Rahul Garg PWC.ppt

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    E-Commerce : Streamlining CrossBorder Taxation and Policy IssuesRahul Garg

    August 11, 2004

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    Agenda

    PricewaterhouseCoopers

    Policy Issues : E-Commerce and BPO

    Cross Border Tax Issues

    Harmonization of Policy IssuesE-Commerce / BPO and WTO

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    Agenda

    PricewaterhouseCoopers

    Policy Issues : E-Commerce and BPO

    Cross Border Tax Issues

    Harmonization of Policy IssuesE-Commerce / BPO and WTO

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    FICCI Round Table on E-Commerce PricewaterhouseCoopers

    Importance

    Small corporations and individuals can aspire to have a global presence.

    Cost savings through reduced labour costs and greater efficiency.

    Competitive advantage - companies can by-pass traditional links in the

    supply chain.

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    FICCI Round Table on E-Commerce PricewaterhouseCoopers

    Immediate Policy Issues

    Conflict in Migrating Work

    Uncertainty

    - future legislations

    - infrastructure promises by Government

    The Need

    Technology is dynamic while government legislations are datedquick

    response from the regulator is required; or

    Deregulate entirely

    Non-redressal will result in

    i. Decline in Shareholder confidence / risk perception

    ii. Reversal in outsourcing to India

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    FICCI Round Table on E-Commerce PricewaterhouseCoopers

    E-Commerce - Policy Issues

    Validity of Online Contracts

    Authentication

    Privacy of Information

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    FICCI Round Table on E-Commerce PricewaterhouseCoopers

    Policy Issues - India Position

    Validity of Online Contracts

    Adopted the UNCITRAL Model Law provision vide Section 4 of the

    Information Technology Act (IT Act) 2000.

    Authentication

    Digital Signatures is legally recognized under the IT Act.

    Privacy of Information

    Encryption and Decryption technology available subject to DoT

    permission.

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    FICCI Round Table on E-Commerce PricewaterhouseCoopers

    E-Commerce - Legal Framework

    Countries Digital

    Signatures

    Encryption Privacy IPR

    Protection

    USAa a a a

    U.Ka a a a

    Singaporea

    X Not Availablea

    Malaysia a X X a

    Indiaa

    X X X

    Comparative Analysis of Indian IT Legislation

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    FICCI Round Table on E-Commerce PricewaterhouseCoopers

    BPOPolicy Issues

    International Outsourcing involves complexity and riskscultural, political,

    financial, technological, managerial and legal. Some of the legalconsiderations are highlighted here: -

    How should the contract

    be structured to obtain tax Benefits

    and minimize regulatory Operationalor other intervention of

    Foreign government?

    What permits and licenses are

    required to conduct the proposed

    operations?

    What restrictions might apply to transborder

    flows of data, personnel, goods and other

    products?

    Is the customers data entitled to

    legal privacy and intellectual

    property protection?

    Does foreign law provide any limitations w.r.t payment conditions,

    limitations of liability, covenants to perform services, the right of

    termination, and dispute resolution mechanism?

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    FICCI Round Table on E-Commerce PricewaterhouseCoopersPricewaterhouseCoopers

    Policy Issues : E-Commerce and BPO

    Cross Border Tax Issues

    Harmonization of Policy IssuesE-Commerce / BPO and WTO

    Agenda

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    FICCI Round Table on E-Commerce PricewaterhouseCoopers

    Direct and Indirect Taxation in India

    Direct TaxExplanation (b) to Section 9(1)(i) of the Income tax Act exempts

    foreign company from taxation in India if it procures goods for export out of

    India.

    Service TaxCurrently, the services exported by a call center / BPO are not

    chargeable to service tax.

    R & D Cess Act 1986 Section 3 levies cess @ 5% on payments made for

    import of technology.

    Tax Exemption vide Section 10A/10B is available till 2009 to service

    exporters, call centers and BPO.

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    FICCI Round Table on E-Commerce PricewaterhouseCoopers

    Cross Border Tax Issues

    Characterization: -

    i. Goods Vs. Services?

    ii. Location

    - Source-based Vs. Residence-based taxation?

    - Conclusion of Contract?

    - Situs of Delivery?- Situs of Breach?

    - Sharing of Taxes?

    iii. Characterization of Income -

    - Business Profits

    - Royalty

    - Fee for Technical Services (FTS)

    Permanent(?) Establishment(?) ?

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    FICCI Round Table on E-Commerce PricewaterhouseCoopers

    Tax IssuesCharacterization

    Goods Vs Services

    Shrink Wrap Software vs Other Software

    Importing intangibles on Media

    Income

    Royalty Paymentsof any kind received as a consideration for the use of or the rightto use any copyright of literary, artistic or scientific work; any patent, trade mark,

    design or model, plan, secret formula or process; for information concerning industrial,

    commercial or scientificexperience.OECD Model

    - use of copyright vs copyrighted Article

    - Interpretation of processand use

    Business Profits - Electronic ordering and downloading of digital products (MajorityView)

    FTS web site hosting, especially where host provides back-up and secure accessservicesIndian Model (OECD Model treats this as Business Profits).

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    FICCI Round Table on E-Commerce PricewaterhouseCoopers

    Tax IssuesLocating Situs

    Source based Vs. Residence based Taxation

    HPC recommendations

    place of effective management concept should be applied after considering

    facts and circumstances of each case. In case this is indefinitive, then source

    based taxation should be used.

    Sharing of taxes

    Relevance of Double Taxation Avoidance Agreements (DTAA) viz-a-viz

    domestic law. (in case of conflict between the two, more beneficial provisions

    will prevail)

    Concerted effort of representatives from all nations must evolve principles of

    sharing tax proceeds.

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    FICCI Round Table on E-Commerce PricewaterhouseCoopers

    Tax IssuesIdentification of Location

    Conclusion of Contract?

    Acceptance is binding the moment the acceptance is out of the control of

    acceptorUNCITRAL Model Law. Section 13 of Information Technology Act

    incorporates similar terms.

    Situs of Delivery?

    Situs of Breach?

    Which jurisdiction will haveadjudication powers in case of breach of tax

    laws?

    Online contract Physical delivery of Goods Situs of sale known

    Online contract Online delivery of Goods Situs of sale unknown

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    FICCI Round Table on E-Commerce PricewaterhouseCoopers

    Tax Issues - PE

    OECD Model(Article 5) Fixed place of business through which the business of an

    enterprise is wholly or partly carried on.Article 5 para. 1PE presupposes a fixed place of business (Fixed specific fixed

    long term connection between place of business and a specific part of earths surface.

    Indian Position - High Powered Committee (HPC) set up by CBDT in December 1999

    submitted the following recommendations: -

    i. The existing concept of PE should be abandoned.

    ii. Existing principles (Residence based taxation and Source based taxation) do not

    ensure (in the E-commerce world): -

    - Certainty of tax burden

    -Equilibrium in sharing of tax revenue between two countries

    iii. Alternative to PE should be developed by OECD / UN

    Indian Stand differs from OECD Model

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    FICCI Round Table on E-Commerce PricewaterhouseCoopers

    CharacterizationTAG vs HPC View

    Comparison of views of TAG and HPC (under ITA and treaties) in respect

    of 28 payments considered by TAG

    Divergent view in 43% cases

    HPC has also examined the 28 categories of payments in the light ofprovisions of the ITA and treaties with UK & USA as illustrations (Judicial

    pronouncements also considered)

    Concurred Concurred

    under treaty

    provisions

    Differed Total

    15 1 12 28

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    FICCI Round Table on E-Commerce PricewaterhouseCoopers

    CharacterizationA Costly Affair

    Indian Revenue Position

    Royalty

    Royalty

    FIS

    Royalty

    Royalty

    Nature of Payment

    Payment for purchase of Software

    Software licensing payment made

    to non resident o/s India forbusiness in India

    Rendering of services (including

    training)

    Connectivity charges

    Payment for access to remote

    CPU

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    FICCI Round Table on E-Commerce PricewaterhouseCoopers

    PESensitive and Qualitative Hurdle

    Exposure on account of Permanent Establishment (PE) is

    asserted due to:

    Expatriates working in ICo as employees of FCo

    Executi