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India Consults On Unitary Taxation Proposals

by Mary Swire,, Hong Kong

29 April 2019

India's Central Board of Direct Taxes has launched a new consultation on proposals to amend Article 7 of India's double tax treaties on attributing profits to permanent establishments, and rule 10 in the Income Tax Rules, 1962, to establish a formula to bring within the charge to Indian tax a proportion of profits of a multinational deemed to have a significant digital presence in India. The country is considering using a formulary apportionment approach, akin to that proposed under the EU's Common Corporate Tax Base initiative.

The EU is considering, as part of its CCTB proposal, replacing the current outdated tax rules on multinational companies with a "unitary taxation" approach that would require that multinational companies are taxed, and revenues are apportioned based on taxing rights allocated to states according to factors such as turnover, sales, and employment levels. This is intended to more closely align tax outcomes with value creation, in line with the recommendations of the OECD in its base erosion and profit shifting (BEPS) project.

In India, from April 1, 2019, new digital permanent establishment rules were introduced. These are intended to expand the definition of business connection to India to include a non-resident entity with a "significant economic presence (SEP)" in the country. These new rules are intended to newly catch those companies that do significant business in India through digital channels but who would not be caught by preexisting permanent establishment rules.

Specifically, through the 2018 Finance Act, the definition of "business connection" was clarified to provide that a non-resident's significant economic presence in India shall constitute "business connection" of the non-resident in India, and the "significant economic presence" for this purpose shall mean:

  • (i) any transaction in respect of any goods, services or property carried out by a nonresident in India including provision of download of data or software in India if the aggregate of payments arising from such transaction or transactions during the previous year exceeds the amount as may be prescribed; or
  • systematic and continuous soliciting of its business activities or engaging in interaction with such number of users as may be prescribed, in India through digital means.

Further, it provided that the transactions or activities shall constitute significant economic presence in India, whether or not the agreement for such transactions or activities is entered into in India or the non-resident has a residence or place of business in India or renders services in India. Moreover, it also provided that only so much of income as is attributable to the transactions or activities referred above shall be deemed to accrue or arise in India.

The Indian Government's latest work looks to clarify the application of these rules. Specifically, the Indian Government is consulting on the recommendations of a task force on: first, potential changes to India's rules on profit attribution under Article 7 of its double tax agreements; and, second, how rule 10 the Income Tax Rules can be amended to provide specific rules on how profits should be attributed to non-resident persons having a PE in India through the new significant digital presence test.

The consultation is on recommendations put forward on the threshold to determine that a company has a significant digital presence, and on how to calculate profits attributable to activities in India, with different formulas prescribed depending on the "level of user intensity" in a multinational's business model and digitally facilitated activities in India.

TAGS: Finance | tax | business | India | agreements | transfer pricing | services | Tax | BEPS

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