India Economy

Moving in sync with anti-BEPS steps

Rakesh Nangia Rakesh Nangia/Nitin Narang | Updated on February 04, 2018 Published on February 04, 2018   -  porcorex

Here’s taking a look at how Budget proposals in this regard will impact Indian taxpayers

Recent years have witnessed dramatic changes in the international tax arena. This is due to the economic challenges arising from the information technology revolution that has given rise to innovative ways of doing business across geographies.

Accordingly, new standards have been developed to enable countries protect their revenue bases. With the political support of the G20 Leaders, OECD and G20 countries have taken joint action to address the weaknesses within the international tax system that create opportunities for base erosion and profit shifting (BEPS).

Countries and jurisdictions are now working together on implementing the BEPS package consistently on a global basis, which has taken the form of Action Plans (APs) 1 to 15.

Keeping in line with global trends and India’s commitment to implement the recommendations from APs 1 to 15, the Government of India took gradual steps towards introducing amendments to the Income-tax Act, 1961. Specific proposals tabled before the legislators in the Budget 2018 for enactment and their corresponding impact on Indian taxpayers is discussed in the following sections.

Dependent Agent PE (DAPE)

The Government recently amended its Double Taxation Avoidance Agreement (DTAA) with many countries to plug certain loopholes. Taking a step further to align the domestic tax law and the DTAA, with the global standards set by OECD, the Budget has announced the implementation of certain anti-BEPS measures in the Indian tax law.

One important concept in the domestic tax law is “business connection”, which constitutes the threshold for creating a taxable presence in a country.

Currently, a non-resident is taxed in India, if a business connection in India is established. As per Section 9 of Act (pertaining to Income deemed to accrue or arise in India), a business connection can be established if there is a dependent agent who has the authority to conclude contracts. In effect, the relevant provisions in the DTAAs are wider in scope than the domestic law.

However, the provisions of the domestic law would prevail over corresponding provisions in the DTAAs, to the extent they are beneficial. Since, in the instant situations, the provisions of the domestic law being narrower in scope are beneficial than the provisions in the DTAAs, as modified by Multi-lateral Instrument (MLI), such wider provisions in the DTAAs are ineffective. Thus, the Government has now proposed to amend the provisions of Section 9 of the Act.

Thus, the scope of dependent agent has been widened in the current Finance Bill to bring it at par with the changes in the definition of Permanent Establishment (PE) by OECD BEPS Action 7. Accordingly, “business connection” shall also include any business activities carried through a person who, acting on behalf of the non-resident, habitually concludes contracts or habitually plays the principal role leading to conclusion of contracts by the non-resident.

The new finance Bill also incorporated this by amending the definition of business connection. In effect, non-resident carrying out business through agents in India will become taxable and income to be determined based on principles of attribution.

Besides, the Budget also seeks to tax the digital economy by enhancing the scope of “business connection” to include “significant economic presence” in line with one of the options discussed in the BEPS Action Plan 1 report.

The thought behind this is that Section 9 of the Act in the domestic tax law is narrow in its scope since it limits the taxability of certain activities or transactions of non-resident to those carried out through a dependent agent. However, in today’s digitised world, businesses do not necessarily need physical presence.

Current provisions only cover areas of taxability where there is legal and physical presence. Therefore, a lot of taxpayers who are engaged in a digital economy are not within the scope of taxability in India.

As per the OECD Model, business income would be taxable only if operations are carried out in India or if there was PE. The definition of PE includes a fixed place of business. However, since business via digital economy does not really require any fixed place of business, taxpayers engaged in a digital economy have been able to stay outside the scope of taxability.

The OECD thus addresses the challenges faced due to digital economy in BEPS Action Plan 1, as it modified the definition of PE to include businesses that have a strong economic presence. The new finance Bill has attempted to align the definition of business connection to the BEPS Action Plan 1 by also including the same in its definition of PE.

In effect, the changes would help the Government increase the tax base and add more non-residents carrying out business in India. For both the above changes, the Government has, however, clarified that the existing treaty benefits will continue until corresponding amendment is also made in the relevant tax treaty.

CbCR provisions

Finance Bill 2018 has proposed to rationalise the CbCR provisions and align them with global standards. From a compliance timeline perspective, the timeline for furnishing CbCR by an Indian constituent entity (CE) not being parent/alternate reporting entity (ARE) or Indian parent entity/ARE, is proposed to be extended to 12 months from the end of the reporting accounting period. This allows some additional time to taxpayers after the return filing season to meet compliance requirement.

Another significant change is where the non-resident parent has no obligation to file a CbCR in its country of residence, but the Indian CE has the obligation to file CbCR due to breaching of the stipulated threshold. In such situations, the India CE is required to furnish CbCR in India. The change is proposed to harmonise Indian provisions with recommendations of OECD’s BEPS Action Plan 13.

In addition, the definition of ‘Agreement’ has been amended to include agreement for exchange of CbCR as may be notified by the Central government, in addition to DTAAs.

This proposal will lead to difficulties as India is yet to enter into agreement for exchange of CbCR with some of its major trade partners like the US as it results in undue administrative burden of compliance on groups with parent entity in these countries.

More spokes have been added to the wheel to check the alignment with global standards. It is imperative to align with global best practices and take corrective measures on a timely basis to overcome the new challenges, as India Inc moves ahead on the world map.

The writer is Managing Partner, Nangia & Co LLP. With inputs from Nitin Narang, Partner - Transfer Pricing, Nangia & Co LLP

Published on February 04, 2018
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