*****MNCs under I-T lens over Esops to staff in India – The Economic Times

Clipped from: https://economictimes.indiatimes.com/news/company/corporate-trends/mncs-under-i-t-lens-over-esops-to-staff-in-india/articleshow/91900333.cms

Synopsis

The tax department is questioning the Indian arms of multinationals on withholding tax when they make such payments to their parents. In most cases, employees around the world get stock options in the multinational’s parent company, which is located outside India.

Multinationals that allotted employee stock options (esops) to their India employees have come under the taxman’s lens for tax applicability on these transactions.

The tax department is questioning the Indian arms of multinationals on withholding tax when they make such payments to their parents. In most cases, employees around the world get stock options in the multinational’s parent company, which is located outside India.

“Many multinationals allocate global esops to employees and they tend to charge this amount to their Indian entities. The tax department is questioning whether any tax should be withheld on this amount when it’s paid back to the foreign entity by the Indian entity,” said Shefali Goradia, partner at Deloitte.

So, if a US company allocates esops worth ₹10 lakh at ₹5 per share to its India employee, the amount is charged back to the India entity as cost. The India entity pays this amount to the US company.

The tax department is questioning the nature of this payment and the percentage of tax applicable on this amount. Tax department has disallowed deduction of this cost for many companies and have questioned whether this transaction can be defined as cost.

In most cases, the companies have made these payments to their parents and not withheld any tax. Tax experts say this is also mainly because this is a cost that is being reimbursed. “The question is not just about whether tax should be deducted on the cost of the esops amount reimbursed by the Indian entity to the foreign entity. There is also no clarity on what the effective percentage of tax rate is applicable on this amount as it would depend on surrounding circumstances including how it’s defined and could range anywhere between 10% and 42%,” said Tejveer Singh, partner, DMD Advocates.

Most Indian arms of multinationals tend to undertake many transactions every year, where they either pay or receive money to its parent or other subsidiaries outside India. As per the tax law, transfer pricing is applied on these transactions. Transfer pricing is a tax framework that is applied on transactions between two related entities or subsidiaries of a company.

Most of the companies based in Bengaluru have been questioned in this regard, say people aware of the development. The tax department is investigating these transactions as it suspects that some of the cost is royalty or similar expense and tax should be deducted on this amount.

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