On February 1, 2018, India disclosed its Finance Bill, 2018. See also the Explanatory Memo. The Budget includes several BEPS measures, including the tax treatment of dependent agents under the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (“MLI”), taxation of business profits under a digital economy model, and country-by-country (CbC) reporting. The Budget also includes provisions regarding penalties for failing to submit information on reportable accounts.
Dependent agent permanent establishment under the MLI
Under section 9(1)(i) of the Income Tax Act, 1961 (the “Act”), all income accruing or arising, directly or indirectly, through or from any business connection in India shall be deemed to accrue or arise in India. Explanation 2 under section 9(1)(i) says that a business connection includes any business activity carried out through a person who, acting on behalf of the non-resident, does one of the following:
- Has and habitually exercises in India an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-resident.
- Has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers on behalf of the non-resident.
- Habitually secures orders in India, mainly or wholly for the non-resident.
The scope of “business connection” under the Act is similar to the provisions relating to a dependent agent permanent establishment (PE) in India’s Double Taxation Avoidance Agreements (DTAAs). In terms of the dependent agent PE rules in tax treaties, if any person acting on behalf of the non-resident is habitually authorized to conclude contracts for the non-resident, then this agent would constitute a PE in the source country. However, in many cases, with a view to avoiding the establishment of a PE under Article 5(5) of the DTAA, the person acting on the behalf of the non-resident negotiates the contract, but does not conclude the contract.
The BEPS Action 7 recommendations are included in Article 12 of the MLI, to which India is a signatory. See BEPS Action 15. These provisions will modify India’s bilateral tax treaties covered by the MLI where India’s treaty partners have also opted for Article 12. India proposes to amend section 9 of the Act to align it with the provisions in the DTAA, as modified by the MLI. Therefore, “business connection” under section 9(1)(i) of the Act would include any business activities carried out through a person who, acting on behalf of the non-resident, habitually concludes contracts or habitually plays the principal role leading to the conclusion of contracts by the non-resident. Also, contracts should be (i) in the name of the non-resident; or (ii) for the transfer of the ownership of, or for the granting of the right to use, property owned by that non-resident or that the non-resident has the right to use; or (iii) for the provision of services by that non-resident. This amendment will take effect from April 1, 2019 and will apply to assessment year 2019-20 and subsequent assessment years.
Taxation of business profits under a digital economy
Under Article 7 of DTAAs, the business profits of an enterprise are taxable in the taxpayer’s resident country. If an enterprise carries on its business in another country through a PE, then the other country may also tax the business profits attributable to the PE. In general, nexus was based on the physical presence of non-residents. However, under new business models, non-resident enterprises interact with customers in another country without having any physical presence in that country, resulting in the avoidance of taxation in the source country.
BEPS Action 1 discusses options to tackle tax challenges arising in digital businesses. One option is a nexus rule based on “significant economic presence.” According to BEPS Action 1, “This option would create a taxable presence in a country when a non-resident enterprise has a significant economic presence in a country on the basis of factors that evidence a purposeful and sustained interaction with the economy of that country via technology and other automated tools.”
The scope of section 9(1)(i) of the Act provides for a nexus rule based on physical presence to tax a non-resident’s business income in India. Explanation 2 of section 9(1)(i) limits the taxability of certain activities or transactions of a non-resident to those carried out through a dependent agent. Therefore, newer business models, such as digital businesses, which do not require physical presence or any agent in India, are not covered under section 9(1)(i) of the Act.
As a result, India proposes to amend section 9(1)(i) of the Act to provide that significant economic presence in India also constitutes a business connection. “Significant economic presence” shall mean either of the following:
- Any transaction in respect of any goods, services or property carried out by a non-resident in India, including downloading data or software in India, if the aggregate payments arising from such transaction(s) during the previous year exceeds a specific threshold.
- Systematic and continuous soliciting of its business activities or engaging with a certain number of users in India through digital means.
India also proposes that the transactions or activities shall constitute significant economic presence in India, regardless of whether the non-resident has a residence or place of business in India, or renders services in India. The proposed amendment in the Act will allow India to negotiate for inclusion of the new nexus rule of “significant economic presence” in its DTAAs. However, unless modifications to PE rules are made in the DTAAs, the cross-border business profits will continue to be taxed according to existing treaty rules. This amendment will take effect from April 1, 2019 and will apply to assessment year 2019-20 and subsequent assessment years.
- The deadline to submit the CbC report, in the case of parent entity or Alternative Reporting Entity (ARE), resident in India, is to be extended to 12 months from the end of the reporting accounting year. The deadline to submit the CbC report by the ARE (that has a foreign parent entity) with its resident tax authority will be the due date specified by that country or territory.
- An Indian-resident constituent entity with a foreign parent must submit the CbC report if the foreign parent entity has no obligation to file the report in its country or territory. The deadline to submit the CbC report is 12 months from the end of the reporting accounting year.
These amendments will take effect from April 1, 2017 and will apply to the assessment year 2017-18 and subsequent years.
Penalty for failure to furnish statement of financial transaction or reportable account
Section 271FA of the Act provides that if a person who is required to furnish the statement of financial transaction or reportable account under section 285BA fails to do so within the prescribed time, the penalty is one hundred rupees for every day of default. India proposes to amend section 271FA to increase the penalty for each day of continuing default. These amendments will take effect from April 1, 2018.
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