For Mncs, Branches Make More Tax Sense

For a foreign company, it makes more tax sense to operate in India through a branch than through a 100 per cent subsidiary.

The 2002-03 budget has reduced the rate of corporate tax for foreign companies from 48 per cent to 42 per cent, whereas it has hiked the rates for others to 36.75 per cent, including a 5 per cent surcharge. This gives a clear tax advantage to branches of overseas companies rather than their subsidiaries, which are taxed at par with domestic companies.

According to Amitabh Singh, director, Ernst &Young, while subsidiaries of foreign companies have to pay an additional 15 per cent withholding tax and have to transfer 10 per cent of their profit to the compulsory reserve, branches have no such liability. This works out to a 42 per cent tax liability for a branch of a foreign company as against a 52 per cent liability for a subsidiary.

Starting from, say, a Rs 100 pre-tax profit of a branch of a foreign company and a subsidiary, the post-tax profit works out to Rs 58 for the former and Rs 63 for the latter.

But while the subsidiary will have to make a provision of compulsory transfer to reserves of 10 per cent and also pay a withholding tax at the rate of 15 per cent, the branch