In part IV of our series on key legal consideration for establishing global capability centres (“GCCs”) in India,[1] we discuss the key taxation issues that foreign companies must be aware of ahead of setting up its operations in India.Continue Reading Taxation landscape of Global Capability Centres (GCCs) in India
The Hon’ble Income Tax Appellate Tribunal (“ITAT”), Delhi has recently held that salary reimbursement of seconded employees paid to the original employer without any profit element is not taxable as fee for technical services.
This case[1] pertains to Ernst and Young LLP, USA (“EY USA”), which is set up in the US. It had sent its employees on secondment (“Seconded Personnel”) to work with various EY member firms in India (“EY India”). During the assessment proceedings, the tax officer held that the cost-to-cost reimbursement of salary of Seconded Personnel is taxable as fee for technical services (“FTS”) as per Article 12 of the India-US Double Taxation Avoidance Agreement (“DTAA”) in the hands of EY USA.Continue Reading Salary reimbursement of seconded employees not taxable in the hands of foreign company: Delhi ITAT
With a view to boost infrastructure investments in India and make Indian investment more attractive, the Finance Act, 2020 (FA, 2020) introduced section 10(23FE) in the Income-tax Act, 1961 (IT Act). This section provides an exemption from tax in India in respect of income of certain specified investors who have investments in the infrastructure sector. Specified investors for this purpose include a wholly owned subsidiary of Abu Dhabi Investment Authority, ‘pension funds’ (PF) and ‘sovereign wealth funds’ (SWF). The exempt income would include interest, dividend or long-term capital gains arising to the specified investors, from their investments made in (a) company or entity engaged in developing, maintaining or operating an ‘infrastructure facility’ (Infra Companies); (b) Category-I and Category-II Alternate Investment Funds which have in turn made all their investments in Infra Companies; and (c) business trusts (i.e. Real Estate Investment Trusts and Infrastructure Investment Trusts). These exemptions are available if the Specified Investors meet certain conditions, including the requirement that they should be notified by the Indian Central Government in this regard. In pursuance to this, the Central Board of Direct Taxes (CBDT) has specified the procedure for the inclusion of PFs in the tax exemption notification.
Continue Reading Foreign Pension Funds’ tax treatment to match Sovereign Funds for certain investments
A special taxation regime, provided under Section 9A of the Income-tax Act, 1961 (“IT Act”), exempts eligible offshore funds, with their fund managers located in India, from treating them as having taxable business presence in India. On satisfaction of the requirements set out in Section 9A of the IT Act, management of the funds through such Indian fund managers would not constitute the offshore fund’s ‘business connection’ in India. It is important to note that when an offshore fund, satisfying these conditions is not taxable in India on its business income under the domestic law, then the question of it not having permanent establishment under the applicable double taxation avoidance agreement (“DTAA”) becomes moot. Additionally, Section 9A also excludes an eligible investment fund from being treated as resident in India for tax purposes under the provision of ‘Place of Effective Management’ when the eligible fund manager undertakes fund management activities while situated in India.
Continue Reading Clarity on eligibility criteria for funds set up by Category I FPIs for exemption from taxable presence in India
Mauritian entities have found it difficult to benefit from the capital gains tax exemption under the India- Mauritius double taxation avoidance agreement (DTAA) upon exit from Indian investments with the tax department questioning the said benefits. Recently, the Authority for Advance Ruling (AAR), declined to give a ruling on taxability of a Mauritian resident in India, on the grounds that the transaction was prima facie designed for avoidance of tax.[1]Continue Reading AAR declines ruling to a Mauritius resident, alleging that transaction was designed to avoid tax
The Base Erosion and Profit Shift (“BEPS”) programme, initiated by OECD, had recommended a host of action plans, which could be implemented by making changes to the international tax treaties. . However, there are more than 3000 bilateral tax treaties entered into by contracting countries and it would have taken years to amend them. To solve this problem, over 100 jurisdictions negotiated and concluded a multi-lateral instrument (“MLI”) in November 2016. Countries that agreed to change their tax treaties were required to sign and notify the OECD Secretariat. India was amongst the first few signatories to the MLI in 2017 and ratified it on June 25, 2019. Thus, its network of bilateral tax treaties would be impacted by the provisions of the MLI where its treaty partner is also a signatory. It is, therefore, necessary now to read the applicable tax treaty with MLI, based on the treaty partner’s position and reservations on the provisions of the MLI.
Continue Reading Have You Checked the Applicability of Multi-Lateral Instrument Impacting Your Treaty Benefit Claim?
In M/s Adidas India Marketing (P.) Ltd. v. Income Tax Officer,[1] the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) held that the insurance compensation received by the foreign parent due to loss of financial interest in its Indian subsidiary is not the subsidiary’s income as alleged by the tax officer and, therefore, is not taxable in India.
Adidas India Marketing (P.) Ltd. (Assessee) is an Indian company engaged in the business of sourcing, distributing and marketing products of the brand ‘Adidas’. Nearly all (98.99 %) of the Assessee’s equity is held by another Indian company, Adidas India Private Ltd. (Adidas India), which, in turn, is a subsidiary of a German company, Adidas AG, Germany (Adidas Germany).
Continue Reading Insurance Compensation Outside India for Loss of Interest in Indian Subsidiary Not Taxable in India, Holds Delhi ITAT
Taxation of international digital transactions has been a perplexing issue. As per the international tax rules, where an enterprise is a resident in one state with income originating in another state (source country), international tax rules provide that the source country will have the taxing rights over such income only if it is established that the enterprise has a permanent establishment (PE) in the source country. Thus, for the source country to be able to tax profits arising from the digital economy, some physical presence of the non-resident enterprise is required in the source state.
However, today a non-resident can carry out a large amount of internet transactions in the source state without having any significant physical presence there. A website can be launched from anywhere and made available to users anywhere in the world. There is no central point, or physical location, for such a transaction and thus, it may not fall within any country’s jurisdiction for taxation purposes.
This opens up two possibilities: double taxation or non-taxation. The concerned people could be even further creative, and actually set up an online business at a place where none of the founders / promoters are present, thereby making it even more difficult to tax them.Continue Reading Taxing the Digital Economy: The Rule of ‘Significant Economic Presence’
Permanent Establishment (PE) is a significant feature of bilateral tax treaties and is a key threshold adopted by source countries to tax profits earned by non-resident entities from the business activities carried out by the non-resident in the source country.
A ‘Fixed Place PE’ relates to a non-resident entity having a fixed place of business in the source country. But certain tax treaties also provide for a ‘Service PE’. A Service PE is established if: (i) the non-resident delivers services for longer than the prescribed threshold; and (ii) the said services are furnished in the source country through the employees or other personnel of the non-resident.
Traditionally, a Service PE required the physical presence of employees of the non-resident in the source country. However, in the present digital economy, this understanding is being challenged as more and more jurisdictions are doing away with this requirement.
The governments of Saudi Arabia and Israel, for example, have passed internal guidelines that suggest a non-resident would have a Service PE if it furnished services, including consultancy services, through employees or other personnel who are offshore and not physically present in the Source State. This would only be the case, however, if the activities continue (for the same or connected projects) within the Source State for more than 183 days in any 12-month period.Continue Reading Service PE Does Not Require Physical Presence of Employees
Putting to rest the speculation surrounding the Double Taxation Avoidance Agreement (DTAA) with Singapore, the Government of India has finally announced that it has been revised. This announcement was made on December 30, 2016, and the text of the new protocol amending the India-Singapore DTAA (Protocol) has since been made available. The Protocol is along expected lines on the taxation of capital gains front. But, surprisingly, it has not granted incentives on taxation of interest income and Singapore based investors would be at a significant disadvantage as compared to Mauritius based investors.
KEY REVISIONS TO THE DTAAContinue Reading India-Singapore DTAA Meets the Same Fate as Mauritius & Cyprus