Shell companies’ patents to come under domestic tax net on adoption of BEPS

MUMBAI: Technologies that are developed in India but their patents registered in tax havens may come under the domestic tax net from the next financial year, when the country is expected to adopt a new world standard aimed at preventing abuse of double taxation avoidance agreements.

Many multinational and local companies have research and development centres in India working on new technologies and products. Once a technology or product is developed, many of them tend to register the patents in countries like Ireland and Switzerland.

With a clear view to pay lower tax, such companies create ‘cash box’ or shell companies in tax havens, which reap the benefits of the patents when the technologies start making revenue, but do no other economically relevant activities.

The practice isn’t illegal, but governments are trying to plug their revenue loss due to creative accounting by multinationals. According to an International Monetary Fund estimate, the lost tax revenue due to such practices could be equal to about 1.75 per cent of GDP for the emerging economies.

The Organisation for Economic Co-operation and Development has mooted the Base Erosion and Profit Shifting (BEPS) guidelines to tackle this problem.

“For multinationals which have R&D facility in India, it may lead to increase in taxation disputes here as the intangibles developed, enhanced or exploited domestically will result in a higher expectation of income allocation to India,” said Rohan K Phatarphekar, partner and national head, global transfer pricing services, KPMG.

India is an important hub for IT and engineering R&D, with several MNCs having their development centres in places like Bengaluru, and the new standard is expected to affect the way they register patents and account the related revenue. Industry trackers say even Indian companies, especially in the information technology and pharma sectors, could see the impact. The tax may not apply at the time of registration of the patents, but when and if the patents become a revenue generating proposition for the company, said tax experts. This means, a patent can have a tax implication even ten years after the registration or even beyond.

“For many multinationals that have R&D centres developing technology intangibles in India, the BEPS guidance will be quite relevant,” said Anis Chakravarty, senior director, Deloitte Touche Tohmatsu. “It will be important to take into account where value creation is happening, that is, development, maintenance and enhancement of intangibles amongst others. The tax authorities would take into account this aspect in determining the returns for such activities.”

Creative tax structures will come under intense scrutiny across the world, said industry trackers. India is expected to adopt BEPS in the next federal budget, they said. Since the guidelines are not binding, the Indian government may give priority to a few of the 15-point BEPS guidelines that could help increase its tax revenue.

Many companies have already started to do an impact analysis of BEPS. Some are doing even mock runs.

Apart from the patents, other forms of taxes that many companies are avoiding may also come under scrutiny.

“As money is shuffled across a series of national frontiers, firms make the most of any loopholes in the relevant tax treaty at each stage,” The Economist wrote recently. “Eliminating such treaty shopping is one of the aims of the OECD’s reform proposal.”