Tax Street – August 2023

Focus Point

Synopsis of Reimbursements of Cost's Taxability

In the current era of globalization of businesses, interdependence among group companies has become more common. Companies within the same group share costs relating to businesses to achieve cost efficiency and streamline operations. These practices are prevalent in multinational corporations and conglomerates where different group entities collaborate closely. Some prevalent practices include allocating common costs such as information technology, procurement, personnel cross-charge, and other cost-sharing arrangements. Such recoupment of expenses is commonly known as 'reimbursement.'

Reimbursement of costs is a widely used concept and an equally debated one in India, especially in the case of payment to overseas group entities. From a corporate tax perspective, the controversy revolves around the taxability of reimbursement in the hands of the recipient, whether it is taxable as income and