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8/14/2019 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
Execution of service contracts in India through employees/ICo
ICo securing orders/ concluding contracts on behalf of FCo
Inter Company services
FCo owned equipment
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FICCI Round Table on E-Commerce PricewaterhouseCoopers
Attribution of Income
Marketing function (comprising 50-people strong sales force) constitutes15% of the physical activity in brick-n-mortar transaction whereas in e-
commerce environment the physical sales force becomes redundant
Contention 1 : Mode of undertaking activity is not relevant for the purpose
of attribution of income and hence, marketing still comprises 15% of the
total transaction activity - income and profits attributable would remain thesame
Contention 3 : Overall significance of the marketing function in the
transaction reduces considerably and therefore the percentage of profits
attributable to such function should also go down
Contention 2 : Cost of marketing function goes down and hence while
income attributable to it may remain the same, profits in absolute terms
may go up
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FICCI Round Table on E-Commerce PricewaterhouseCoopers
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
International Tax Dialogue
Representation of International Organizations
World Bank and IMF bilateral technical assistance in tax policies and
administration issues
The Committee on Fiscal Affairs of OECD key policies and administrativeissues on international tax policy agenda, tax treaties, transfer pricing,
international tax avoidance and E-commerce.
UN Ad Hoc Group on International Co-operation in Tax Mattersfocuses on
International Tax issues
Committee of International Organizations on Tax Administration umbrella
group of many regional and international tax organizations.
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FICCI Round Table on E-Commerce PricewaterhouseCoopers
5 Principles for International Tax Policy (ITP)
Neutralitybetween taxation of e-commerce and the commerce carried
on in traditional manner.
Efficiencyfull protection to taxpayer against double taxation, and
facilitating international flow of trade, investment and technology.
Certainty and Simplicityclear and transparent framework for easy
understanding of taxpayer and the taxation authorities.
Effectiveness and Fairnesswith respect to tax sharing between
countries.
Flexibilityin adapting changing technology.
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FICCI Round Table on E-Commerce PricewaterhouseCoopers
Need to Converge to ITP
Avoid Asymmetry
- Tax credit
- presumptive tax rationalization
- tax attributes alignment by period
- APA / APM for TP
- Quick MAP
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FICCI Round Table on E-Commerce PricewaterhouseCoopers
Facilitate Operations
Allow tax efficient consolidation
- of industry
- of vendors
Integrated tax free zones
- satellite cities
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Improve Understanding
Other countrys processes
Global business Practices
Technology impact
New E-Money System
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FICCI Round Table on E-Commerce PricewaterhouseCoopers
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
E-Commerce and WTO
E-commerce and Council on TRIPS
Copyright Protection digital networks has changed the way that works and other
protected materials are created, produced, distributed and used. Some of the
measures taken to address this issue by WIPO include: -
i. WIPO Copyright Treaty
ii. WIPO Performances and Phonograms Treaty
Protection of Trademarks concerns in this regard include applying the territorial
nature of trademarks to internet, protection of well-known trademarks and the
relationship between trademark and Internet Domain Names. To address the latter
issue, WIPO published The management of Internet Names and Addresses:
Intellectual Property Issues. The standing committee in WIPO is involved in
redressing other concerns highlighted herein.
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FICCI Round Table on E-Commerce PricewaterhouseCoopers
BPO and WTO
The General Agreement on trade in Services (GATS)treaty
provides for 4 modes for supply of services: -
Mode 1 Cross border supply of servicesa call center in India
providing back office support to British Airways.
Mode 2 Consumption AbroadTourism would ideally fit into this
category
Mode 3 Establishment of Commercial PresenceA US bank starting
a branch in India.
Mode 4 Movement of Natural PersonsAn Indian software
professional working on site of a client based in US.
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FICCI Round Table on E-Commerce PricewaterhouseCoopers
BPOWTO Policy and India
What India should ideally bargain for under the GATS Treaty: -
Mode 1 Cross border supply of servicesMeasures like the New Jersey Bill in US
typically defeat the objective under this mode of supply of services, which in turn has
serious repercussions on the Indian IT sector. Though the Bill has been stalled in the New
Jersey State Assembly, adequate steps under negotiations should be taken by India
preventing such precedents from occurring.
Mode 4 Movement of Natural PersonsGATS quotas for visas over and above the visa
currently being issued on a discriminatory basis.
1. Facilitates free movement of professionals in the WTO member countries.
2. Impetus to the Indian IT sector considering the competitive advantage it holds in the
form of cheap, highly skilled labor force.
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FICCI Round Table on E-Commerce PricewaterhouseCoopers
Current StatusThe Positives
International Companies still optimistic about India.
Domestic Companies and IT professionals inclination to embrace technology.
Soft infrastructure (human side) open to accept latest technology
Hard infrastructure (connectivity, networking) still lacking
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Thank You