CBAM, permanent establishment rules, transfer pricing key in India’s outbound FDI: EY

Beyond geopolitical situations, the growing global concern surrounding environmental issues and clean energy pose certain threats to Indian companies planning to invest abroad, consultancy major EY said in a report. While deeper insights are needed in areas like Carbon Border Adjustment Mechanism (CBAM), transfer pricing regime, permanent establishment rules, it said that higher investment limits for strategic PSUs investing overseas and investment by family offices are expected to spur overseas investments.

India’s outward foreign investment increased to $22.88 billion in FY23 from $1 billion in FY02.

On CBAM, it said: “Effective October 2023, it will be an additional cost for importers of specific emission-intensive product categories into the EU and means new compliance and reporting obligations. Companies therefore need to proactively address CBAM-related challenges for exporting ‘covered products’ to their overseas subsidiaries by understanding the requirements, assessing the potential impact on their operations and by developing a compliance plan”.


Referring to India’s new-age free trade agreements (FTA), it said that Indian MNCs would need to undertake comprehensive market analysis to identify new avenues for growth and understand tariff reductions, market access, regulatory changes and overall compliance environment to seize emerging opportunities and competitiveness in the post FTA regime.

“As companies navigate this expansion, they must astutely manage the local environment and manage emerging challenges like the Carbon Border Adjustment Mechanism (CBAM) to maintain competitive exports. Additionally, a robust financing strategy and meticulous post-acquisition integration are crucial for successful global acquisitions,” said Ajit Krishnan, Tax Partner, EY India.

Another emerging issue in recent years, under consideration of foreign multinationals in oil and gas sector, is the structuring of investments in developing nations through a jurisdiction that has a ‘Bilateral Investment Treaty’(BIT), with the operating (local) jurisdiction.

“This could mitigate risk of dilution of interest in the event the local government seeks to nationalize or take any other regulatory step which impacts the Indian MNC’s value in the overseas asset,” it said.

As countries implement the Base Erosion and Profit Shifting (BEPS) Pillar 2 rules, there could be variations and inconsistencies, adding complexities to cross-border investments and tax planning.

“While the rules aim to prevent tax evasion, they may also lead to potential double taxation scenarios if not applied uniformly across countries,” EY said.

Place of Effective Management (POEM), investment regime and incentives in the foreign country and differences in intellectual property laws and enforcement mechanisms may impact the protection of patents and proprietary technologies, posing risks to investment returns, according to the report.

“Further, in some regions, local manufacturing requirements or import restrictions may require a specific strategy for supply chain management for operations,” EY said.

As per the report titled ‘India abroad: navigating the global landscape of overseas investment’, energy security, technological collaborations and access to new markets are among the key factors for overseas investment.