Understanding Purpose Codes for Outward Remittances: A Guide for Foreign Subsidiaries

Sending money across borders? A small oversight can cost you a significant amount.

Imagine you have wrapped up a project for your parent company and are awaiting payment against the invoice. And suddenly, the bank flags your remittance, a delay, an inquiry, a huge compliance headache.

So, what did you do wrong? A tiny detail that many companies overlook – the purpose code.

This one thing can be the difference between a regulatory nightmare and smooth sailing. As a foreign subsidiary operating in India, it is strategically important to understand purpose codes.

Let’s decode the codes.

What are Purpose Codes?

These are standardized alphanumeric codes from the Reserve Bank of India (RBI) that indicate the purpose of a foreign outward remittance. As a subsidiary, whether you make payments as profit repatriation, royalties, license fees, or intercompany charges, the authorized dealer (the bank) must declare the relevant purpose code. This ensures:

✅ Accurate reporting of foreign exchange transactions to the RBI

✅ Alignment between GST and tax authorities

✅ Regulatory clarity under the FEMA guidelines

Importance of Purpose Codes for Foreign Subsidiaries

Often, foreign subsidiaries enter into complicated intercompany cross-border transactions. Here are a few reasons why choosing the accurate purpose code is important:

✅Bank Level Delays

Prior to processing cross-border payments, the banks verify that the right purpose code is used, the entity is permitted to make such transactions, and the remittance complies with the regulatory guidelines. An incorrect purpose code may trigger a red flag and result in delaying the transaction by days or even weeks.

✅Foreign Liabilities and Assets (FLA) Reporting

All entities registered in India must file annual FLA returns, which depend on the nature of funds paid and received, the type of transactions, and the relationship with the international entity. Purpose codes influence such cash flow reporting, and any error may result in incorrect FLA submissions. This violates FEMA guidelines and may result in hefty penalties or other extreme measures.

✅Alignment of Intercompany Agreements and Transfer Pricing

Foreign companies must adhere to transfer pricing regulations while making cross-border payments. An important aspect of these regulations is the justification and nature of these payments. Using incorrect codes may raise red flags during transfer pricing audits, lead to disputes on the nature, or undermine the rationale of intercompany agreements. This increases the risk of substantial penalties and reassessments, resulting in delays.

Common Challenges Faced by Foreign Subsidiaries

✅Code Confusion: This may result in overpayment or underpayment of taxes, potential non-deduction penalties, and difficulty during tax audits and assessments. It may also result in misreporting TP documentation, which increases potential penalties and other risks.

✅Transfer Pricing: Purpose codes are important to ensure adherence to TP regulations. If the code is misaligned with the TP report, it may result in scrutiny from the tax authorities, undermining the arm’s-length principle. As a result, companies may need to make adjustments or risk disallowance and penalties.

✅FIRC Discrepancies: Forward Inward Remittance Certificates (FIRCs) are proof of global transactions and are needed for GST filings, RBI compliance, transfer pricing disclosures, and fund repatriations. If the purpose code on the FIRC does not match the nature of the remittance, it may raise red flags during audits. Inconsistency may hinder the repatriation of funds or delay tax credit claims.

Best Practices for Purpose Code Management

✅Avoid superficial categorization

 ✅Ensure intercompany agreements are updated

✅Proactively engage with authorized dealers

✅Coordinate with the finance and transfer pricing teams

✅Seek expert assistance to avoid expensive missteps

In today’s globally connected world, money moves fast, but it must be coded correctly. For foreign subsidiaries, purpose codes are not just a regulatory formality; they are the base of clean cross-border transactions. Misclassification may cost companies time, trust, and tax. However, the right partner with a proactive approach ensures your global transactions are compliant and flawless.

Reach out to us; call on +91 8237857853 or drop us a mail at info@greenvissage.com.