International Tax Issues in Entertainment Industry Including Film Production

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Presentation made in Direct Taxes Regional Training Institute at Mumbai in refresher course on Emerging Sectors for AddCITs and ACITs across India.

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  • Dear sir,
    I would like to request you to advice about referal charges.Referal charges means if doctors ( General practitioners)refer patients to hospital for treatment, then hospital pays referal charges i.e. 20% of the treatment bill i.e. Rs. 55000/-.The question is whether TDS is applicable or not & if appicable how much % of TDS ?

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    Parameshwar
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International Tax Issues in Entertainment Industry Including Film Production

  1. 1. International Tax Issues inEntertainment Industryincluding Film productionSeminar on ‘Emerging sectors’Direct Taxes Regional TrainingInstitute, Mumbai All rights reserved | Preliminary & TentativeRomesh S A SankheSeptember 12, 2012
  2. 2. Contents Sector Outlook International Tax Issues Direct Taxes Code All rights reserved | Preliminary & Tentative 2
  3. 3. Sector OutlookAll rights reserved | Preliminary & Tentative
  4. 4. Sector Outlook | Industry Growth Media & Entertainment Industry in India 1275 1500 1104 Size (in INR Billions) 957 1000 738 834 587 652 500 Projected CAGR growth of 14% 0 2009 2010 2011 2012 2013 2014 2015 Source: FICCI-KPMG report on Entertainment 2011 Largest film producing market in the world with over 1,000 films released every year and more than 3 billion tickets sold annually All rights reserved | Preliminary & Tentative The number of TV channels grown from 5 (1991) to 550 plus (2011), more than 50% were added in the last five years With successful hosting of ICC Cricket World Cup and annual Indian Premier League (IPL) along with recent Formula One Grand Pix (F1 Race) the sports entertainment industry in India is on rise 4
  5. 5. Sector Outlook | Global Association India’s association with overseas entertainment industry is growing over the years  “Slumdog Millionaire” the film based in India and shot in India won eight academy awards (Oscar) including best film  Awards for best original score, best song, best lyrics and best sound mixing went to Indian artists  “Robot (Endhiran)” the highest grosser Indian film collected over INR 375 crores, in which costumes, special effects, stunts, animations were executed by foreign professionals  Over 65 overseas players participates in a mega event of IPL which is held for two months every year  International sensations such as Akon, Bryan Adams, Lady Gaga, Shakira all had their concerts in various cities of India and more such artists will be visiting All rights reserved | Preliminary & Tentative India in coming months  All are targeting the 700 million plus Indian population below 30 With second largest population in the world and growing per capita income levels, India has become one of the top target market for global entertainment industry 5
  6. 6. International Tax IssuesAll rights reserved | Preliminary & Tentative
  7. 7. International Film Co-production Benefits of international film co-production are as under:  the ability to pool financial resources  access to the partner governments incentives and subsidies available under film co-production treaty  India has a film co-production treaty with Brazil, France, Germany, Italy, Switzeland, United Kingdom, etc.  access to the partners market, or to a third market  access to a particular project initiated by the partner  cultural benefits  the opportunity to learn from the partner All rights reserved | Preliminary & Tentative Possible tax implications in India on the co-production agreement  Exposure to constitution of ‘Association of Persons (AOP)’  If not deemed as AOP, then the foreign resident is exposed to constitution of Permanent Establishment (PE) such as Fixed base PE, Service PE, etc. 7
  8. 8. Association of Persons (AOP) Based on tax provisions and various judicial precedents till date, the essential ingredients of AOP are as under;  Two or more persons,  Voluntary contributions,  A common purpose or common action,  Combination of joint enterprises,  Some kind of scheme for common arrangement Some notable judicial precedents:  Geoconsult ZT Gmbh (AAR) [2008] - The common management and common design held to be against the tax payer All rights reserved | Preliminary & Tentative  Hyosung Corporation (AAR) [2009] - Separate contracts, independent work execution and back to back guarantee proved to be in favor of the tax payer 8
  9. 9. Taxation of AOP 1/2 Key tax implications are explained hereunder in brief: Consortium AOPStatus & • Not treated as ‘separate entity’ • Treated as a separate taxabletaxation and hence profits & gains are entity and hence entire profits of taxable in the hands of each the project is taxable at member separately maximum rate of 30.90%/ 32.45%/42.02%Treatment of • Losses, if any, will be eligible for • Losses, if any, will not beLosses set off in the hands of each eligible for set off in the hands member against the gains from of members, due to separate All rights reserved | Preliminary & Tentative its other business income, entity treatmentHead office • Deduction of common business • Deduction of common businessexpenses expenses possible expenses difficult 9
  10. 10. Taxation of AOP 2/2 Consortium AOPApplicability • Each member can avail their • Treated as a separate taxableof tax treaty treaty benefits as per its entity, hence each member is eligibility not eligible for treaty benefitsTreatment of • Members are eligible for tax • May not be eligible for theforeign tax credit in their home country foreign tax credit in their homecredit countryRemuneration • Cross charges may be • Remuneration to members iscross charges deductible not allowed All rights reserved | Preliminary & TentativeTaxability of • Not possible for non-residents • Treated as resident, henceglobal income possible If co-production contracts are indivisible contracts then it may result in significant tax inefficiencies 10
  11. 11. AOP | Key Differentiators Partnering  Well defined scope, rights and obligations of Consortium partners Pre-work arrangement  Separate contracts by each parties with the Contractors with clearly identified and divisible scope and obligations are preferable,  If Contractor insist for a single agreement then one agreement can be executed containing separately identifiable and divisible scope, rights and obligations of each party, Contract execution All rights reserved | Preliminary & Tentative  Raising of separate invoices and receiving separate payments from Contractor Actual implementation and conduct of parties is vital, otherwise arrangement could be held as sham and disregarded 11
  12. 12. Shooting of Films in India Section 9(d) - No income deemed to accrue or arise on shooting of films in India, if  The producer is  An Individual who is neither resident nor a Citizen of India, or  A firm or company not having any partner/shareholder who are citizen or resident of India  Producer’s operations are confined only to ‘shooting of films’ in India  Examples: Mission Impossible 4, Singularity, Eat Pray love, Slumdog Millionaire, The Mighty Heart, etc.Exhibition of Films in India Section 9(1)(vi) - Explanation 2 specifically excludes consideration received towards sale, All rights reserved | Preliminary & Tentative distribution or exhibition of cinematographic films from the ambit of royalty  Whether the same be taxable under 9(1)(i) due to ‘business connection’?  Whether the consideration towards Video rights, broadcasting rights, DTH rights or music rights may still be taxable as ‘royalty’? 12
  13. 13. Production of Films | Indian branch 1/3 At the initial stages of Indian business, the production of movies may be undertaken by the foreign companies through its Indian branch  Branch constitutes fixed base PE in India and hence the foreign company will be liable to tax both under the Act as well as tax treaty  Therefore, foreign producers of the Indian films will be governed by the provisions of the income tax Act Section 285B - Submission of statement by producers of films  Statement in form 52A to assessing officer per film per year, within 30 days from end of the financial year or completion of the film, whichever is earlier  Stating the details of persons to whom the aggregate annual payments exceeds All rights reserved | Preliminary & Tentative INR 50,000  Failure to comply may attract penalty of INR 100 per day under 272A 13
  14. 14. Production of Films | Indian branch 2/3 Rule 9A - Deduction of ‘Cost of Production’ for film producer  Outcome of exercise of power given to CBDT u/s 295 (1)  Recognizes the special characteristics of the production expenses which may spread over a period beyond a year  Deduction Criteria Censor Exhibition/ Release 90 days Deduction of ‘Cost of Board Sale of rights before end of the production’ Certification financial year    Full Deduction    Extent of amount realized All rights reserved | Preliminary & Tentative    No Deduction‘Cost of Production’ includes all expenditure incurred on production of the film, except  Expenditure incurred on preparation of positive films  Expenditure incurred on advertisement of the film after Censor certificate  Subsidy received from the government will be reduced from the cost 14
  15. 15. Production of Films | Indian branch 3/3 Exhibition on a commercial basis’ - Whether it includes paid preview, direct online release, direct exhibition on Television, etc.  Yes, as per Vishesh Films Pvt. Ltd vs. Dy. CIT (Mumbai ITAT) ITA No 5569 & 5570/Mum/2004 dated August 27, 2008  The requirement of Rule 9A is exhibition of film and the mode has not been prescribed  Hence exhibition film on Television on commercial basis clearly falls within the ambit of Rule 9A ‘Remuneration to actors, artists, etc. paid in Kind’ - Whether liable to TDS/withholding tax?  Yes, as per Kanchganga Seas Foods Ltd. v. CIT (SC) [2010-TII-03-SC-INTL] and Mr. Amitabh Bachhan Vs DCIT (Mumbai Tribunal) ITA No 1584 & 2509 /Mum/2006 All rights reserved | Preliminary & Tentative dated November 29, 2006  Remuneration in kind should be properly accounted at its fair market value  It should be added to the Cost of production and the TDS needs to be deducted Precaution while computing cost of production - Rule 9A may not override other provisions of Act, hence the deduction may be subject to other conditions such as compliance of section 40(a)(ia), 40A, 43B, etc. 15
  16. 16. Film Artist and Other Professionals | Non-residents Income tax Act - Section 115BBA  Entertainers - Person, who is neither Citizen nor resident of India, may liable to tax on gross basis @20.60% earned from performance in India  Withholding of tax on above income covered under section 194E  No income tax return needs to be filed by such entertainer, if Indian income is restricted to above mentioned sources  Others  Under ‘fees for technical services’ / ‘royalty’ and taxable at @10.30% ,or  in all the other cases, taxable on net income @30.90%, also needs to file return and comply with other norms such as tax audit, etc. All rights reserved | Preliminary & Tentative Tax treaty  Entertainers - Article dealing with “Artists and athletes” generally bestows the right of taxation to the source state i.e. Indian income tax Act  Others - Those not covered under the term “Artist” may get covered under article dealing with “Independent personal services” and generally may not be taxable in India in the absence of their fixed base and number of days of stay below the prescribed limit generally 180 days 16
  17. 17. Sportsperson, sports Association | Non-residents 1/2 Income tax Act - Section 115BBA and CBDT circular No. 787 dated February 10, 2000  Sportsperson - Person, who is neither Citizen nor resident of India, may liable to tax on gross basis @20.60% on their income earned from participation in any game in India, advertisement and contribution of articles relating to any game in India, subject to exemption under section 10(39)  Sports Association - Association, who is not resident of India, may liable to tax on gross basis @20.60% on their income earned in relation to any game played in India, subject to exemption under section 10(39)  Withholding of tax on above income covered under section 194E  No income tax return needs to be filed by such Sportspersons and Sports associations, if Indian income is restricted to above mentioned sources All rights reserved | Preliminary & Tentative Taxation of others involved in sports  Sportsperson is not defined under the Act, generally it means “a person who takes part in sports”  Persons such as Coaches, Supports staff, Umpires, Commentators. Cheerleaders, etc. may not be covered under section 115BBA  If covered under ‘fees for technical services’ [section 9(1)(vii)] then taxable at his/her gross income @10.30% in the absence of his/her fixed base and availability of PAN 17
  18. 18. Sportsperson, sports Association | Non-residents 2/2 Taxation of others involved in sports (contd)  In all the other cases, may be taxable at net income pertaining to operations carried in India @30.90%, also needs to file return and comply with other norms such as tax audit, etc.  If employed by foreign company then short stay exemption may be availed according to section 10(6)(vi) Tax treaty  Sportspersons - Article dealing with “Artists and athletes” generally bestows the right of taxation to the source state i.e. Indian income tax Act  Sports Association - Income earned by such entities will be covered under Article dealing with “other income” as stated in CBDT Circular No. 787 (supra) All rights reserved | Preliminary & Tentative  Others  May get covered under article dealing with “Independent personal services” and generally may not be taxable in India in the absence of their fixed base and number of days of stay below the prescribed limit generally 180 days  If employed by foreign company then exemption available under article dealing with “Dependent personal services” subject to fulfillment of prescribed conditions 18
  19. 19. Foreign Telecasting company 1/3 Income streams of foreign telecasting companies  Subscription charges for pay channel  Advertising revenues Subscription charges - May not be covered under the term “royalty” under the Income tax Act and hence may not be taxable in the absence of non-resident’s business connection Advertising revenues - Position varied over the years  Option of presumptive taxation on deemed profits i.e. 10% of the gross receipts meant for remittance [gross receipts excluding amounts retained by advertising agent and Indian agent’s commission] - CBDT Circular no.742 dated May 2, 1996 All rights reserved | Preliminary & Tentative and no.765 dated April 15, 1998  The above circulars were withdrawn vide Circular no.6/2001 dated March 5, 2001, w.e.f. March 31, 2001 19
  20. 20. Foreign Telecasting company 2/3 Profit attribution incase of PE  If non-resident’s operations are solely carried out through its PE in India and if the PE is remunerated at arms length then no further profits could be attributed to the non-resident operations in India, as held in  CBDT Circular no.23/1969 dated July 23, 1969  CBDT Circular No. 5/2004 dated September 28, 2004  DIT v. Morgan Stanley and Co Inc [2007] 292 ITR 416 (SC)  Set Satellite (Singapore) v. DDIT [2008] 218 CTR 452 (Bombay HC)  Worley Parsons Services Pty. Ltd [2008] 170 Taxman 91 (AAR)  Galileo International Inc v. DDIT [2009] 180 Taxman 357 (Delhi HC)  BBC Worldwide Ltd. [2011] 203 Taxman 554 (Delhi HC) All rights reserved | Preliminary & Tentative  Rolls Royce Plc v. DDIT (Delhi ITAT)  Amadeus Global Travel v. DDIT (Delhi ITAT) Circular 23/1969 was withdrawn vide Circular no. 7 dated October 22, 2009 - Whether this withdrawal will effect the above stated position ? 20
  21. 21. Foreign Telecasting company 3/3 Profit attribution incase of PE  The withdrawal of circular 23/1969 may not affect the prevailing legal position, because:  Most of the above rulings do not refer to Circular 23/1969 including Circular 5/2004 which is not yet withdrawn, the rulings were passed considering the judicial position under section 9(1)(i)(a) which remains unchanged  Supreme court in its ruling in the case of CCE v. M/s Ratan Melting and Wires Industries [2008] 220 CTR 98 has held that: “Circulars and instructions issued by the Board are no doubt binding in law on the authorities under the respective statutes, but when the Supreme Court or the High Court declares the law on the question arising for consideration, it would not be appropriate for the Court to direct that the circular should be given effect to and not the All rights reserved | Preliminary & Tentative view expressed in a decision of this Court or the High Court. So far as the clarifications/circulars issued by the Central Government and of the State Government are concerned they represent merely their understanding of the statutory provisions. They are not binding upon the court. It is for the Court to declare what the particular provision of statute says and it is not for the Executive. Looked at from another angle, a circular which is contrary to the statutory provisions has really no existence in law.” 21
  22. 22. Payment for Transponder | New Skies ruling 1/7• Facilitating the Facts signal transmitting Satellite  Dutchco owned and operated satellites process for telecasting companies• Amplifying the  These satellites were located outside signals India and there was no presence of Dutchco in India  The telecasting companies would relay their programmes through the communication transponders on the satellites by using their own earth stations to uplink and downlink the signals All rights reserved | Preliminary & Tentative Uplink Earth Downlink  The transmission facility was availed of station Earth station by telecasting companies according to their needs • Encryption of data into • Downlinking of the TV signals signals • Uplinking of the • Distribution of signals signals in the footprint area 22
  23. 23. Payment for Transponder | New Skies ruling 2/7• Facilitating the Issues signal  Whether the payment received by transmitting Satellite process Dutchco from its customers for use of its• Amplifying the satellite will satisfy the definition of signals “royalty” under the India / Netherland treaty?  Whether the services rendered by Dutchco through its satellite amount to “secret process” or only “process”?  Whether the process needs to be “secret” to be treated as “royalty”? Definition of “royalties” in India / Netherlands All rights reserved | Preliminary & Tentative treaty: Uplink Earth Downlink “….means payments…. received as a consideration for the use of, or the station Earth station right to use, any …., secret formula or process, or for information….” • Encryption of data into • Downlinking of the The missing comma TV signals signals “…., secret formula or process, ….” Should this be interpreted as: A. “secret formula or secret process” ; or • Uplinking of the • Distribution of signals B. “secret formula, or process” ? signals in the footprint area What is the significance of there being no comma after “formula”? 23
  24. 24. Payment for Transponder | New Skies ruling 3/7• Facilitating the Ruling of Special Bench of the Tribunal signal  The services rendered by Dutchco through transmitting Satellite process its satellite amounts to a “process”• Amplifying the  Payment by telecasting companies is for signals the use of or right to use the “process”  The process in a transponder is not secret  Process need not be “secret” to be characterized as “royalty” under the treaty – i.e. interpretation B. (“secret formula, or process”) is correct  The payment made to Dutchco by telecasting companies will be taxable as All rights reserved | Preliminary & Tentative Uplink Earth Downlink “royalty” station Earth station • Encryption of data into • Downlinking of the TV signals signals • Uplinking of the • Distribution of signals signals in the footprint area 24
  25. 25. Payment for Transponder | New Skies ruling 4/7• Facilitating the Key observations of the Tribunal signal  The process of uplinking and downlinking transmitting Satellite process is embedded in the transponder which is• Amplifying the used by the telecasting companies as per signals their needs through the earth stations owned by such companies  Once the process in the transponder is predetermined by Dutchco, it is made available to the customers  Dutchco has no right to interfere in the transmission process  Without knowing the process involved in All rights reserved | Preliminary & Tentative Uplink Earth Downlink the transponder, the telecasting station Earth station companies will not be able to telecast their programmes in the desired area at the desired time • Encryption of data into • Downlinking of the TV signals signals • Uplinking of the • Distribution of signals signals in the footprint area 25
  26. 26. Payment for Transponder | New Skies ruling 5/7• Facilitating the Key observations of the Tribunal signal  PanAmSat decision is overruled transmitting Satellite process  The word “secret” does not qualify the• Amplifying the word “process” in the royalty definition signals under the provisions of the Act as well as Tax Treaty  Skycell decision is distinguished  In telecommunication process, customer merely makes a request to the service provider and does not take part in the process unlike the telecasting process All rights reserved | Preliminary & Tentative Uplink Earth Downlink station Earth station  ISRO decision is distinguished  The ruling in ISRO was in context of a • Encryption of data into • Downlinking of the navigational transponder which is TV signals signals different from the communication • Uplinking of the • Distribution of signals transponder used by the telecasting signals in the footprint area companies 26
  27. 27. Payment for Transponder | Post New Skies 6/7Verizon Communication Singapore (Chennai ITAT) [January 2011] While analyzing payments made by Indian customers towards International Private Leased Circuit or dedicated bandwidth, the tribunal observed as under:  This capacity is made available on a dedicated basis to the customer for the entire contract period, usually a year  The amount received by tax payer from Indian customers is also for the use of a ‘process’ and would therefore qualify as royalty under Act as well as treaty The Delhi special bench ruling in the case New Skies satellite has been referred and relied uponAsia Satellite Telecommunication (Delhi HC) [January 2011] The High Court observed that: All rights reserved | Preliminary & Tentative  The transponder is not distinct and separate from the satellite  The transponder is situated in orbit and merely because the satellite had a footprint in India would not mean that the process took place in India  The payment can not be deemed to be the payment for the process Hence, payment for transponder are not ‘royalty’ under the Act However, the special bench ruling in the case New Skies satellite has not been specifically discussed, reliance placed on Isro (AAR), Ishikawajima Harima Heavy Industries (SC) and OECD commentary 27
  28. 28. Payment for Transponder | Finance Act 2012 7/7Explanation 5 to section 9(1)(vi) inserted with effect from 1 June 1976 to providethat: The royalty includes and has always included consideration in respect of any right, property or information, whether or not -  The possession or control of such right, property or information is with the payer  Such right, property or information is used directly by the payer  The location of such right, property or information is in IndiaExplanation 6 to section 9(1)(vi) inserted with effect from 1 June 1976 to providethat: The expression “process” includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking All rights reserved | Preliminary & Tentative of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret Government clarified in May 2012, that completed assessments will not be reopened !! 28
  29. 29. Finance Act 2012 | Clarificatory amendmentExplanation 6 clarifies ‘process’ however royalty covers ‘use of process’, hence all thepayments towards satellite transmission may not be covered under section 9No withholding tax obligations could be enforced on the payment made prior toannouncement of Finance Bill 2012 Mumbai ITAT (August 2012) in Channel Guide India Limited, observed that: “The taxpayer cannot be held to be liable to deduct tax at source relying on the subsequent amendments made in the act with retrospective effect. The law cannot possibly compel a person to do something which is impossible to perform relying on Kirshna Swamy S. Pd (SC) 281 ITR 305”If nonresidents satellite companies have filed their returns in India, then benefits of recent All rights reserved | Preliminary & Tentativeamendments in Section 201 could be availed by the taxpayers with retrospective effectrelying on following judicial precedents where in similar cases, section 40(a)(ia) was given aretrospective effect Virgin Creations (Calcutta HC) Piyush C Mehta (Mumbai ITAT) By virtue of non-discrimination article in the tax treaty the benefit could be extended to non-residents 29
  30. 30. Direct Taxes CodeAll rights reserved | Preliminary & Tentative
  31. 31. Key amendments for Entertainment industry 1/2Tax provisions Income tax Act DTCthe transfer of all or any rights Not taxable due to specific Included in ‘royalty’in respect of cinematographic exemption videfilms explanation 2 to section 9(1)(vi)Shooting of films in India by Not taxable due to specific There is no specificnon-resident who is not a exemption vide section exemptionIndian citizen 9(1)(d)Deduction to film producer and Rule 9A and Rules are yet to be notified All rights reserved | Preliminary & Tentativefilm distributor Rule 9BIncome earned from house May be considered as Included in ‘income fromproperty such Multiplex, business income, based letting of house property’studio, stadium, etc. on the judicial precedents and the standard deduction reduced to 20% 31
  32. 32. Key amendments for Entertainment industry 2/2 Increase in withholding tax rate from 10.51% to 20% for royalty and fees for technical services - In the following cases the payments to non-residents may liable to higher withholding tax:  India has more than 75 tax treaties, out of which over 30 tax treaties provide for a withholding tax rate of 15% to 20%  Resident from a non tax treaty country may liable to higher withholding tax rate of 20% Permanent establishment - No threshold limit has been specified for construction site, building site, services rendered etc. hence following circumstances may lead to constitution of PE of foreign residents from a non-tax treaty country:  Building site, construction site, rendering of services or leasing of equipments within All rights reserved | Preliminary & Tentative India for a day or more32
  33. 33. Open HouseAll rights reserved | Preliminary & Tentative
  34. 34. Thank you All rights reserved | Preliminary & TentativeRomesh S A Sankhe(E) romesh_sankhe@rediffmail.com(M) 9892 892504The views expressed in this presentation are solely that of the speaker and do not constitute any kind of professionaladvice. These views or opinion expressed in this presentation should not be applied or used without a prior professionaladvice, as the review of the facts and prevailing judicial position is of utmost importance in the analysis of taximplications.

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