Saturday, January 23, 2010

How taxes will be determined for subsidiary and parent company?

Hi, Suppose a company has head office in India and a subsidiary company in USA.

How will tax be calculated for subsidiary company and parent company? Will subsidiary company have to pay taxes in USA and again in India? Will not it be double taxation? What does things work for multinational companies which have offices in so many countries?How taxes will be determined for subsidiary and parent company?
International companies use many strategies to move the realization of profits to the country that will charge the least taxes. Most countries evaluate the books of international countries to be sure that these strategies are not being used to their own detriment.

For example. a subsidiary may pay all of its income to the parent as payment of royalties on intellectual properties. And prices of goods sold to the parent may be understated based on the prices they charge to other companies. These are obvious ruses, and they do attract double taxation, or put different way, the parent company is not allowed to cook the books this way. Parent companies in general must demonstrate that they are dealing with a subsidiary much as they would another arms length company.

This can mean that the parent sells to competitors or companies that would ordinarily buy from the subsidiary. They document the leasing of property rights to other companies at competitive prices.

When a parent and subsidiary deal with each other as though they were not related, we expect them to be taxed fairly in both countries.

If there are significant opportunities to save on taxes, because one country has much lower tax rates, we expect ever so vigilant treatment from both governments.

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