International Tax - Resident, PE, Royalty & FTS, Capital Gain
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Transcript of International Tax - Resident, PE, Royalty & FTS, Capital Gain
INTERNATIONAL TAXATION
Study
2
RESIDENCY AND SCOPE OF INCOME
RESIDENCY UNDER DOMESTIC LAW - INDIVIDUAL
3DIRECT TAX
Stay >= 182 days in PY
RESIDENT
NON RESIDENT
Stay >= 60 days in PY and stay >= 365 days in preceding 4 PY
ORDINARILY RESIDENT NOT ORDINARILY RESIDENT
Yes No
Non Resident in 9/10 preceding PY
AND Stay in India <730 days in
preceding 7 PYYes
Yes
No
No
RESIDENCY UNDER DOMESTIC LAW - COMPANY
4DIRECT TAX
• Indian company
• Other than an Indian company – when the control and management is wholly in India
• Other than an Indian company – when the control and management is wholly or partly outside India
RESIDENT NON - RESIDENT
SCOPE OF TOTAL INCOME
5DIRECT TAX
Income received / Deemed to be received
in India
Income accrued /
Deemed to be accrued
in India
Income deemed to accrue or
arise outside
India
Income derived from a business
controlled in / profession
set up in India
Non Resident
Resident
Not Ordinarily Resident
6
TREATY PROVISIONS
Overall Structure of DTAA
7
Articles Description
Article 1& 2 Scope of the convention
Article 3, 4,5 General Definitions, Resident, Permanent establishment
Article 6 to 21 Taxation of various incomes- Business profits, Royalties, Fees for Technical services, Interest, Dividends, Others
Article 22 Taxation of capital
Article 23A and 23B Methods of elimination of double taxation
Article 24 and 29 Special provisions-Non discrimination, MAP, etc.
Article 30,31 Entry into force, Termination
7DIRECT TAX
Resident as per DTAA - Article 4
8 8DIRECT TAX
Resident
Place of Incorporation
Place of Management Citizenship
Residence
Domicile
Resident as per DTAA - Article 4
9
Dual Residency – Tie Breaker Provisions as per Treaty
Permanent Home
Centre of vital Interest
Habitual Abode (Max Time Spent)
Nationality
Mutual Agreement
9DIRECT TAX
Case Study 1…
10
Rohan is a US citizen
He has been employed in India
He has taken accommodation on rent for 5yrs
His family continues to stay in US in their own house
He goes to US on business trips for approx 15 days a month
He has investments in both the countries
What is the residential status of Rohan?
10DIRECT TAX
Particulars US India Conclusion
Country of permanent home
Yes Yes Country of residence not determined
Country of personal and economic interest
Yes Yes Country of residence not determined
Habitual abode Yes Yes Country of residence not determined
Nationality Yes No Country of residence determined
11
…Case Study 1
11DIRECT TAX
12
BUSINESS CONNECTION
Business Connection as per the Act….
13
US Company
Indian agent
Habitually secures orders
Maintains stock in
India
Habitually exercises
authority to conclude contracts
13DIRECT TAX
ExceptionBroker, general commission agent or any
other agent having an independent status, acts in the ordinary course of
his business
ExceptionRelated parties
14
PERMANENT ESTABLISHMENT
Business Profits - DTAA
15
Business profit of company would be taxable in India as per Tax Treaty, only if it has a Permanent Establishment in India
15DIRECT TAX
16
Types of PE
PE
Basic PE Management PE Agency PE Service PE
16DIRECT TAX
Types of PE
17
Basic PE
Fixed Place PE
• A branch
• An office
• A factory
• A workshop
• A mine, an oil &
gas well, a quarry
or any other place
of extraction of
natural resources
Others
• A building site
• Construction,
assembly or
installation project
• Supervisory activities
• Service PE
(but only where such
site, project or
activities continue for
a period of more than
a specified period
(usually 90 / 180 days)
Agency PE
• A person (other than
Independent Agent)
• Acting on the behalf
of an enterprise
• Habitually exercise an
authority to conclude
contracts for an
enterprise or
Habitually delivers
goods from stock
maintained or
Habitually secures
orders for the
enterprise (US treaty)
17DIRECT TAX
18
ROYALTY AND FEES FOR TECHNICAL SERVICES
INDIRECT TAXATION 19
Royalty – Section 9(1)(vi) of Income Tax Act
Royalty means consideration for :
• Use of or Transfer of all or any rights including granting of any license secret formula, copyright or scientific work including films or video tapes
• Imparting of any Information concerning Technical, industrial, commercial or scientific knowledge, experience or skill
• Use or right to use industrial, commercial or scientific equipment
19 19DIRECT TAX
Royalty – Article 12 DTAA
Royalty is consideration for use or right to use
Cinematographic films
Industrial, commercial or
scientific equipment or for
information concerning industrial or
scientific experience
Literary, artist or scientific work
20DIRECT TAX
Royalty Challenges• Copyright vs Copyrighted article
• Use or right to use industrial, commercial or scientific equipment
Purchase of Artist’s copyright in a song Purchase of Audio CD
Purchase of Author’s copyright in a story Purchase of Book
Acquiring use of equipment Acquiring service of equipment
Control & Physical possession over the equipment
No Control or physical possession over equipment
Equipment should be available for exclusive use
Equipment is available for use by anyone
Royalty No Royalty
21DIRECT TAX
INDIRECT TAXATION 22
Royalty Challenges
Revenue Authorities
• Supply of software involves use / right to use of following:
Copyright Patent Invention Process or
industrial commercial or scientific equipment
• Taxable in Indian as royalty on gross basis
Whether Royalty?
Software supply
Whether Business Income?
Taxpayer
• Supply of software does not involve any use/right to use of copyright, patent, invention or process
• It is business income not taxable in India in the absence of any PE in India
Issue under litigation in a number of cases pre and
post introduction of Explanations to Section
9(1)(Vi)
Characterisation of receipts from software supply by foreign
company
22DIRECT TAX
Royalty Challenges
• Whether subscription charges paid for accessing web portal constitute Royalty ?
- Yes In re. Cargo Community Network Pte Ltd 289 ITR 355(AAR)
• Whether payment for standardized ‘Business Information Reports’ publicly available on the Internet upon payment of subscription charges constitute Royalty?
- No, Dun & Bradstreet Espana S.A. 272 ITR 99 (AAR) and In re. ABC Ltd 284 ITR 1 (AAR)
23DIRECT TAX
INDIRECT TAXATION 24
Fees for Technical Services - Section 9(1)(vii) of Income Tax Act
Consideration (includes consideration) for rendering any
• Managerial / Technical / Consultancy Services
• Includes provision of services of technical/other personnel
Excludes:• Construction;• Assembly• Mining;• Any like project;• income chargeable as ‘Salary’
Payable by• Government; or• Resident except where payable for the purpose of / in business or profession carried on by such
person outside India, or for the purposes of making or earning any income from any source outside India; or
• Non-resident where it is payable for the purpose of a business or profession carried on by such person in India, or for the purposes of making or earning any income from any source in India
24DIRECT TAX
Case Study
Titan Manufacturer and Seller of
Watches
Paid fees to a professional
firm for registration of Trade name
‘Titan’ in Hongkong
Whether the fees paid will be taxable?
25DIRECT TAX
Case Study
X Ltd (Incorporated
in India)
Y Pte Ltd (Tax
Resident of Singapore)
Z Ltd (Tax Resident of
US)
Payment for FTS
Payment for FTS
Technical Services Provided
which
In turn provided to X Ltd, India
Whether payment made by Y Pte Ltd, Singapore to Z Ltd, USA is taxable in India ?- Yes- the services utilised for the purpose of business carried on ( X Ltd, India) in
India- The services utilised for earning any source of income in India
26DIRECT TAX
Fees for Technical Services - Article 12 DTAA
Fees for Technical Services
Payment of any kind to any person
Other than payments to an employee of the person
making the payment and any individual for independent
personal services
In consideration for the rendering of any
technical or consultancy
services
Only if such services make available technical knowledge, experience,
skill, know-how or process or consist of the development and transfer of technical plan or technical design
27DIRECT TAX
India – USA DTAA - Make available Concept
Whether ‘technical’ services?
Yes No
Whether services involve “technical” knowledge, etc
Article 12 not applicable
Whether services “make available” such technical knowledge, etc?
Yes
Yes
No
Article 12 applicable
Article 12 not applicable
28DIRECT TAX
INDIRECT TAXATION 29
Rate of Tax on Royalty and Fees For Technical Services
29DIRECT TAX
Income Tax Act
• As per section 115A @ 25 % (Excl. Surcharge and Edu. Cess)
DTAA - TRC & PAN Available
• As per Article 12 @ 10 % (Incl. Surcharge and Edu. Cess)
No PAN & No TRC
• As per section 206AA Higher of 20 % or 25% (Excl. Surcharge and Edu. Cess)
30
CAPITAL GAINS
CAPITAL GAINS UNDER THE DOMESTIC LAW
31DIRECT TAX
• Section 9(1)(i)
“All income accruing or arising whether directly or indirectly, ..........................….through the transfer of a capital asset situate in India.”.
• Section 45
“Any Profit or gains arising from transfer of a Capital Asset shall be chargeable to tax as Capital Gains and shall deemed to be income of the previous year in which transfer took place.”
INDIRECT TRANSFER
32DIRECT TAX
X Co.
I Co.
Overseas
X Co.
Y Co.
I Co.
• Taxable as direct transfer of a capital asset situated in India
• Taxable, conditional on the shares in Y Co deriving their value substantially from the assets located in India ( Explanation 5 to section 9(1)(i))
• Term “substantially” not defined
Sale Sale Overseas jurisdiction 1
Overseas jurisdiction 2
RETROSPECTIVE AMENDMENT
33DIRECT TAX
Explanation 5 to section 9(1)(i) of the Act is not restricted to capital asset but extends to other assets as well
“For the removal of doubts, it is hereby clarified that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India“
INDIA-MAURITIUS TAX TREATY
34DIRECT TAX
Hold Co.
I Co.
TransactionSale of shares of the Indian company by Hold Co.
As per domestic Law of India - Taxable
As per India – Mauritius Tax treaty – Article 13 – Gains derived by a resident of a Contracting State from the alienation of any property shall be taxable only in that State.
As per Mauritius domestic law – No capital gains tax
MAURITIUS
INDIA
Sale
INDIA-SINGAPORE TAX TREATY
35DIRECT TAX
Limitation of Benefit Clause in India – Singapore Tax treaty –
A resident of a Contracting State shall not be entitled to the benefits of the treaty • if its affairs were arranged with the primary purpose to take advantage of the
benefits of the Treaty
• A shell/conduit company A shell/conduit company is a company with nil business operations or
with no real and continuous business activities carried out
• It is not considered as a shell/conduit company if - • It is listed on a recognised stock exchange• A resident of a Contracting State is deemed to be a shell/conduit
company if its total annual expenditure on operations is less than S$200,000 or INR 50,00,000 in the respective as the case may be, in the immediately preceding period of 24 months from the date the gains arise
INDIA-UK TAX TREATY
36DIRECT TAX
Hold Co.
I Co.
UK
TransactionSale of shares of the Indian company by Hold Co.
As per domestic Law of India - Taxable
As per India – UK Tax treaty – Article 13 – Except as provided in Article 8 (Air transport) and 9 (Shipping) of this Convention each Contracting State may tax capital gains in accordance with the provisions of its domestic law.
NO BENEFIT UNDER TAX TREATY
INDIA
Sale
37
WITHHOLDING OF TAX
INDIRECT TAXATION 38
Section 195
Objective of Section 195
• Tax is collected at the earliest point of time
• No difficulty in collection of tax at the time of assessment
• Avoiding loss of revenue as non residents may have no assets in India for subsequent recovery
• Examples of payments covered – royalty/ fees for technical services
38DIRECT TAX
39
Overview of Section 195
Section Provisions
195(1) Scope and conditions for applicability
195(2) Application by the “Payer” to the AO
195(3) Application by the “Payee” to the AO
195(4) Validity of certificate issued by the AO
195(5) Powers of the CBDT to issue Notifications
195(6) Furnishing of information by payer
195A Grossing up of tax
39DIRECT TAX
INDIRECT TAXATION 40
Grossing Up Of Payments Under Section 195A
If Remitter bears the tax liability i.e. payment is “net of tax” then for computing withholding tax, income has to be
grossed up [ Section 195A of the Act]
Example : Amount payable to Non Resident is 100 and the withholding rate is 10%, Gross amount for
withholding purpose would be
100 X 100 = 111
90
40DIRECT TAX