Amid mounting pressure from the Supreme Court over the issue of black money, the government is preparing to turn the heat on MNCs as efforts to bring back money stashed overseas by resident individuals have run into legal hurdles. India is set to tighten rules for multinational companies that shift hefty profits to offshore group firms to escape tax.
MNCs and transnational companies enter into a series of transactions to move funds to their arms in tax havens and other jurisdictions where the income tax rates are significantly lower than India. This is done by MNCs buying services from their arm in India at less than the market price or fair value and selling it at a higher price outside, thereby booking profits outside the country. Such 'transfer prices' between 'related parties' are used to shift profits out of India.
An internal panel, set up by the government ahead of the Budget to review the transfer pricing regulation, has recommended a more robust legal framework to end the practice of MNCs mis-pricing products and services.
Unfortunately that's in India - not here, where George Osborne is doing the exact opposite.
Strange that, isn't it?
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India is also a tax haven for IT service companies. SEZ (Special Economic Zones), STPI (Software Technology Parks of India), and no tax on software exports (which has included “bodyshopping” staff to work “onshore” in other countries) have given significant tax breaks to Indian IT service companies. They have typically paid less than 13% company income tax. I suspect it has been common practice to “transfer price” their profits from their UK branches to India so very little UK Corporation Tax is paid on the work carried out in the UK by their seconded/deputed/transferred workers.
Some of the tax breaks are coming to an end very soon. Also the Indian Tax authorities have recently questioned whether the onshore provision of services (which they called bodyshopping) can be called a software export:
‘the tax department said “deputation and technical manpower (DTM) contract for deputing software professional abroad is not an eligible activity for claiming deduction under sections 10A/10AA of the Income-Tax Act”.’
In the UK, the Indian software professionals are usually sent on “intra company transfer” visas (a type of mode 4 visa). The vast majority are sent to work at client sites and charged out at a daily rate to the client. This is sometimes called staff/resource augmentation or onshoring, or less politely “bodyshopping”.
It is profitable to do this because the transferred worker can be paid significantly less than a UK worker and worker and employer receive tax relief. For isntance, the Social Security (Contributions) Regulations 2001 section 145(2) exempt Class 1 NIC for the first 52 weeks.
http://www.theyworkforyou.com/wrans/?id=2011-03-22a.154.0&s=laird+national#g154.1
The inta company transferred worker (ICT) should be paid the going or appropriate rate set by the UKBA, but this is set at the national lower quartile salary for the job. This is well below the market rate in London where 50% are sent (e.g. 40% below).
The ICT’s “salary” can include expenses paid as round sum allowances. These can make up over 70% of the “salary”:
http://www.theyworkforyou.com/wrans/?id=2011-03-14a.26.0&s=laird+national#g26.1
I have seen a real example of an ICT receiving a total “salary” of about £27k of which £22k was allowances and, of that £22k, £18k was tax free (presumably under a scale rate agreed with HMRC).
Changes to the National Minimum Wage Regulation at the start of the year now mean that these allowances do no not count towards the National Minimum Wage, so we have the anomaly that 7% of ICTs pass the UKBA going/appropriate rates but are paid less than the National Minimum Wage.
Richard,
This is all so frustrating.
Thousands march and even friendly Vince comes on TV to tell us we will be ignored.
We need to stress the point that the Bankers caused the problem (not the teachers and nurses)and much of it could be fixed by stopping (not encouraging) the rampant tax abuses.
ALL the politicians are hooked on the Race to the Bottom tax drug – HELP!
Keep up the excellent work
Regards
Martin
Richard didn’t the Indian government force Vodafone to pay their back taxes, while our George Osborne let Vodafone off of paying £6 billion in tax owed to the HM Treasury?