International Tax Updates

1. Organisation for Economic Co-operation and Development (OECD) releases fourth annual peer review report on BEPS Action 6 on prevention of tax treaty abuse:

The OECD released the fourth annual peer review report on 21 March 2022 on the implementation of the Action 6 minimum standard which is one of the four Base Erosion and Profit Shifting (BEPS) minimum standard on treaty shopping. This fourth report on the implementation of the Action 6 minimum standard reflects the first peer review process carried out under the revised peer review methodology released in April 2021.

This report contains the aggregate result of the peer review and detailed information on the implementation of minimum standard background by the 139 jurisdictions that were members of the OECD/G20 Inclusive Framework on BEPS on 31 May 2021.

It was seen that number of compliant agreements concluded between members of the inclusive framework and covered by Multilateral Instrument (MLI) almost doubled (from 350 to more than 650) and more than 960 additional agreement will shortly become compliant under MLI once all signatories ratified it.

This report reveals the jurisdictions plans to implement the minimum standard in non-compliant agreements concluded with other members of the Inclusive Framework. The vast majority of these plans involve the application of the MLI to concerned agreements. 

2. OECD released Draft rules for tax base determinations under Amount A of Pillar One for public comments and has already released public comments received

Under the ongoing work of the OECD/G20 Inclusive Framework on BEPS to implement the Two-Pillar Solution to address the Tax Challenges arising from the Digitalization of the Economy, the OECD sought public comments on the Draft Model Rules for Tax Base Determinations under Amount A of Pillar One before 4 March 2022.

The Amount A of Pillar One has been developed as part of the solution for addressing the tax challenges arising from the digitalization of the economy by introducing a new taxing right over a portion of the profit of large and highly profitable enterprises for jurisdictions in which goods and services are supplied or consumers are located.

The purpose of the tax base determination rules is to establish the profit (or loss) of an in-scope multinational entity (MNE) that will be used for the Amount A calculations to reallocate a portion of its profits to market jurisdictions.

As per the rules, all items (subject to specified exclusions) within the consolidated profit and loss statement will be taken into consideration to determine the tax base and certain book to tax adjustments will be made to arrive at a Standardized adjusted Profit Before Tax figure. Such rules also provides provisions for carry forward of losses.

OECD also released public comments received from various stakeholders on the Draft Model Rules for Tax Base Determination under Amount A of Pillar One. In the public comments, amongst others stakeholders call for elimination of cap on restatement adjustments, suggest elimination of book-to-tax adjustment with respect to policy disallowed expenses; The stakeholders also recommend extension of time period for carry forward of losses and clarity on 'business continuity conditions' for carry forward of transferred losses in case of eligible business combinations; Further, recommend that profit shortfalls should also be considered in the carry f1orward regime and suggest that reallocation of taxing rights under Amount A should not disadvantage the controlling group or minority shareholders.

The model rules, once finalized, will reflect the substantive agreement of the members of the inclusive framework on the functioning of Amount A and will serve as the basis for the substantive provisions that will be included in the Multilateral Convention.

Recent Jurisprudence on Permanent Establishment ('PE')

Constitution of PE of foreign companies is a vexed topic in India and is often subject to litigation. Summarised below are two recent decisions of ITAT in the context of PE constitution:-

A. Delhi ITAT holds Indian JV's factory in India does not constitute fixed place or supervisory PE of the foreign entity in India

Delhi ITAT in the case of FCC Co Ltd [(2022) 136 taxmann.com 137] ruled in favour of foreign company against PE constitution.

The parent company, tax resident of Japan had entered into three Agreements with the Indian subsidiary, viz. License Agreement, Agreement for Dispatch of Engineers and Master Sales Agreement. While receipts under the first two Agreements were offered to tax at 10 per cent as fees from technical services, income on account of supply of raw material and components derived under the third Agreement was not offered to tax in the absence of PE constitution in India.

The tax authorities alleged that a Fixed PE of the foreign company existed in India on account of interlinked agreements and presence of engineers of foreign company for technical guidance, inspection etc.

In addition, a Supervisory PE was also alleged on account of the presence of foreign expats in India for observing and directing / guiding the manufacturing and assembly activity, guidance on operational procedures for manufacturing facilities etc.

The ITAT ruled in favour of the taxpayer, and against PE constitution as alleged by tax authorities. In doing so, it observed that:-

• merely providing access to the premises for the purpose of providing agreed services would not amount to the place being at the disposal.
• The Indian entity is an independent legal entity carrying on its business with its own clients for which time to time technical assistance as required if any was provided by the foreign company.
  

The allegation of Supervisory PE was struck down on the basis that employees were not rendering any services in connection with building site or a construction project or an installation project or an assembly project. 

B. Indian distributor of Mauritian company held as not constituting a Dependent Agent PE in India

Mumbai ITAT in the case of Taj TV Limited [TS-202-ITAT-2022(Mum)], opined that distribution revenue accruing to the taxpayer (a Mauritian company engaged in telecasting sports channel called Ten Sports") by virtue of entering into distribution agreement with Taj India, is not taxable in India in the absence of a PE in India.

The taxpayer was engaged in the business of telecasting sports channel called "Ten Sports" and for generating revenue, it had been collecting advertisement revenue and distribution of channel in India. It has appointed Taj India as its advertising sales agent to sell commercial slot/spot to the prospective  advertisers and other parties in India in connection with the business of programming and telecasting of 'Ten Sports'  Channel.  As per the agreement, commission @ 10 per cent of the advertisement revenue was paid to Taj India.  There was addendum to the agreement whereby clause 5(a) was replaced in the agreement  granting authority to Taj India to conclude the contracts.

The tax authority sought to treat Taj India as dependent agent PE. The taxpayer claimed that, no income was not taxable in India, because there was no PE in India.

The Mumbai ITAT observed that tax authority has merely referred to the aforesaid clause of the Addendum, has neither established nor brought anything on record either at the assessment stage or before appellate authorities that Taj India had actually habitually exercised the authority to conclude the contract on behalf of tax payer and thus upheld the contention of the taxpayer that the distribution income cannot be taxed in India.