On August 30, 2018, India’s Central Board of Direct Taxes (CBDT) published a statement on the extension of time (i.e., until September 30, 2018) to submit comments on income tax rules for “significant economic presence” (SEP).
On July 13, 2018, the CBDT requested comments in a consultation on the SEP rules, which India introduced under section 4 of the Finance Act 2018. See also section 9(1)(i) of the Income Tax Act, 1961 (“ITA”).
Double taxation agreements (DTAs) generally provide that a company’s business profits are subject to tax only in the residence jurisdiction. However, if a company carries on a business in another country through a permanent establishment (PE), then the other country can also tax the business profits attributable to the PE. See BEPS Action 7. Under new digital business models, a non-resident company can carry on a business and interact with customers in another country without having a physical presence in that country. See BEPS Action 1.
According to section 4 of the Finance Act 2018, a SEP of a non-resident in India constitutes a “business connection” in India. A SEP arises in either of the following two situations:
- Transaction of any goods, services, or property carried out by a non-resident in India, including the provision of downloading of data or software in India, if the aggregate payments arising from these transactions during the previous year exceeds a specified amount.
- Systematic and continuous soliciting of business activities or engaging with a specified number of users in India through digital means.
The transactions or activities will be considered a SEP in India, regardless of whether the agreement is entered into in India; the non-resident has a residence or place of business in India; or the non-resident renders services in India. Only the income attributable to the transactions or activities mentioned above is deemed to accrue or arise in India.
The CBDT is requesting comments and suggestions, by September 30, 2018, on the following issues:
- Revenue threshold of transaction in respect of physical goods or services carried out by a non-resident in India.
- Revenue threshold of transaction in respect of digital goods or services or property, including providing the downloading of data or software carried out by a non-resident in India.
- Threshold for number of users with whom a non-resident engages or carries out systematic and continuous soliciting of business activities in India through digital means.
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