Sunnyvale, CA -- (SBWire) -- 04/23/2012 --India’s Central Board of Direct Taxes (CBDT) in a recent notification has provided detailed information that foreign companies with representative or liaison offices must provide to tax authorities in accordance to a 2011 tax law amendment.
Under the 2011 amendment, non-resident companies with Liaison Offices in India must file an annual statement. The latest CBDT notification provides details on the specific form for the statement (Form No. 49C) and the rules that are effective since April 1, 2012.
A Liaison Office is easier to establish, maintain and close down than other entities making it a popular choice for foreign companies starting their operations in India. A Liaison Office in India cannot engage in business or commercial activities or earn revenue but is allowed to conduct preparatory and auxiliary activities. It does not constitute a Permanent Establishment (PE) i.e. has no taxable presence.
Indian tax authorities have, however, been increasingly scrutinizing Liaison Offices and in some cases Indian Courts ruled that certain Liaison Offices by the nature of their activities did constitute a PE. India’s transfer pricing authorities as well have acted by attributing significant profits to Liaison /Offices that were ruled to have a taxable presence.
The new reporting requirements allow the government greater access to information about Liaison Offices allowing them to crackdown on errant operations. The key highlights for the requirements are:
- The annual statement must be signed and verified by a chartered accountant or a signatory duly authorized by the Liaison Office parent
- The annual statement must be provided via an electronic form with a digital signature
- The information that must be provided in the form about the Liaison Office to include:
1. All details for the financial year that relate to India. This includes receipts, income and expenses of the nonresident from or in India (this is not information related to the Liaison Office only);
2. Details of all purchases, sales of materials and services from or to Indian parties during the year by the nonresident parent (not just transactions entered into by the Liaison Office);
3. Salary or compensation details where the salary or compensation is paid or is payable outside India to any employee working in India or for services rendered in India;
4. Total count of employees working at the Liaison Office for the current year
5. Complete details about the representatives, distributors and agents of the nonresident parent in India and details of the top five parties in India with whom the Liaison Office has liaised;
6. Complete information about the product or service for which research or preparatory activity is carried out by the Liaison Office along with details of any other entity for which liaising activity is carried out by the Liaison Office;v
7. Information about group entities that maybe present in India e.g. branch office, company, limited liability partnership, etc., established in India
8. Details of other Liaison Offices of group entities in India; and
9. Information regarding other group entities operating from the same premises as the office of the Liaison Office.
This annual statement must be submitted within 60 days from the close of the Liaison Office’s financial year.
These reporting requirements are in addition to a separate guideline that requires a Liaison Office to submit an Annual Activity Certificate to the designated authorized bank in India with a copy to jurisdictional Directorate General of Income Tax.
Foreign companies with operations in India need to revisit their Liaison Offices and do a health-check on their operations to spot any PE risks. With heightened scrutiny from India tax authorities, companies should make it best practice to maintain robust documentation of their Liaison Office operations. In cases where a risk of PE is found, voluntary filing of corporate tax returns could help the case.
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India Provides Details on Mandatory Tax Reporting Requirements for Liaison Offices