NITI Aayog Proposes Presumptive Tax for MNCs to Reduce Transfer Pricing Disputes

NITI Aayog Proposes Presumptive Tax for MNCs to Reduce Transfer Pricing Disputes

Issue: To provide a practical solution to the persistent and mounting tax litigation problem faced by Multinational Corporations (MNCs) in India, particularly disputes arising from the complex application of Transfer Pricing (TP) and Permanent Establishment (PE) rules.

Facts:

• Transfer pricing and PE attribution are highly contentious issues for foreign companies, often leading to large, long-pending litigation (e.g., HUL, Samsung, LG have faced similar disputes).
• The current tax rules require MNCs to prove that transactions with their foreign related parties (Associated Enterprises) are at an Arm’s Length Price (ALP), a complex and subjective exercise.
• The government has already implemented presumptive taxation in a limited form for specific foreign business sectors like shipping, oil and gas services, and airline companies.

Decision:

NITI Aayog proposed an optional Presumptive Tax regime for Multinational Corporations (MNCs) operating in India.

Key TakeDowns:

• Mechanism: The presumptive tax would be an optional scheme allowing foreign companies to be taxed on a fixed, industry-specific percentage of their gross receipts from Indian operations.
• Exemption from Litigation: Companies opting for this simplified regime would be exempt from litigation related to transfer pricing and Permanent Establishment (PE) matters.
• Flexibility: MNCs would retain the choice to continue with the current complex tax rules if they find the latter to be more beneficial, but they would then remain subject to TP and PE litigation.
• Rebuttal Option: The proposal includes the option for the foreign taxpayer to ‘rebut’ the deemed profitability where they envisage the actual profits to be lower, providing necessary flexibility. * Ease of Business: This regime aims to enhance the ease of doing business by introducing simplicity and predictability to tax outcomes for foreign taxpayers, making long-term strategy planning easier and minimizing tax friction.