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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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    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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    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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    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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    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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    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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    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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    Agenda

    PricewaterhouseCoopers

    Policy Issues : E-Commerce and BPO

    Cross Border Tax Issues

    Harmonization of Policy IssuesE-Commerce / BPO and WTO

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    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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    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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    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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    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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    Agenda

    PricewaterhouseCoopers

    Policy Issues : E-Commerce and BPO

    Cross Border Tax Issues

    Harmonization of Policy IssuesE-Commerce / BPO and WTO

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    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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    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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    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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    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