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Management Control Systems

Notes payer). Consequently, local firms and affiliates of foreign MNCs are taxed on the income earned
in the source country. Obviously if the parent company of the foreign alternate also levies tax on
the worldwide income, the possibility of double taxation exists unless a mechanism is there to
prevent it.

Notes Under the Indian Income Tax Act, 1961, the incidence of tax on the tax payer depends
on his residential status and also on the place and time of accrual or receipt of income.
Indian Income (i.e., income earned or received in time) always taxable in India irrespective
of the residential status of the tax payer. Foreign income (i.e., income which is not received
or accrued in India) is taxable in the hands of resident (in case of firm, an association of
persons, a joint stock company and every other person) or resident and ordinarily resident
(in case of an individual and Hindu individual family) in India. Foreign income is not
taxable in the hands of non-residents in India (Sec 5 and 9 of the Income Tax Act, 1961).

14.1.6 Foreign Tax Credits

The typical approval to avoid double taxation is for a nation not to tax foreign source income of
its national residents. An alternative method is to grant the parent firm, foreign tax credit
against the home taxes for taxes paid to foreign tax authorities on its foreign source income. In
a given year, an overall limitation applies to foreign tax credits that are; maximum total tax
credit should be limited to the amount of tax that would be due on foreign source income if it
had been earned in the Home country.

Self Assessment

Fill in the blanks:

1. An ……………………. is a direct tax i.e., one that is paid directly by the tax payer on whom
it is levied.
2. A ……………………… is an indirect national tax levied on the value added in the production
of a good (or service) as it moves through the various stages of production.

14.2 Alternative Organisation Structures to Plan Tax Liabilities

Different forms of structuring a multinational organisation within a host country can result in
variation in tax liabilities for the multinational organisation. These are being discussed below.

14.2.1 Branch and Subsidiary Income

An overseas alternate of an MNC can be organised as a branch or a subsidiary. A foreign branch
is not an independently incorporated entity separate from the parent; basically, it is an extension
of the parent. Consequently, active or passive foreign source income earned by the branch will
be consolidated with the domestic source income of the parent for determining the parent’s tax
liability, regardless of whether the foreign income has been repatriated to the parent in the
foreign country or not.

A foreign subsidiary is an affiliate organisation of the MNC that is independently incorporated
in the foreign country with the parent owning at least 10% of the voting equity stock. A foreign
subsidiary in which the parental owns more than 10% but less than 50% of the voting equity is
a minority foreign subsidiary or an uncontrolled foreign subsidiary. Active and passive foreign

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