income-tax
Act is lower than the rates provided in a number of Double Tax Avoidance
Agreements. This is an anomaly that must be corrected. Hence, I propose to
increase the rate of tax on payments by way of royalty and fees for technical
services to non-residents from 10 percent to 25 percent. However, the
applicable rate will be the rate of tax stipulated in the DTAA.
case is the distribution of profits by a subsidiary to a foreign parent company
in the form of royalty. Besides, the rate of tax on royalty in the Income-tax
Act is lower than the rates provided in a number of Double Tax Avoidance
Agreements. This is an anomaly that must be corrected. Hence, I propose to
increase the rate of tax on payments by way of royalty and fees for technical
services to non-residents from 10 percent to 25 percent. However, the
applicable rate will be the rate of tax stipulated in the DTAA.
While the precise impact of
this proposal would depend on the use of appropriate double taxation avoidance
treaties, the higher taxation is likely to have a negative effect on the payment
of royalty at least in some cases. In those, the unintended consequences of
taxation may turn out to be a creative solution to address the corporate
governance problem (whereby minority shareholders are unable to share in the
returns of the company to the same extent as the controlling shareholder due to
excessive payments of royalty).