Multinationals Being Probed In Connection With ESOPs Paid To Employees In India

Multinational companies offer their employees stock options in their parent company, which is located outside India. Called esops (employee stock ownership plan), it is a common way of paying compensation to employees. It allows the employees to own a part of the company. However, these transactions have come under the lens of tax authorities. The tax department wants to know from the Indian arms of these MNCs how good they are in meeting tax-related norms while making these stock transactions. The authorities also want to know the tax applicable on these transactions — to allow them.

How does esops function? If a company headquartered in the US allocates shares worth Rs 10 lakh to an employee in India as esops, the parent company charges that amount to its Indian arm as “cost”. The Indian subsidiary has to pay it to the American company.

What's the problem? The tax authorities want to know the nature of this payment and the tax applicable on it. They have already reached out to some companies based in Bengaluru, the Economic Times has reported, citing people who know about the matter. The tax authorities suspect some of these esops shown as “cost” fall into the category of royalty. And thus tax should be deducted on this amount.

Most Indian arms of multinationals offer esops and pay that amount to their parent company as cost. These transactions between two related entities or subsidiaries of a company should invite transfer pricing. However, companies usually pay this amount to their parent company without deducting tax. So, the tax authorities have begun probing the matter.

Tax experts say the issue is not only about whether tax should be deducted when these payments are made by an Indian arm to its parent, outside India, it is also about the lack of clarity on the effective percentage of tax rate applicable.