The Delhi High Court ruling last week dealing with definition of
permanent establishments (PEs) of overseas companies in India is set to
bring cheer to IT, ITES and BPO firms. It will help prevent the tax
department from levying higher tax on Indian contract manufacturers by
saying that some part of the overseas parent's global income is also
theirs.
The ruling prevents the Indian Revenue Department fr-om trying to get a slice of global profits of the parent firm by virtue of characterising contract service providers in India as PEs of the parent.
Besides, contract manufacturers not classified as PEs — such as subsidiaries of foreign parents — are now liable to pay income tax at 30% plus applicable surcharges and cesses, while PEs are taxed at 40% plus surcharges. Citing OECD model convention on taxation and provisions of double tax avoidance treaties, the court identified scenarios where a contract manufacturer should not be considered by the tax authorities as a PE.
The ruling clarified that treating a contract service provider in India as a PE of its overseas parent in certain circumstances is a wrongful attempt to go beyond what is taxable in India and tax a part of the global income of the parent, explained Rahul K Mitra, Partner, Price Waterhouse & Co. “This is one of most impo-rtant rulings on international taxation in the history of Indian tax jurisprudence, having a huge beneficial impact on taxpayers,” said Mitra.
Foreign companies entering India typically have the option to set up shop either as a subsidiary or as a liaison office, branch office or as project office. Liaison offices and bra-nch offices are prone to get characterised by the tax department as PEs with the consequence of a higher tax rate. If repatriation of profit is not the goal, then organising business in India as a subsidiary is much more tax efficient. “The tax liability in India of a PE depends on how much of the glo-bal income of the parent is attributable to the PE, on which 40% tax plus applicable surcharges are levied, said Amit Maheshwari, Partner, Ashok Maheshwary & Associates.
When it comes to repatriation of profits, both are treated on a similar footing. Double tax avoidance treaties ensure there is no discrimination between domestic firms and PEs on repatriated profits based on tax residency. A dividend distribution tax offsets the tax differential subsidiaries have over PEs which are exempt from DDT.
Source: Financial Express
The ruling prevents the Indian Revenue Department fr-om trying to get a slice of global profits of the parent firm by virtue of characterising contract service providers in India as PEs of the parent.
Besides, contract manufacturers not classified as PEs — such as subsidiaries of foreign parents — are now liable to pay income tax at 30% plus applicable surcharges and cesses, while PEs are taxed at 40% plus surcharges. Citing OECD model convention on taxation and provisions of double tax avoidance treaties, the court identified scenarios where a contract manufacturer should not be considered by the tax authorities as a PE.
The ruling clarified that treating a contract service provider in India as a PE of its overseas parent in certain circumstances is a wrongful attempt to go beyond what is taxable in India and tax a part of the global income of the parent, explained Rahul K Mitra, Partner, Price Waterhouse & Co. “This is one of most impo-rtant rulings on international taxation in the history of Indian tax jurisprudence, having a huge beneficial impact on taxpayers,” said Mitra.
Foreign companies entering India typically have the option to set up shop either as a subsidiary or as a liaison office, branch office or as project office. Liaison offices and bra-nch offices are prone to get characterised by the tax department as PEs with the consequence of a higher tax rate. If repatriation of profit is not the goal, then organising business in India as a subsidiary is much more tax efficient. “The tax liability in India of a PE depends on how much of the glo-bal income of the parent is attributable to the PE, on which 40% tax plus applicable surcharges are levied, said Amit Maheshwari, Partner, Ashok Maheshwary & Associates.
When it comes to repatriation of profits, both are treated on a similar footing. Double tax avoidance treaties ensure there is no discrimination between domestic firms and PEs on repatriated profits based on tax residency. A dividend distribution tax offsets the tax differential subsidiaries have over PEs which are exempt from DDT.
Source: Financial Express
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