(Edit Image Courtesy: Genpact)

 

Genpact Limited is rattled by crossfire of threats on taxation and other regulations from the US, India (including $ 158 million tax demand) and elsewhere.  The company has shared its concern with investors over growing uncertainty of the combined effect of national & regional initiatives on its business.

This Berumda-based US multinational company of GE lineage has substantial operations in India, the country where it grew up as global provider of business process outsourcing (BPO) and information technology services. 

Genpact’s wholly owned subsidiary, Genpact Luxembourg S.à r.l (GLS), has vividly projected the price a globalized service provider might have to pay in increasingly insular world. 

In its final offering memorandum dated 27th March 2017 for senior notes (debt) aggregating to $ 350 million, GLS has  referred to “destination-based cash flow tax” mooted last year by certain US Congress representatives. This tax, if introduced, could result in higher taxes being imposed on Genpact and other entities that buy goods and services from outside the US.

It says: “The current U.S. President (Donald Trump) and his administration have stated that they are considering this proposal as well as other potential tax reforms.”

It adds: “any changes imposing higher taxes on entities buying goods and services from outside the United States could have a material adverse effect on our operations, effective tax rate and financial condition and could materially reduce the willingness of clients and prospective clients to utilize our services.”

The company is also worried over the prospects of Trump administration levying some new tax or taking some regulatory action on companies for outsourcing, with incentives for returning outsourced operations to the U.S.

Referring to scrutiny of its income tax returns by the tax administrations of different countries, it says there can be no assurance that negative outcomes from those examinations will not adversely affect its operations. 

India’s Income Tax Department (ITD) issued assessment orders to Genpact in 2014, 2015 and 2016 seeking to assess tax on certain transactions that occurred in 2009, 2010 and 2013. 

GLS says: “We do not believe that the transactions should be subject to tax in India under applicable law, including due to the relief provided under the Mauritius-India treaty, and have accordingly filed appeals. Our appeal in respect of tax year 2010 has been resolved in our favor. We have received demands for potential tax claims resulting from assessments related to tax years 2009 and 2013 in an aggregate amount of $158 million, including interest. To date, we have paid a total of $20 million toward these demands to the Indian tax authority under protest, and may be required to pay the remainder of the demands pending resolution of the matter.”

Moreover, Indian Government has appealed against a 2011 ruling by the Delhi High Court that Genpact’s subsidiary Genpact India Private Limited cannot be held to be a representative assessee of GE in connection with an assertion that GE has a “permanent establishment” in India by reason of a 2004 transfer of shares of its predecessor company. If the Government wins this case, GE would be obligated to indemnify Genpact for any resulting tax.

GLS has pointed out that “the European Union (EU) is asserting that a number of country-specific favorable tax regimes and rulings in certain member states may violate, or have violated, EU law, and may require rebates of some or all of the associated tax benefits to be paid by benefitted taxpayers in particular cases.”

Genpact is also worried about the final shape of visa restrictions that US and other countries impose on entry of skilled professionals into their markets. 

Explains GLS: “Our business depends on the ability of our employees to obtain the necessary visas and entry permits to do business in the countries where our clients and, in some cases, our delivery centers, are located. In recent years, in response to terrorist attacks and global unrest, immigration authorities generally, and those in the United States in particular, have increased the level of scrutiny in granting visas”.

It adds: “there is currently uncertainty with respect to immigration laws and standards in the United States due to potential policy changes suggested by public figures, including the current U.S. President and members of his administration….”

 

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