Introduction
Indian companies establishing overseas branches, such as in Saudi Arabia, face challenges in accounting and tax compliance due to differences in financial year periods and Tax regimes.
This note addresses the treatment of such foreign branch income in India, focusing on consolidation, tax treatment, foreign tax credit, and relevant accounting and legal provisions.
Saudi Arabia: Corporate Tax Framework
- Corporate Tax Rate: 20% on profits attributable to foreign (non-GCC) shareholders.
- Tax Base: Income earned by the Saudi branch is taxed under Saudi corporate tax law.
- Tax Year: Calendar year basis (January 1 to December 31).
- Tax Authority: Zakat, Tax and Customs Authority (ZATCA).
Indian Tax Law Treatment
a. Global Income Taxability
Under Section 5 of the Income Tax Act, 1961, Indian resident companies are liable to tax on their global income, including profits earned by foreign branches.
b. Consolidation of Accounts
As per Accounting Standard AS 11 (The Effects of Changes in Foreign Exchange Rates) and AS 21/Ind AS 110 (Consolidated Financial Statements):
- A foreign branch is treated as an integral foreign operation.
- The branch’s financials must be translated to Indian Rupees and consolidated line-by-line with the Indian HO.
- Foreign currency translation differences are recognized as income or expense in the profit and loss account (under AS 11).
c. Mismatch of Financial Year
- India follows the financial year: April 1 to March 31.
- Saudi Arabia follows the calendar year: January 1 to December 31.Prepare a provisional trial balance for the Saudi branch aligned to the Indian FY. Alternatively, use pro-rata allocation from Saudi audited accounts to match Indian FY: Example: Use 9 months of the Saudi calendar year (Apr–Dec) and estimate the next 3 months (Jan–Mar).
Foreign Tax Credit (FTC)
a. Section 90 of the Income Tax Act, 1961
Provides for relief from double taxation via the Double Taxation Avoidance Agreement (DTAA) between India and Saudi Arabia.
b. CBDT Notification No. 9/2017 (Rule 128)
- Details the procedure to claim Foreign Tax Credit (FTC).
- Credit available only if the income is included in the Indian taxable income.
- Tax credit shall not exceed the Indian tax payable on such foreign income.
c. Filing Requirements
- Form 67 must be filed before the due date of the income tax return (u/s 139(1)).
- Documents required: Foreign tax return or certificate (ZATCA filing acknowledgement).Income allocation working.
Example:
Saudi income (SAR 120,000) → Apr-Mar basis → SAR 90,000 (Apr–Dec) + SAR 30,000 (Jan–Mar est.)
- Tax paid in Saudi: SAR 24,000 (20%)
- Convert to INR (say 1 SAR = 22 INR): INR 26,40,000 income; INR 5,28,000 tax paid.
- Report in ITR and claim FTC up to Indian tax payable on that income.
Books of Accounts & Audit
- Maintain a separate ledger/trial balance for the foreign branch.
- Convert using AS 11 rates and consolidate with Indian HO.
- Show FTC as an asset: “Foreign Tax Credit Receivable”.
