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24 May 2013
Case: Clifford Chance (India)
Special Bench of the Income Tax Appellate Tribunal
Article 7 (1) of the India / UK treaty: if the enterprise has a PE in the source country, then the source country is permitted to tax the profits which are "directly or indirectly attributable" to the PE
This approach differs from both the OECD model and the UN model
Article 7 (3) of India / UK treaty states how to calculate profits "indirectly attributable" to the PE: a proportion of the global profits, based on the PE's relative contribution
Facts in case
UK firm provided legal services in regard to several projects in India
Work performed in India and outside India
Accepted that UK law firm had a PE in India (due to regular visits by partners and employees)
Issue: in calculating the profits "directly or indirectly attributable" to the PE, do you include profits which relate to work done outside India?
Special Bench: "no"
Unclear aspect from case: do you aggregate "profits directly attributable to PE" and "profits indirectly attributable to PE"? If so, is there not then double counting?
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17 May 2013
Delivered on 14 May
Thin cap: "safe harbor" rules tightened
Nexus test for interest deductions
Taxation of gains made by non-residents on sales of shares in Australian land-rich companies
"Land" to be widened to include mining information and certain intangible assets
10% non-final withholding tax
Exchange of information
Australia, UK, and U.S. tax authorities are working together to find assets hidden in Cayman Islands, BVI, Cook Islands, and Singapore
Singapore government will significantly strengthen its framework to allow information exchange
Australia / Switzerland initial new double tax treaty (which will allow ATO to identify Australians with Swiss bank accounts)
China: Circular 165 and Bulletin 19
Relates to the "beneficial owner" condition in the dividends article in the China / Hong Kong double tax arrangement
Provides guidance on Circular 601 "negative factors" and the Bulletin 30 "listed company safe harbor"
Circular 165 will likely be applied by SAT to the dividends articles in other double tax treaties (and possibly also the interest and royalties articles)
Relates to the issue of whether in-bound seconded employees cause an "establishment" (domestic law) or PE (treaty) for the foreign employer
"Real or substantive employer" principle is followed
First test: Does the overseas company take responsibility for the work performed by the employee and does it assess the employee's performance?
Second test: List of 5 factors
If the answer to the first test is "yes" and if at least one of the 5 factors in the second test is satisfied, then
Overseas company has an "establishment" in China (domestic law)
That establishment is a PE (for treaties), if maintained for a sufficiently long time period
India: Convergys case
Delhi Income Tax Appellate Tribunal
Indian subsidiary provides substantial support services to U.S. company
U.S. company held to have a PE in India (at the Indian subsidiary's premises), under Art. 5(1) of the India / U.S. treaty
Tribunal applied a 4 step methodology to calculate the profits attributable to the PE
Hong Kong / Qatar treaty signed
New Zealand: Budget
10 May 2013
Japan / UAE
Treaty signed on 2 May 2013
Dividends: (i) 5% (if shareholder is a company which has owned at least 10% of the voting shares for the 6 months prior to dividend); (ii) 10% otherwise
Interest: (i) 0% (if paid to a Government institution, including a sovereign wealth fund); (ii) 10% otherwise
Japan's domestic tax law applies to a silent partner in a TK
"Main purpose" test, but no general LOB article
Treaty does not apply to exploration and exploitation of hydrocarbons
Netherlands-resident company which operates aircraft in international traffic
Provides ground handling and technical services to other airlines at airports in India
Such services are covered by the by-laws of the International Airlines Technical Pool (IATP), of which KLM is a member
Tribunal held that the service fees are "profits from the participation in a pool", and are therefore "profits from the operation of aircraft in international traffic" for the purposes of Article 8 of the India / Netherlands treaty
Thus, Article 8 provides exemption from Indian tax, despite the existence of a PE in India
Dutch company sells 100% of the shares in an Indian company to a Singaporean company
Indian company owns and operates an industrial park in India
Issue: how to apply Article 13 of India / Netherlands treaty?
Article 13(4) (land-rich provision) does not apply, because of exclusion for immovable property in which the business of the company is carried on
Article 13(1) (immovable property situated in India)
"Immovable property" takes its meaning under Indian law
Tribunal: under the general meaning of "immovable property" under Indian law, shares in a company which owns immovable property are not included
Thus, Article 13(1) does not apply
Article 13(5) (residual provision): applies
Thus, Dutch company is exempt from Indian tax
India: Right Florists case
Kolkata Income Tax Appellate Tribunal
Were payments made to Google Ireland and Yahoo U.S., for online advertising, subject to Indian withholding tax?
Online advertising operated by way of complex software and algorithms
No computer servers in India
Decision based on Indian domestic tax law
No "deemed source" in India, because the payments were not "fees for technical services" (which requires significant human involvement - not present here)
Was there an "actual source" in India?
Based on case law, there would be an "actual source" in India only if Google Ireland and Yahoo U.S. have a "permanent establishment" (PE) in India (in accordance with the double tax treaty meaning of "PE"
Applying OECD Commentary on Article 5
A website is not a PE
A server (located in the source country) can be a PE
Tribunal: OECD Commentary is generally relevant in interpreting a double tax treaty
But Indian Government has made a relevant reservation on the OECD Commentary: "a website may consitute a PE in certain circumstances"
A reservation, if relevant at all, is only relevant to treaties signed after the reservation was made
This reservation is "vague and ambiguous" and thus "cannot have any practical impact on a website being treated as a PE"
Thus, no "actual source" in India
Thus, payments were not subject to withholding tax
Australia: ATS Pacific case
Concerns an issue which is common to most VAT / GST systems in Asia Pacific
Service provider in country A provides a service directly to contractual party (X) in country B
Through one or more other contractual links, a benefit is obtained by another party in country A
Should the invoice issued to X be zero-rated or standard-rated?
China State Administration of Taxation (SAT) has published Circular 82, which describes a significant "Circular 698 / indirect share transfer" case
The case concerns Walmart's indirect share acquisition of a 65% interest in Trust-mart of China
Korea's National Tax Service (NTS) announced last week that large businesses should expect tougher tax audits
"Large business" = Sales of more than 50 billion won (US$44 million)
Duration of tax audits expected to increase to 6 - 8 months (from the current 3 - 4 months)
India: Excise duty for motor vehicle manufacturers
Tax authorities are investigating motor vehicle manufacturers to determine whether they are under-paying excise duty
Follows last year's Supreme Court case concerning Fiat
New regulation permits certain mining companies to use the current withholding tax rate for services payments, instead of the higher rate which is stated in their Production Sharing Contract or Contract of Work
12 April 2013
India / Malta
Signed: 8 April 2013
"Short form" LOB rule
Hong Kong / Mexico
In force: 7 March 2013
Effective: 1 January 2014 (Mexico) / 1 April 2014 (Hong Kong)
Very interesting provisions in protocol
OECD and UN Commentaries required to be used for interpretation
Art. 5(3) PE: aggregation of similar activities of associated companies
Double non-taxation due to differing classification of income: no treaty benefits
OECD working groups
Source countries' jurisdiction to tax (incorporating CFC rules)
chaired by France
chaired by Italy
Countering base erosion (incorporating intragroup financial transactions, hybrids and anti-avoidance measures)
chaired by Denmark
CFC rules vs. transfer pricing
Looming tussle between residence country taxation (CFC rules) vs. source country taxation (transfer pricing)
U.S. government officials argue in favor of stronger CFC rules
China: VAT pilot scheme
VAT pilot scheme will be expanded nationwide on 1 August 2013 and will be extended to more services
Government intends that the VAT reform will be completed by 2015
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