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