Key Tax issues in India Maulik Doshi SKP

Key Tax issues in India Maulik Doshi, SKP. May 30, 08, Vienna. 1

Agenda Opening Thoughts Key tax issues in India Corporate Tax issues on deputation of expatriates to India Taxability of payments by Non-Residents to Non. Residents Taxation of software Other emerging issues Concluding remarks 2

Opening Thoughts Increasing Globalization Significant increase in cross-border activities to / from India Tax laws evolving It is only recently that India is exposed to tax issues on cross border transactions Host of judicial pronouncement with differing views “Ground” realities Practical difficulties when applying the tax law Tax authorities’ approach generally biased towards Revenue Frequent retrospective amendments Need to keep this aspect in mind while planning A tax payer is presumed guilty unless proven otherwise ! 3

ISSUE I: Corporate Tax Issues on Deputation of Expats to India 4

Deputation – The Concept UK Co • Expat continues on UK payroll • Salaries Back-to-back payments for deputed expat’s cost borne by UK Co? ? paid by UK Co Deputation of Expatriate Indian Co 5

Deputation vis-à-vis PE Permanent Establishment Creates a taxable presence in jurisdiction (read India) Deputation of employees may result in: Fixed Place PE Agency PE Service PE Important precedent - Morgan Stanley Supervisory / Stewardship activities do not constitute PE PE exposure could be avoided with suitable tax planning 6

Deputation vis-à-vis FTS / Service Tax Reimbursement of salary cost to UK Co. in respect of deputed employees – whether taxable in India? View 1 – Taxable as FTS As services rendered by Foreign Co. to Ind Co. through employees AT&S India Private Limited View 2 – Not Taxable As salaries paid abroad on account of administrative convenience and therefore, mere reimbursements HCL Infosystems Ltd Similar issues under Service Tax Contractual arrangement assumes significance! 7

Deputation – other aspects Withholding tax issues Expenses disallowed in case taxes not withheld FBT Exposure In respect of employee “based in India” Implications for deputed employees – treaty benefits 8

ISSUE II: Taxability of payments by Non Residents to Non Residents 9

Payments by one NR to another NR outside India Whether payments made by NR to NR outside India taxable in India? Yes, if the source if income is in India / income arises in Indian domestic law provides for taxability in India in such situations Even certain treaties provide for it Examples - Royalties / FTS paid by NR to NR outside India but in connection with license / services utilized in India Obligation on the payer to withhold taxes while making payment and to comply with Indian regulations Non deduction of TDS would lead to tax disallowance under the Indian laws Law amended to hold “buyer” / “payer” responsible for taxes not paid by seller / recipient of income 10

Vodafone controversy Capital gains earned on transfer of shares of Indian company taxable in India Even group re-organization covered Whether capital gains on sale of shares of off-shore holding company taxable in India? Till now not taxable in India Infact many MNCs have been interposing holding company to make investments in India to save on capital gains tax However tax authorities are taxing the same Since the underlying asset / shares are in India Vodafone’s acquisition of Hutch Essar – currently litigated 400 M&A / PE deals being scrutinized by Indian tax authorities Even FIIs being asked to pay taxes on PN dealings outside India 11

Vodafone Controversy – The Ripple Effect!!! 12

ISSUE III: Taxation of Software d e x Ta 13

Software categories Canned or Shrink Wrapped Software Prewritten software requiring no modification for customer use Custom Made Software Developed for specific customer needs. Software embedded with the hardware Software supply along with related services like customization, installation etc. Limited duration rights for use of software license 14

Taxation of software Payment for purchase of shrink wrap software is purchase of goods and not royalty Sonata Software Ltd Transfer of right to use software put in media amounts to sale of goods Tata consultancy services Right to use copyright vs right to use copyrighted product Payment only covering the former without transfer of any of the latter rights does not come within the definition of royalty Samsung Electronics Co. Ltd. Lucent Technologies Hindustan Ltd. Motorola Inc. , Ericsson Radio Systems A. B. , Nokia Networks OY. Turnkey contract for software supply as well as installation Service PE issue even for the supply portion 15

Taxation of software Majority of the OECD countries does not treat payments for import of shrink wrapped software as royalty. Indian High Powered Committee report differs from OECD TAG Report in many aspects Indian judicial pronouncements not consistent with each other Many cases where software supply is not treated as Royalty Lower level tax authorities inclined to take a stand that software supply is Royalty Desirable for the government to come out with suitable guidelines Certainty for the taxpayers and tax administration 16

Other Emerging Issues Attribution of profits to PE SET Satellite vs Morgan Stanley Taxation of Liaison Offices of foreign companies Transfer Pricing issues Taxation of FIIs – whether capital gains or business income? 17

Key Transfer Pricing issues Payment of royalties and management fees to meet the economic benefit test Mark-up required for Captive ITES / BPO companies in India Use of Secret Comparables Market Penetration strategy and business considerations ignored for distribution entities Adjustments for distributors promoting brand of foreign parent Not accepting foreign company as tested party Adjustments of imputed interest costs for excess credit period granted 18

Concluding Remarks Changing legislation Retrospective amendments Treaties re-negotiated to plug loopholes Revenue officers on the learning curve New income tax code to be in place soon CFC and thin cap regulations on the cards! Front-end planning essential (advance rulings) International precedents increasingly being used Litigation can be complex, costly & time consuming – evaluate costs, risks & benefits 19

Mumbai Bangalore Pune Hyderabad New Delhi A P ASSION F OR S OLUTIONS A PASSION FOR SOLUTIONS 20

FAST FACTS Established in 1962 Over 300 team members and growing Offices in 6 major cities in India 15 partners “ Ultimately, we believe that true value lies not just in intelligence or superior knowledge but in actionable advice and decisions born out of a commitment in finding the best solution for you. ” Clients from over 30 countries A P ASSION F OR SAPAN PAREKH CEO, SKP S OLUTIONS A PASSION FOR SOLUTIONS 21

TAX ASSURANCE OUTSOURCING E RS E NIV U ICE V R SE BUSINESS ADVISORY CROSS BORDER TAX A P ASSION CORPORATE SERVICES BUSINESS SETUP SERVICES F OR S OLUTIONS A PASSION FOR SOLUTIONS 22

SKP’s Tax & Transfer Pricing Services International Tax Entry Strategy for Inbound investments Structuring Outbound investments Expatriate taxation International Contract structuring in relation to EPC Contracts Exchange control assurance and advisory Transaction support services Withholding tax advice and certification on overseas payments Industry specific certifications such as tax relief and port clearance certificates for the shipping industry A P ASSION F OR Transfer Pricing Designing Global TP policy Review of an existing policy Benchmarking support Documentation Certification Representation S OLUTIONS A PASSION FOR SOLUTIONS 23

Some of our work… Advising one of Israel’s largest shipping company in relation top nontaxability of various ancillary charges in India and thereby saving substantial taxes in India Advising an Indian listed company on optimal holding company jurisdiction for it to make investments / acquisitions in 23 target countries Advising an Indian listed company into diversified business on the optimal holding company jurisdiction with respect to their acquisition in Greece Advising a large US private equity firm on consolidating the existing 8 investment structures with regard to US and Indian IT investments into a single holding company Advised a UK pharmaceutical company regarding tax minimization in UK and other jurisdictions on international royalty income from 5 countries A P ASSION F OR S OLUTIONS A PASSION FOR SOLUTIONS 24

Some of our work… Advising an UK Company in structuring their private equity swap in India Advising leading software company having operations in US, UK and other European countries in relation to designing their employees’ foreign travel policy from commercial, Indian & overseas tax, immigration, regulatory and legal perspective Assisting Indian software companies in procuring special dispensation for their employees from tax authorities in overseas jurisdictions International tax planning / structuring issues related to the establishment of a Greenfield packaging plant in India for a Canadian investor Advising and obtaining tax refunds for a leading Austrian engineering company undertaking a turnkey contract for technical assistance and supervision in India Providing an optimal & tax efficient structure to overseas funds investing into Real Estate Sector in India A P ASSION F OR S OLUTIONS A PASSION FOR SOLUTIONS 25

Some of our work… Providing an international structure for establishing operations in over 35 countries including China, Belgium, US, UK, etc for a leading healthcare company Minimization of Indian withholding tax relating to fees being paid by a leading Indian investment bank to a large international consulting company which had offices in 5 cities abroad Tax planning and obtaining withholding tax certificate for an Israel based NASDAQ listed telecom software company Assisting Indian software companies executing projects abroad, in their international tax structuring and avoiding PE exposure abroad Advised an overseas dredging company on their dredging contract in India with a view to reduce overall Indian tax considering Indian and international tax structuring via an intermediate sub-contracting entity A P ASSION F OR S OLUTIONS A PASSION FOR SOLUTIONS 26

Some of our work… Advising one of the largest shipping company in changing the transfer pricing policy to remunerate its agent (subsidiary in India) from % commission to cost plus thereby achieving substantial tax savings Advising a listed Indian company and largest paint manufacturer in India with 23 subsidiaries overseas in formulating an intra-group management fee policy from transfer pricing perspective Assisting an US listed publishing company in formulating a global transfer pricing policy with respect to intra-group transactions with its Indian subsidiary and maintenance of documentation under US & Indian regulations Advising an India Software company having marketing offices in US & UK in formulating transfer pricing policy with benchmarking search on overseas databases Representing a leading global cosmetic company in defending their transfer pricing policies before the Indian transfer pricing authorities A P ASSION F OR S OLUTIONS A PASSION FOR SOLUTIONS 27

Our Service Edge Experience At SKP, we take full ownership and responsibility for the job!!! Over 40 years of tax advisory experience Practical advice Innovative solutions that balance theory and practice Holistic approach Integrating commercial, international tax and transfer pricing, exchange control, withholding tax, service tax, legal considerations Track Record Clients from 25 countries across several industries Customised Services Aligning services to meet client needs Personal touch Partner – led services Our associations with trade Knowledge partner of NASSCOM TP Representation for Gem and Jewellery industry Global access Established network of worldwide tax consultants Global approach Integrating Indian and foreign tax needs Transfer Pricing policy approved by Indian and UK authorities A P ASSION F OR S OLUTIONS A PASSION FOR SOLUTIONS 28

Our Service Edge At SKP, we take full ownership and responsibility for the job!!! Technical Competence Practice heads trained overseas Extensive international tax library Access to Indian and foreign databases Dedicated research team that ensures timely and high quality advice Good rapport and established credibility with Tax Authorities SKP’s TP Documenation Report sent to CBDT as a model report Appointed by CBDT to study and comment on Indian TP Regulations and recommend way forward Seminars / training to TP Officers Special TP audit for the CBDT Strong representation skills A P ASSION F OR S OLUTIONS A PASSION FOR SOLUTIONS 29

Seminars More than 50 worldwide such as……. Indian regulatory framework - EU invitation to seminars in 10 cities in Europe Joint ventures - European Research Agency, Brussels Indian international tax issues and advance rulings - European American Tax Institute, London Doing business in India and regulatory framework Leeds University Business School Outsourcing Services Overseas Norton Rose, London Setting up in India Scottish Chambers & High Commission of India, Edinburgh Setting-up software facilities NORAD, Oslo Doing Business in India Singapore Confederation of Industries, Singapore A P ASSION F OR S OLUTIONS A PASSION FOR SOLUTIONS 30

Seminars and in India too ……. Practical issues in Transfer Pricing assessment – Institute of Chartered Accountants of India (ICAI) – WIRC, Pune Documentation under Indian Transfer Pricing Regulations (ICAI) – WIRC, Mumbai & Pune Indian Transfer Pricing Regulations – ICAI (WIRC) & BCAS Transfer Pricing - Gem & Jewellery Council Transfer Pricing & Outbound Investments to UK – Invest UK British Trade Office Transfer Pricing – Direct Tax Regional Institute, CBDT Attribution of Profits to a Permanent Establishment - (ICAI) – WIRC, Mumbai Introduction to International Tax – Direct Tax Regional Institute, CBDT Deputation of Employees and Expatriate Tax Issues – Quest India, Mumbai A P ASSION F OR S OLUTIONS A PASSION FOR SOLUTIONS 31

Written Word… Books Doing business in India and UK Amalgamation of Companies Joint Ventures & Foreign Collaborations Practical guide foreign companies Guide to income-tax in India Written an article for Institute of Chartered Accountants of England on “Offshoring Finance and Accounting processes to India” “Inward and Outward Investment: India and the UK” published by Tottel Publications Written an article for the UK trade and Investments publication “Infinite Possibilities – a guide to establishing a presence In the UK” Articles in Economic Times, International Tax Review, Tax Notes International, UK Trade and Investment, etc. A P ASSION F OR S OLUTIONS A PASSION FOR SOLUTIONS 32

Visit us at www. skpgroup. com Contact Maulik Doshi 2 nd Floor, Ballard House, Adi Marzban Marg, Ballard Estate, Mumbai 400 001. India Phone # +91 22 6617 8000 Cell # +91 98205 40027 Fax # +91 22 6617 8002 Email: maulik. doshi@skparekh. com This profile is solely for information and private circulation and has been provided on request 33