New norms for taxing MNCs: Why amending rules on profit attribution matters

MNCs with business operations in India should review the implications of the recommendations on their business models, as well as consider any risk of double taxation

Rajendra Nayak
Last Updated at April 29, 2019 01:36 IST

Bilateral international tax treaties set the principles for taxation of international business. Under these, profits of a multi-national enterprise are taxable only in the country where the enterprise is resident. However, this rule is subject to an exception when the enterprise has a permanent establishment (PE) in another country. In that case, profits that are “attributable” to the PE may be taxed in the country where the PE is situated. The attribution of profits to PEs has always been subject to controversy as practices of countries and their interpretation have varied considerably. However, over the last several years a broad consensus has evolved under the so-called “authorized OECD approach” or AOA. Under the AOA, profits to be attributed to a PE are the profits that the PE would have earned at arm’s length if it were a legally distinct and separate enterprise performing the same or similar functions under the same or similar conditions. In other words, profits attributable to a PE are to be determined by applying the arm’s length principle. Without specifically acknowledging the AOA, Indian courts, including the Supreme Court, have generally upheld the principle underlying the AOA. However, disputes often arose on how to apply some of the principles.

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