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The provisions of SEP had been introduced to bring non-residents (‘NR’) having SEP in India within the tax net. However, the same remained inoperative in absence of the thresholds for SEP. Notification No. 41/2021 has been issued to lay down dual threshold for a NR to have SEP in India, as below:
Aggregate value of transactions of INR 20 million in a financial year, in respect of any goods, services or property carried out by a non-resident with any person in India, including provision of download of data or software in India; or
The number of users with whom systematic and continuous business activities are solicited or who are engaged in interaction shall be 0.3 million. India would have taxing rights in respect of revenue attributable to such transactions/activities referred above.
While this would have a very wide coverage for tax purposes, entities from jurisdictions having Double Taxation Avoidance Agreement (‘DTAA’) with India would continue to be governed by DTAA.
Protocol to DTAA between India and Netherlands provides for application of a lower tax rate, if subsequently India limits taxation of dividends and other specified incomes in DTAA between India and any other OECD member country. Typically, extension of such benefit is referred as MFN clause. DTAAs of India with Slovenia, Lithuania and Columbia provided for 5 per cent tax on dividend. However, these countries were not OECD member countries when India entered into DTAAs with them. They became OECD member subsequently. Hon’ble Delhi High Court [Concentrix Services Netherlands B.V. and Optum Global Solutions International B.V. (W.P.(C) 9051/2020 and W.P.(C) 882/2021, CM Appl. 2302/2021)] held that these countries did not need to be members of the OECD when they entered into DTAA with India and benefit of the MFN clause was granted to the Dutch shareholders basis that these countries were members of the OECD at the time of application of the Most Favoured Nation (‘MFN’) clause. In reaching this conclusion, the Hon’ble Court has heavily relied upon the decree issued by the Dutch Government (Secretary of State for Finance) dated February 28, 2012 by applying the principle of Common Interpretation. The Court has observed that the interpretation of tax treaties is liberated from the technical rules which govern the interpretation of domestic/municipal law.
Another ruling [M/S NESTLE SA (W.P.(C) 3243/2021)] has been issued in the context of India – Switzerland DTAA as well relying on the above.
It may also be possible for entities based out of France, Sweden and Hungary to rely on this decision and avail benefit of the lower withholding of 5 per cent on dividend income, having regard to similar MFN clause in their DTAAs with India.
The UN Committee of Experts on International Cooperation in Tax Matters agreed to the text of a new article 12B and commentary for the UN model tax treaty that would enable possibility of introducing a new article governing automated digital services (‘ADS’) and granting additional taxing rights to countries where an ADS provider’s customers are located.
The model treaty provisions allow source countries to apply a withholding tax on gross payments made in exchange for the specified ADS. Alternatively, companies can elect for the withheld amount to be based on profits earned in the source country from the ADS.
ADS would include any service provided (requiring minimum human involvement from the service provider) on the internet or another electronic network. It also provides a list of 9 services (including online advertising, cloud computing; online gaming, social media platforms, etc); but specifically excludes payments qualifying as royalties or fees from technical services.
The multilateral instrument (MLI) has entered into effect with respect to India’s several DTAAs. In line with the same, CBDT released synthesized texts of MLI and India’s DTAA’s with over 9 jurisdictions recently. Synthesised texts include the provisions of MLI applicable in respect of a particular DTAA, thereby making it simpler for tax payers to understand the effects of the MLI and the way it modifies each Agreement. Synthesised texts include explanatory information, including information on the entry into effect of the relevant MLI. Some of the important trading partner countries of India, for which such texts are released by the Government of India include Italy, Cyprus, France, Russia, Portugal, Norway, Netherlands etc.
The Government of India released a Press Statement that India joined the OECD/G20 Inclusive Framework. Earlier, the OECD reported that 130 out of 139 countries of OECD/G20 Inclusive Framework on BEPS have agreed on “Statement on a Two-Pillar Solution to Address the Tax Challenges arising From the Digitalisation of the Economy”. The proposed solution consists of two components – Pillar One which is about reallocation of additional share of profit to the market jurisdictions and Pillar Two consisting of minimum tax and subject to tax rules (a treaty-based rule that allows source jurisdictions to impose limited source taxation on certain related party payments subject to tax below a minimum rate). The two pillar deal aims at fair distribution of profits to be allocated to market jurisdictions where goods and services are used or consumed annually using a revenue-based allocation key. It is proposed that detailed implementation plan be finalised by October 2021 and made effective by 2023. The solution should result in allocation of meaningful and sustainable revenue to market jurisdictions, particularly for developing and emerging economies. The consensus will accelerate the ongoing efforts to reset of nearly a century-old international tax rules enshrined in bilateral tax treaties along with phasing out unilateral measures like digital service tax and any like measure such as Equalisation levy in India.
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Martin Wörlein
Partner, Head of India practice
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