From Local To Global: Indian Corporates Take On World Stage
The dynamic geopolitical scenario and rivalry between traditional superpowers have propelled India into an unprecedented position of economic leadership. Countries with divergent mindsets and interests are racing to be on the 'friends list' of India. More and more nations are exploring opportunities to enhance business ties and economic participation with India. Indian talent and products are highly regarded on global platforms, opening up new opportunities for Indian companies to explore foreign markets.
While venturing into unknown terrains, Indian companies often require support from local entities or agents well-versed in the social fabric of foreign geographies. However, as the cultural, social, and economic mindset of such geographies could be very different, Indian companies must walk the path cautiously. While entering into local partnerships or agent arrangements, Indian companies should carefully consider the following aspects:
"Background & track record of the local partner or agent should be examined carefully, since the reputation of businesses are set to intertwine. A partner with proven ethical practices can help Indian companies establish their credibility in the foreign market.
"Similar to India, several developing countries have well-codified regulations for foreign exchange management. It is imperative for Indian companies to evaluate these regulations to avoid any unwarranted pitfalls at a subsequent stage.
"The flow of income between jurisdictions often requires withholding taxes from the payer country. Withholding taxes are guided by the domestic tax laws as well as tax treaties that India may have executed with the relevant country. Hence, having a good understanding of the trigger and quantum of withholding tax in a specified jurisdiction is important for the Indian company to avoid cash blockage in foreign jurisdictions.
"Given the diverse rules for taxation in different countries, the possibility of double taxation of income is common. Hence, availability of tax credits on doubly taxed income is important. Generally, the source or host country (where business is carried out) retains the prime rights of taxation and the home country (the country where the relevant company belongs to, i.e., India) provides tax credit of the income (if the income is again liable to tax in India).
"While negotiating contractual arrangements, it is important for Indian companies to ensure that the contractual terms safeguard their commercial interest. This is important since different countries have different regulations to safeguard the parties in a contract.
"Understanding the labour laws of the host country is very important as different countries have different levels of obligations for hiring and termination of local employees. Such obligations have substantial costs as well as penal consequences, hence understanding and factoring labour laws in employment contracts is important.
"Agents operating in foreign jurisdictions could be working exclusively for the Indian company or the arrangement could be non-exclusive. While a non-exclusive arrangement could have business/ commercial issues, an exclusive arrangement and financial dependence could increase the potential exposure of an Indian company to a Permanent Establishment in the host jurisdiction.
"The authority granted by the Indian company to the foreign agent/ partner could impact the potential Permanent Establishment exposure of the Indian company in the foreign country. Similarly, the period of contract would also have a bearing on the possible Permanent Establishment discussion for the Indian company in the foreign jurisdiction.
"Lastly, Indian companies must be mindful of the various compliances and filing requirements in the foreign jurisdiction. Most foreign countries have transaction taxes such as GST or VAT as well as profit tax or income tax. Further, in the case of a Permanent Establishment situation, the Indian company may also be liable to profit attribution and transfer pricing adherence in the foreign country. Hence, being mindful of the compliances and filings would insulate against any unwarranted consequences in the future.
The above points would help Indian companies ensure that they can spread their wings across the world and be ambassadors of our country across global geographies.
Nabin Ballodia, Partner & Leader (North), Tax & Regulatory Services, BDO India
