US levy: Cos in SEZs fear jump in tax outgo

The Biden administration’s plan to introduce new levies on multinationals that undertake tax planning is set to impact top Indian information technology (IT) and pharmaceutical companies that have a presence in the US.As per the plan, the Biden administration is looking to slap a “minimum tax” on global profit pools of multinationals that pay less than a certain percentage.This would essentially mean that any company that doesn’t pay at least 28% tax on their profits in any country will face additional levies in the US.Tax experts say that Indian IT and pharma companies that operate through Special Economic Zones (SEZs) are set to be impacted.“The new levy would mean that any company that doesn’t pay a minimum tax on their profits will have to pay additional taxes in the US,” said Girish Vanvari, founder of tax advisory firm Transaction Square. “This is set to impact Indian IT and pharma companies that have either branches or companies in the US. This is mainly as these companies operate from Indian SEZs and enjoy concessional tax rates, which would lead to additional levies in the US.”82058824SEZs were introduced by the Indian government to promote exports. Companies based in SEZs have income tax exemptions ranging from 50% to 100%. Most pharma and IT companies operate from SEZs and will now have to justify the tax rate they pay on their global pool.Tax experts say several companies are going back to the drawing board and are looking to tweak their holding structures fearing the new levies in the US.The Biden administration is mainly targeting some of the global tech companies that have created structures whereby they can take their profits to tax havens.This is mainly done through a maze of subsidiaries and shell companies registered in various jurisdictions that cross charge and pay royalty and other such payments to each other.Some of the large Indian entities and even many American multinationals had tweaked shareholding patterns, customer contracts besides reducing management fees, interest and royalty payments to India from the US as part of their tax planning under the Donald Trump regime.The main objective then was to reduce their tax outgo in the US under Base Erosion and Anti Abuse Tax (BEAT). The new levies that could be brought in by the Biden administration will be different. Under the new levy, any company present in the US will have to cough up a minimum 28% tax on their profits. Also, they will have to make sure that they pay this percentage of tax across the world, wherever they have a presence.Indian IT and pharma companies that operate through subsidiaries and even separate listed entities in the US would be impacted. These companies do not pay 28% tax in India, mainly because they operate through SEZs, and would come under the gamut of the new levies. Several companies had moved their manufacturing facilities and even holding entities in some cases to the US as it offered better tax in the Trump regime. These companies would now be impacted adversely under the new levy, which is all set to be passed by the US in the coming months.

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