ROLE OF CORPORATE SOCIAL RESPONSIBILITY &
TAX TRANSPARENCY IN TAX MANAGEMENT
PRACTICES IN INDIAN MNC’s
Mr. Mukesh Kumar1 , Mr. Prashant Kumar2
1,2
Research Scholars, Dept. of Business Administration, University of Lucknow (India)
ABSTRACT
The increase in globalization insists India to open up and attracts investments from various multinational
companies (MNCs) from all over the world and become the prominent economy for development. In 1991 firms
are entering a dynamic world of international business that is marked by liberalization of economic policies in a
large number of emerging economies like India. Multinational corporations sell technology - both for
production and for consumption - on highly imperfect international markets to less developed countries. The
buyers must concern themselves both with appropriateness and with price. In today’s scenario India is playing
a leading role in the global business community. It is second largest growing economy of the world and the one
among the favoured destination for FDI inflow. According to the Ministry of Corporate Affairs it is one of the
ways to developing a system of activities. In 2009 the government made mandatory for all public sector oil
companies to spend 2% net profit on CSR activities.
This paper based on conceptual study of different literatures from various sources and trying to highlights some
important aspects faced by emerging Indian multinational companies in their work environment. The concept of
CSR began in 1920 and found itself in the spot light after 1951. Corporate social responsibility and tax
planning are some of the main aspects of tax management of Indian multinational companies. In the Indian
context most of the multinational companies have advantage with the tax authorities. The taxation procedure of
Multinational companies mainly concerned with parent company and subsidiary companies.
Keywords: Business, Corporate Social responsibility, Globalization, Multinational Companies, Tax
Transparency.
I. INTRODUCTION
Multi National Corporations (MNCs) are huge industrial organizations which are aiming for maximization of
their profits from one or two products, the MNCs operate in a number of fields and from this point of view, their
business strategy extends over a number of products and over a number of countries.
(i) MNCs are playing a major role in the globalization process.
(ii) More and more goods and services, investments and technology are moving between countries.
(iii) Most regions of the world are in closer contact with each other than a few decades back.
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1.1 Control over Multinational Corporations
The responsibility of controlling the activities of Multinational Corporation in India rests on different
government agencies. These agencies are:
1) The ministry of Company Affairs
2) The reserve Bank of India
3) The ministry of Industrial Development, and
4) The Ministry of finance. However, these agencies do not work in close cooperation with each other.
Tax management was a term that was little used by companies until a few years ago. Tax authorities are more
and more aggressive around the world and having been doing their best to make sure that business managers can
have no excuses for ignorance about their tax function. , there is a lot more to tax management in companies
than making sure that the right amount of tax is paid on time in the places where it should be paid. Stakeholder
communication, the role of technology and the structure of the tax function are other topics that contribute to
effective tax management in companies.
Tax management is the basic requirement through which businessmen are required to fulfill the procedural
requirement of taxation such as filing of returns, reply to the income tax intimations and notices, proper data
base management and timely availability of accounting data etc.
Tax planning is facilitated by an efficient tax management system. Most companies are involved in tax planning
extensively with the purpose of reducing their income taxes since the income tax expenses will reduce their
profits. It is arrangement of one’s financial affairs so that legal provisions won’t violate, it carried out the full
enjoyment of Tax Rebates, Tax Exemptions, Tax Deductions and it is within the four corners of LAW and
regarded as fully legitimate.
1.2 Csr Playing Critically Important Part In Tax Management
Corporate responsibility is about how a business takes into account the impact that its operations have on the
economic, social and environmental fabric of society with a view to maximising the benefits and minimising the
downsides that it perceives. Corporate responsibility or sustainability reporting is a process for publicly
disclosing an organisation’s economic, environmental and social management and performance.
II. LEGAL FRAMEWORK FOR CSR
The new section 135 introduced in the Companies Act, 2013 – mandating certain class of companies to spend
2% of the profits on CSR – is applicable to Foreign companies / MNCs operating in India.
2.1 Clause 3 (1) of CSR Rules: Corporate Social Responsibility:
Every company including its holding or subsidiary, and a foreign company defined under Section 2 (clause 42)
of the Act having its branch office or project office in India which fulfils the criteria specified in section 135 (1)
of the Act shall comply with the provisions of section 135 of the Act and these rules.
2.2 Section 2 (clause 42) of the Indian Companies Act, 2013
 ―Foreign company‖ means any company or body corporate incorporated outside India which —has a place
of business in India whether by itself or through an agent, physically or through electronic mode; and
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 Conducts any business activity in India in any other manner.
2.3 Section 135 of the Indian Companies Act, 2013
(1) Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand
crore or more or a net profit of rupees five crore or more during any financial year shall constitute a Corporate
Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one
director shall be an independent director.
(2) The Board’s report under sub-section (3) of section 134 shall disclose the composition of the Corporate
Social Responsibility Committee.
(3) The Corporate Social Responsibility Committee shall,—

Formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the
activities to be undertaken by the company as specified in Schedule VII;

Recommend the amount of expenditure to be incurred on the said activities, and

Monitor the Corporate Social Responsibility Policy of the company from time to time.
(4) The Board of every company referred to in sub-section (1) shall,—

after taking into account the recommendations made by the Corporate Social Responsibility Committee,
approve the Corporate Social Responsibility Policy for the company and disclose contents of such Policy in
its report and also place it on the company’s website, if any, in such manner as may be prescribed; and

Ensure that the activities as are included in Corporate Social Responsibility Policy of the company are
undertaken by the company.
(5) The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every
financial year, at least two per cent of the average net profits of the company made during the three
immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy:

Provided that the company shall give preference to the local area and areas around it where it
operates, for spending the amount earmarked for Corporate Social Responsibility activities:

Provided further that if the company fails to spend such amount, the Board shall, in its report made under
clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount.

Explanation- for the purposes of this section ―average net profit” shall be calculated in accordance with
the provisions of section 198.
2.4 How does corporate responsibility apply to tax?
Many organisations have given a great deal of thought to their CR in relation to social and environmental issues.
Paying tax is considered to be an important part of a company’s economic impact and contribution to society, as
taxes fund social investment. A call for a CR agenda on tax is not simply a call for companies to pay more tax. It
is about applying the relevant principles of CR. These include:
• Accountability
• Transparency and Disclosure
• Engagement with stakeholders; an ethical approach
• A commitment to add economic value
• Setting an appropriate tax strategy.
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2.5 Tax planning and CR
Historically, the determination of what can be defined as acceptable tax planning has referred back to the
concepts of tax evasion and tax avoidance. Tax evasion and tax avoidance are widely recognised and used
terms. While both are concerned with the reduction of a tax liability, evasion is illegal whereas avoidance is
legal. Evasion typically involves suppression, concealment or misreporting; avoidance involves using the
provisions in the tax code. The difference between the two terms was encapsulated by former UK Chancellor of
the Exchequer Denis Healey as being ―the thickness of a prison wall‖.
Tax planning is legitimate in most countries because the law offers the potential for economic transactions to be
structured in a number of different ways. Ultimately, business has an obligation to pay the amount of tax that is
due under the law of the country in which it operates, and in accordance with the law.
III. WHAT STAKEHOLDERS ARE LOOKING FOR?
Now day’s stakeholders have a need to understand what a company’s tax strategy is and how that strategy is
managed by the board and executive management. Understanding a company’s tax strategy and objectives is a
key first step to understanding how a company approaches tax, its attitude to planning and tax compliances and
the way it balances the pressures of minimising.
Source: OECD (2001)
In addition, stakeholders want to understand the impact of the company’s taxes on its business and on the
community. Particularly, they want to know how tax impacts the business strategy of the organisation, how tax
impacts shareholder value and the impact of taxes paid by companies as part of their economic contribution to
the communities in which they operate. A company’s response to these demands and its ability to adapt to the
changing tax environment is fundamental to its ability to manage its risk to reputation.
Transparency is a key factor. Stakeholders want detailed information about the taxes paid by the company, the
company’s tax strategy and how that strategy is managed by the board and the executive management. The
diagram on this page summarises what each of the main categories of stakeholder is looking for; this can be
assisted by increasing effective disclosure and communication.
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IV. THE TAX TRANSPARENCY FRAMEWORK
4.1 Tax Strategy and Risk Management-
A clear discussion of the company’s tax strategy and objectives
-
Full details of how the company’s tax strategy and function is managed and who in the organisation has
responsibility for governance and over sight
-
Clear disclosure of the material tax risks faced by the company.
4.2 Tax Numbers and Performance
A clear explanation as to why the current tax charge is not equivalent to the accounting profit at the statutory
rate of tax
- A transparent reconciliation of the company’s cash tax payments to the tax charge included in the income
statement;
- Disclosure of forward looking measures for tax, including forecast accounting and cash tax rate.
4.3 TTC and the Wider Impact of Taxes
- Detail as to how tax impacts the wide r business strategy and results of the company
-Disclosure of the impact of tax on shareholder value
- Clear communication of the economic contribution of all taxes paid by the company.
In the present age, a major chunk of the cross-border trade is in the hands of multinational enterprises, which
undertake the majority of their transactions within different entities under common control. The prevalence of
intra-group transactions has facilitated fixing their internal price at less or more than market value-a practice
known as transfer pricing. One of the repercussions of the transfer pricing manipulation is tax avoidance, which
is the most important issue in international taxation today. The majority of transactions in the international trade
take place between related entities within MNEs without passing though the neutral and independent market,
enabling them to fix internal prices of their goods and services according to their own convenience and motives
in respect of transactions between themselves. These prices are called transfer prices (also known as internal
prices or accounting prices or inter-corporate transfer prices). It may be defined as the price at which goods or
intangible properties are transferred or services rendered between the related enterprises and which does not
represent true, normal, natural and real market prices of the transactions. In the corporate sector, transfer pricing
takes place between related enterprises like between parent and subsidiaries, between subsidiaries of the same
parent, between parents and foreign affiliates. The transactions involved in transfer pricing, inter alia include:
transfer of tangible goods, capital assets and other such tangible asserts, transfer of intangible property rights,
rendering of services, provision of finance and others like property rental, leasing arrangements etc. The price in
such transactions may be enhanced (over-pricing or high transfer price) or reduced (under-pricing or low
transfer price). Tax Avoidance through transfer pricing:
1) Reduction of Income or corporation tax liability
2) Shifting of business profits from high-tax country to low-tax country or countries.
The Arm’s Length Price: The 1979 OECD Report defined the arm's length price as ―the price that would have
been agreed upon between unrelated parties engaged in the same or similar transactions under the same or
similar conditions in the open market.‖
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The G20 nations that profits of multinational companies should be taxed where economic activities deriving the
profits are performed and where value is created is an "important landmark" and it validates the country's
position.
Acknowledging that effective taxation of mobile income is a key challenge, the G20 leaders including Prime
Minister Manmohan Singh vowed to take steps to change rules to tackle tax avoidance, harmful practices and
aggressive
tax
planning.
"Profits should be taxed where economic activities deriving the profits are performed and where value is
created," the declaration adopted at the end of the summit of Group of 20 developed and major
developing countries said.
Referring to the stand taken by G20, Economic Affairs Secretary Arvind Mayaram told reporters that every
country has the right to tax profits made in their territory and it is a well accepted principle.
The stock of FDI in India, as per the Reserve Bank of India (RBI), is now about 12% of GDP. Multinationals
have a long history here. It had a steady course – not counting the aberration in the 1970s, when IBM and CocaCola were sent packing. An RBI study says that the 745 foreign firms that have invested in India had an overall
return on equity of about 13% in the year ended March 2011.
The Indian units of global consumer goods firms such as Hindustan Unilever, Nestle and Colgate-Palmolive
have posted returns of over 95%, 110% and 150%, respectively, on an average during the last three years, more
than double the 35-42% returns reported by Indian companies such as Dabur and Godrej Consumer (source: the
Economic Times, August 22, 2012).
Some multinationals in India, however, have much higher returns and consequently much higher valuations. The
market value of Indian affiliates of Suzuki, BAT, Holcim, Daichi Sankyo and Unilever had respectively 59, 44,
42, 32 and 15 percent of their global market value (source: Bloomberg). Nestle India is valued at 50 times its
profits; more than double the ratio of its Swiss parent.
OECD director Pascal Saint Amans has said in this regard that ―If you are a multinational you will be able to
reduce your taxes substantially because the international tax structure is completely out of date. Therefore,
OECD urges global tax clampdown on MNCs.‖
V. CONCLUSION AND FUTURE SCOPE OF THE STUDY
Tax management system in selected Indian emerging MNC’s is a very vast and controversial topic from many
past decades. This is the most discussed topic in every important tax meetings or annual budgets in India. The
desire and practice to avoid tax remained prevalent in all era and among all the professions. Indian businesses
should follow the principle of ―Karma Yoga (Selfless Work)‖ as mentioned in Gita.
The environment around tax is increasingly subject to change. Historically, tax has been perceived as a technical
subject of limited interest to most stakeholder groups. However, as mentioned, the environment is increasing its
demands, through a more diverse set of stakeholders, for more information on tax. These stakeholders have a
need to understand what a company’s tax strategy is and how that strategy is managed by the board and
executive
management.
Understanding a company’s tax strategy and objectives is a key first step to understanding how a company
approaches tax, its attitude to planning and tax compliance and the way it balances the pressures of minimising
taxes to enhance shareholder returns while managing risks to its reputation. In addition, stakeholders want to
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understand the impact of the company’s taxes on its business and on the community. Particularly, they want to
know how tax impacts the business strategy of the organisation, how tax impacts shareholder value and the
impact of taxes paid by companies as part of their economic contribution to the communities in which they
operate.
A company’s response to these demands and its ability to adapt to the changing tax environment is fundamental
to its ability to manage its risk to reputation. Transparency is a key factor. Stakeholders want detailed
information about the taxes paid by the company, the company’s tax strategy and how that strategy is managed
by the board and the executive management. The diagram on this page summarises what each of the main
categories of stakeholder is looking for; this can be assisted by increasing effective disclosure and
communication.
REFERENCS
Journal Papers
[1]
OECD (2001) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, OECD
Page 3.
[2]
Roy Rohatgi (2002) the Basic International Taxation, Kluwer Law International, London/The Hague/New
York Page 412-3.
[3]
Roy Rohatgi (2002) the Basic International Taxation, Kluwer Law International, London/The Hague/New
York Page 414.
[4]
Nishant Gehlot, Yamini Sharma and Neelam Kalla (2013), CSR Ethical Practices for Indian Business:
The Strategy to Achieve Global leadership, Global Journal of Management and Business Studies, ISSN
2248-9878
[5]
Volume 3, Number 10 (2013), pp. 1173-1180.
Tax Management in companies by International Tax review 2 nd edition, Tax reference library no.44
published in Association with Price water house coopers.
Websites:
[1]
http://www.incometaxindia.gov.in
[2]
https://incometaxindiaefiling.gov.in
[3]
http://pib.nic.in/newsite/erelease.aspx?relid=97490
[4]
http://businesstoday.intoday.in/story/e-filing-income-tax-returns-becomes-mandatory-sometaxpayers/1/185704.html
[5]
http://www.outlookindia.com/news/article/India-Hails-G20-Stand-on-Taxation-of-MNCs/809209
[6]
http://www.governancenow.com/views/columns/mncs-and-tax avoidance#sthash.Awg5Sj8C.dpuf
[7]
http://sandeepkejriwal.com/2014/06/10/does-csr-law-apply-to-mncs.
[8]
http://www.governancenow.com/views/columns/mncs-and-tax-avoidance.
Newsletters & Articles:
[1]
Financial Express
[2]
Economic times
[3]
Business Standards
[4]
The Hindu Business lines.
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