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Key Tax issues in IndiaKey Tax issues in IndiaMaulik Doshi, SKP. May 30, 08, Vienna.Maulik Doshi, SKP. May 30, 08, Vienna.

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Agenda

Opening ThoughtsKey tax issues in India

Corporate Tax issues on deputation of expatriates to IndiaTaxability of payments by Non-Residents to Non-ResidentsTaxation of softwareOther emerging issues

Concluding remarks

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Opening Thoughts

Increasing GlobalizationSignificant increase in cross-border activities

to / from IndiaTax laws evolving

It is only recently that India is exposed to tax issues on cross border transactionsHost of judicial pronouncement with differing views

“Ground” realitiesPractical difficulties when applying the tax lawTax authorities’ approach generally biased towards Revenue

Frequent retrospective amendmentsNeed to keep this aspect in mind while planning

A tax payer is presumed guilty unless proven otherwise !

A tax payer is presumed guilty unless proven otherwise !

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ISSUE I: Corporate Tax

Issues onDeputation of Expats to India

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Deputation – The Concept

Back-to-back payments for deputed expat’s cost borne by UK Co??

• Expat continues on UK payroll

• Salaries paid by UK Co

Deputation of Expatriate

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Deputation vis-à-vis PE

Permanent EstablishmentCreates a taxable presence in

jurisdiction (read India)Deputation of employees may result in:

Fixed Place PEAgency PEService PE

Important precedent - Morgan StanleySupervisory / Stewardship activities do not constitute PE

PE exposure could be avoided with suitable tax planningPE exposure could be avoided with suitable tax planning

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Deputation vis-à-vis FTS / Service Tax

Reimbursement of salary cost to UK Co. in respect of deputed employees – whether taxable in India?

View 1 – Taxable as FTSAs services rendered by Foreign Co. to Ind Co. through employeesAT&S India Private Limited

View 2 – Not TaxableAs salaries paid abroad on account of administrative convenience and therefore, mere reimbursementsHCL Infosystems Ltd

Similar issues under Service Tax

Contractual arrangement assumes significance!

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Deputation – other aspects

Withholding tax issuesExpenses disallowed in case taxes not withheld

FBT Exposure In respect of employee “based in India”

Implications for deputed employees – treaty benefits

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ISSUE II: Taxability of

payments by Non Residents to Non

Residents

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Payments by one NR to another NR outside India

Whether payments made by NR to NR outside India taxable in India?

Yes, if the source if income is in India / income arises in India

Indian domestic law provides for taxability in India in such situationsEven certain treaties provide for it

Examples - Royalties / FTS paid by NR to NR outside India but in connection with license / services utilized in India

Obligation on the payer to withhold taxes while making payment and to comply with Indian regulations

Non deduction of TDS would lead to tax disallowance under the Indian lawsLaw amended to hold “buyer” / “payer” responsible for taxes not paid by seller / recipient of income

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Vodafone controversy

Capital gains earned on transfer of shares of Indian company taxable in India

Even group re-organization covered

Whether capital gains on sale of shares of off-shore holding company taxable in India?

Till now not taxable in India Infact many MNCs have been interposing holding company to make investments in India to save on capital gains tax

However tax authorities are taxing the same Since the underlying asset / shares are in IndiaVodafone’s acquisition of Hutch Essar – currently litigated 400 M&A / PE deals being scrutinized by Indian tax authoritiesEven FIIs being asked to pay taxes on PN dealings outside India

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Vodafone Controversy – The Ripple Effect!!!

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ISSUE III: Taxation of

Software

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Software categories

Canned or Shrink Wrapped SoftwarePrewritten software requiring no modification for customer use

Custom Made SoftwareDeveloped for specific customer needs.

Software embedded with the hardwareSoftware supply along with related services like customization, installation etc.Limited duration rights for use of software license

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Taxation of software

Payment for purchase of shrink wrap software is purchase of goods and not royalty

Sonata Software Ltd Transfer of right to use software put in media amounts to sale of goods

Tata consultancy servicesRight to use copyright vs right to use copyrighted product

Payment only covering the former without transfer of any of the latter rights does not come within the definition of royalty

Samsung Electronics Co. Ltd. Lucent Technologies Hindustan Ltd. Motorola Inc., Ericsson Radio Systems A.B., Nokia Networks OY.

Turnkey contract for software supply as well as installationService PE issue even for the supply portion

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Taxation of software

Majority of the OECD countries does not treat payments for import of shrink wrapped software as royalty.Indian High Powered Committee report differs from OECD TAG Report in many aspectsIndian judicial pronouncements not consistent with each other

Many cases where software supply is not treated as RoyaltyLower level tax authorities inclined to take a stand that software supply is Royalty

Desirable for the government to come out with suitable guidelines

Certainty for the taxpayers and tax administration

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Other Emerging Issues

Attribution of profits to PESET Satellite vs Morgan Stanley

Taxation of Liaison Offices of foreign companies

Transfer Pricing issuesTaxation of FIIs – whether capital gains or business income?

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Key Transfer Pricing issues

Payment of royalties and management feesto meet the economic benefit test

Mark-up required for Captive ITES / BPO companies in IndiaUse of Secret ComparablesMarket Penetration strategy and business considerations ignored for distribution entitiesAdjustments for distributors promoting brand of foreign parentNot accepting foreign company as tested partyAdjustments of imputed interest costs for excess credit period granted

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Concluding Remarks

Changing legislationRetrospective amendmentsTreaties re-negotiated to plug loopholes

Revenue officers on the learning curve New income tax code to be in place soonCFC and thin cap regulations on the cards!Front-end planning essential (advance rulings)International precedents increasingly being usedLitigation can be complex, costly & time consuming – evaluate costs, risks & benefits

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SKP’s Tax & Transfer Pricing Services

International TaxEntry Strategy for Inbound investmentsStructuring Outbound investmentsExpatriate taxationInternational Contract structuring in relation to EPC ContractsExchange control assurance and advisoryTransaction support services

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Some of our work…

Advising one of Israel’s largest shipping company in relation top non-taxability of various ancillary charges in India and thereby saving substantial taxes in IndiaAdvising an Indian listed company on optimal holding company jurisdiction for it to make investments / acquisitions in 23 target countriesAdvising an Indian listed company into diversified business on the optimal holding company jurisdiction with respect to their acquisition in GreeceAdvising a large US private equity firm on consolidating the existing 8 investment structures with regard to US and Indian IT investments into a single holding companyAdvised a UK pharmaceutical company regarding tax minimization in UK and other jurisdictions on international royalty income from 5 countries

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Some of our work…

Advising an UK Company in structuring their private equity swap in IndiaAdvising leading software company having operations in US, UK and other European countries in relation to designing their employees’ foreign travel policy from commercial, Indian & overseas tax, immigration, regulatory and legal perspectiveAssisting Indian software companies in procuring special dispensation for their employees from tax authorities in overseas jurisdictionsInternational tax planning / structuring issues related to the establishment of a Greenfield packaging plant in India for a Canadian investorAdvising and obtaining tax refunds for a leading Austrian engineering company undertaking a turnkey contract for technical assistance and supervision in IndiaProviding an optimal & tax efficient structure to overseas funds investing into Real Estate Sector in India

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Some of our work…

Providing an international structure for establishing operations in over 35 countries including China, Belgium, US, UK, etc for a leading healthcare companyMinimization of Indian withholding tax relating to fees being paid by a leading Indian investment bank to a large international consulting company which had offices in 5 cities abroad Tax planning and obtaining withholding tax certificate for an Israel based NASDAQ listed telecom software company Assisting Indian software companies executing projects abroad, in their international tax structuring and avoiding PE exposure abroadAdvised an overseas dredging company on their dredging contract in India with a view to reduce overall Indian tax considering Indian and international tax structuring via an intermediate sub-contracting entity

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Some of our work…

Advising one of the largest shipping company in changing the transfer pricing policy to remunerate its agent (subsidiary in India) from % commission to cost plus thereby achieving substantial tax savingsAdvising a listed Indian company and largest paint manufacturer in India with 23 subsidiaries overseas in formulating an intra-group management fee policy from transfer pricing perspectiveAssisting an US listed publishing company in formulating a global transfer pricing policy with respect to intra-group transactions with its Indian subsidiary and maintenance of documentation under US & Indian regulationsAdvising an India Software company having marketing offices in US & UK in formulating transfer pricing policy with benchmarking search on overseas databasesRepresenting a leading global cosmetic company in defending their transfer pricing policies before the Indian transfer pricing authorities

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Our Service Edge

Experience Over 40 years of tax advisory experience

Practical adviceInnovative solutions that balance theory and practice

Holistic approachIntegrating commercial, international tax and transfer pricing, exchange control, withholding tax, service tax, legal considerations

Track RecordClients from 25 countries across several industries

Global accessEstablished network of worldwide tax consultants

Global approachIntegrating Indian and foreign tax needsTransfer Pricing policy approved by Indian and UK authorities

Customised ServicesAligning services to meet client needs

Personal touchPartner – led services

Our associations with trade Knowledge partner of NASSCOMTP Representation for Gem and Jewellery industry

At SKP, we take full ownership and responsibility for the job!!!

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Our Service Edge

Technical Competence Practice heads trained overseasExtensive international tax libraryAccess to Indian and foreign databasesDedicated research team that ensures timely and high quality advice

Good rapport and established credibility with Tax AuthoritiesSKP’s TP Documenation Report sent to CBDT as a model reportAppointed by CBDT to study and comment on Indian TP Regulations and recommend way forwardSeminars / training to TP OfficersSpecial TP audit for the CBDTStrong representation skills

At SKP, we take full ownership and responsibility for the job!!!

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Indian regulatory framework - EU invitation to seminars in 10 cities in EuropeJoint ventures - European Research Agency, BrusselsIndian international tax issues and advance rulings - European American Tax Institute, London

Doing Business in India Singapore Confederation of Industries, Singapore

Doing business in India and regulatory framework Leeds University Business School

Outsourcing Services Overseas Norton Rose, London

Setting up in India Scottish Chambers & High Commission of India, Edinburgh

Setting-up software facilities NORAD, Oslo

More than 50 worldwide such as…….

Seminars

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Practical issues in Transfer Pricing assessment – Institute of Chartered Accountants of India (ICAI) – WIRC, PuneDocumentation under Indian Transfer Pricing Regulations - (ICAI) – WIRC, Mumbai & PuneIndian Transfer Pricing Regulations – ICAI (WIRC) & BCAS

Transfer Pricing - Gem & Jewellery Council

Transfer Pricing & Outbound Investments to UK – Invest UK British Trade Office

Transfer Pricing – Direct Tax Regional Institute, CBDT

Attribution of Profits to a Permanent Establishment - (ICAI) – WIRC, Mumbai

Introduction to International Tax – Direct Tax Regional Institute, CBDT

and in India too …….Seminars

Deputation of Employees and Expatriate Tax Issues – Quest India, Mumbai

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Written Word…

BooksDoing business in India and UKAmalgamation of CompaniesJoint Ventures & Foreign CollaborationsPractical guide for foreign companiesGuide to income-tax in IndiaWritten an article for Institute of Chartered Accountants of England on “Offshoring Finance and Accounting processes to India” “Inward and Outward Investment: India and the UK” published by Tottel Publications Written an article for the UK trade and Investments publication “Infinite Possibilities – a guide to establishing a presence In the UK”

Articles in Economic Times, International Tax Review, Tax

Notes International, UK Trade and Investment, etc.

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Contact

Maulik Doshi2nd Floor, Ballard House, Adi Marzban Marg, Ballard Estate, Mumbai 400 001. IndiaPhone # +91 22 6617 8000Cell # +91 98205 40027Fax # +91 22 6617 8002Email: maulik.doshi@skparekh.com

Visit us at www.skpgroup.com

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