On July 13, 2018, India’s Central Board of Direct Taxes (CBDT) requested comments and suggestions on “significant economic presence,” 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.
According to section 4 of the Finance Act 2018, a significant economic presence of a non-resident in India constitutes a “business connection” in India. A significant economic presence 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 significant economic presence 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 August 10, 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.
Click here for more information on our BEPS research and technology solutions to address your immediate and ongoing needs.