In 2025, India will intensify tax scrutiny on Global Capability Centers (GCCs), signaling a shift from the previous predictable tax framework. Multinational companies employing centralized service hubs, such as technology, monetary, data analysis, and operational support, now face more thorough tax reviews that may lead to higher tax liabilities.
This change reflects India’s strategic focus on tightening Transfer Pricing rules to ensure profits reported by GCCs align with the real economic value they generate locally.
Background: The Cost-plus Model Under Scrutiny
Most GCCs in India use the Cost-plus method, invoicing related companies abroad by adding a 10%-15% margin to operating costs. This approach is based on market comparables and the view that GCCs perform low-risk, non-IP functions.
Conversely, the tax authorities argue that many GCCs have evolved to perform more complex activities, including proprietary software performance, advanced data analysis, and strategic process design. These functions could support higher Arm’s Length margins, thereby leading to substantial Transfer Pricing adjustments.
Safe Harbour Shifts and Their Practical Impact
In an effort to simplify compliance, India has maintained safe harbor regimes that set predetermined margins and reduce audit risks. By 2025, the revenue threshold to qualify for this regime increased from ₹200 crore* to ₹300 crore. Nevertheless, the safe margin set (around 17%) exceeds that currently applied by most GCCs.
It should be an operational dilemma: Accept a higher margin than the market one to avoid audits or stay within the range of comparables and assume a higher risk of adjustments by the authorities. The decision is not insignificant, as it can directly affect the profitability and competitiveness of the multinational group.
Reclassification Risk as a Permanent Establishment
The audit does not only focus on the profit margin. The Indian government is analyzing whether certain GCCs meet the criteria to be considered permanent establishments (PEs) of their foreign parent companies. This reclassification would mean taxation on a broader tax base and reallocate additional profits to the entity in India.
For Transfer Pricing, this change requires a more in-depth functional analysis (FAR), reviewing in detail the functions performed locally, assets used, and risks assumed. An insufficient framing of the analysis could result in significantly higher tax burdens.
Intensification of Audits and Tax Disputes
The increase in audits by the Income Tax Department means more detailed scrutiny of:
- Intragroup contracts and how they match up with actual operations.
- Comparables used to support margins.
- Allocation of costs and its relation to value creation.
In this scenario, even companies with seemingly solid Transfer Pricing policies could face challenges if their documentation has not been updated to reflect the actual evolution of their operations.
Strategic Implications for Multinationals
The current situation forces multinationals with GCCs in India to adopt a more proactive approach to tax matters:
- Review margins and comparables: Verify whether market ranges remain defensible under greater scrutiny.
- Solid and up-to-date documentation: Include detailed functional analyses supporting the declared risk profile.
- Preventive tax planning: Model the effects of adjustments and consider restructuring functions or assets.
Companies should also assess how the measures adopted in India align with global tax trends, especially when the OECD drives stricter standards for transparency and consistency in Transfer Pricing.
Conclusion
A thorough tax control over GCCs in India is not an isolated event, but part of a broader strategy to capture greater value from multinational operations carried out locally. Although the measure is an adjustment to local tax policy, it is essentially closely linked to the application and supervision of Transfer Pricing.
Those proactive companies that review their policies and enhance their documentation will be better positioned to face an environment where compliance and tax contingency are increasingly blurred.
*One crore is equivalent to 10 million rupees.
Source: CommunicationsToday