International Tax Updates

published on 31 October 2022

International Tax updates

1. Tax report from OECD Secretary-General to G20 finance ministers and central bank governors

The OECD on 11 July 2022 released a tax report from OECD Secretary-General to G20 finance ministers and central bank governors apprising on the progress of Two-Pillar solution and revised timelines to deliver a Multilateral Convention (MLC) for implementation of Amount A.

The report provides that members of Inclusive Framework have agreed on a new, more realistic timeline which will optimise chance for MLC to be ratified by a critical mass of countries which includes the largest economies where the in-scope companies are headquartered. The ultimate deadline for signing MLC is fixed for mid-2023 and the year for its entry into force as 2024.

This report covers the work in respect of carbon mitigation approaches, tax and development, tax transparency and provides cover note to the progress report on Amount A of Pillar One, the progress report on Amount A was subject to public comments latest by 19 August 2022.

2. Decision of Danish Tax Council on Permanent Establishment exposure on "work from home"

The covid pandemic brought about a major shift in working models of employees. Hybrid working has gained prominence, with several work from home options for employees.  While this may seem like a win-win situation for both parties involved, the one concern that surrounds such models, is the risk of constitution 

of Permanent Establishment ('PE') on account of presence of employees in a country different than the employer country. PE risk arises when a non-resident entity carries on business in another jurisdiction through a fixed place of business. When employees work from home in their home country, the question 

that arises is whether there is a PE risk on account of such Home Office.

Interestingly, the Danish Tax Council recently held that the taxpayer in question had no PE in Denmark through its Managing Director ('MD') working from his home. It observed that the MD was not involved in prospecting sales/work for the taxpayer and the work in Denmark arose randomly and sporadically which could not be planned. An important factor considered by Court was that work from Denmark was not required by the Company, but it was approved for retaining the employment of the MD, who had his permanent residence in Denmark.

In deciding this, it made an important observation that a home office can also be a 'place of businesses for the purpose of PE, if it is available for company's business, especially where the enterprise has requested an employee to use home office for carrying out enterprise's business.

3. Delhi Tribunal (ITAT) holds loss arising from foreign exchange fluctuation on loan transaction between PE and its Head Office (HO) as allowable revenue expenditure

In case of Cobra Instalaciones Y Services S.A [TS-571-ITAT-2022(DEL)], taxpayer was a company registered in Spain and had a PE in form of Project office (PO) in India. Taxpayer claimed forex loss of INR 11.5 million in its ROI, which was disallowed by tax officer. PO was engaged in executing infrastructure projects, for which working capital was required that was provided by its HO. Funds were received in Euro and converted into Indian Rupees (INR) on date of receipt. Since repayment was to be made in Euro, outstanding amounts were restated on prevailing exchange rate as at end of financial year. Since funds were utilized for executing the contracts by PO, forex fluctuation loss on outstanding balance at end of the year was claimed allowable as per Mercantile System of Accounting. Tax officer denied this notional forex loss noting that fund given by HO is not debt but is equity and capital invested cannot be revalued. He further referred to provisions of India-Spain Double Taxation Avoidance Agreement (DTAA) and held that no deduction of expense from HO, other than reimbursement, should be allowed.

Commissioner (Appeals) allowed the deduction. Department challenged the order before ITAT, which noted the following facts:-

• Taxpayer has not violated any law like Foreign Exchange Management Act, 1999 (FEMA), while receiving such funds from HO.
• Taxpayer being PE cannot obtain borrowings from any bank in India and thus, needed funding from HO.
• Money received by HO was for working capital required for project execution and procurement of raw material. The outstanding balance as at year end, thus has a character of 'payable' to HO.
• Taxpayer being PE was prevented from raising External Commercial Borrowing (ECB) and hence, it had to obtain funds from HO.
• Provisions of India-Spain DTAA are not applicable, as nothing is 'paid' to HO but in fact it is a loss on account of foreign exchange fluctuation.
• In the earlier and subsequent assessment years, the gain arising on foreign exchange fluctuation was offered by taxpayer as income.
  

In view of these facts, Tribunal dismissed the Department's appeal and allowed deduction of forex loss to the taxpayer PE.