MNCs and their Indian subsidiaries are in a standoff | Economic Times

The second Covid-19 wave is creating disputes between multinational companies and their Indian subsidiaries over who should bear losses and additional costs arising out of the pandemic. Under the transfer pricing mechanism, subsidiaries can only charge a predefined sum to their parent or any group company and taxes are accordingly levied on these mark-ups or margins. Bearing additional costs would mean changing these margins and even the associated tax for the Indian subsidiaries.Tax on transfer pricing, which is levied on Indian subsidiaries and units of multinational companies for cross-border transactions within the group, was already a complicated problem for many companies due to the unavailability of data and delayed results on account of the pandemic last year.“International taxation principles recognise that the headquarters, or the entity which takes critical decisions, should bear losses arising out of those key decisions,” said Sanjay Tolia, tax leader at PwC India. “India has many subsidiaries of multinationals which are modelled as a low-risk service provider or low-risk manufacturer or low-risk distributor, receiving guaranteed returns. So, the question is should these low-risk subsidiaries incur losses arising due to the pandemic?”In many cases, multinationals want their Indian arms to absorb the additional costs, people aware of the matter said. However, if the Indian entity that already works on wafer-thin margins absorbs these costs, any money it makes could be wiped out. On the other hand, some multinationals absorbed the additional costs of the past year and readjusted some of the transactions and associated costs.The second wave has brought additional expenses unique to operations in India, which the parent and other group companies are disputing. During the first wave, the margins were renegotiated and taxes readjusted, in some cases, with the blessings of the taxman.This time, the jump in costs is due to the provision of infrastructure for employees working from home and paying for vaccinations, and this is set to create additional challenges not just within the group but also with the tax department. Tax experts said the pandemic has also impacted the margins or mark-ups of Indian entities. Many multinationals facing margin pressures due to the coronavirus outbreak were renegotiating these mark-ups. This would mean margins for Indian entities of multinationals could come down.