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Legal Process Outsourcing (LPO)

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Presentation by Professor William H Byrnes to the Florida Bar Association annual meeting on India's Legal Process Outsourcing industry.

1. Economics and Other Driving Factors

2. Bar Ethics

3. Risk Management

4. Tax Issues

5. Education & Training the LPO Workforce

See http://www.profwilliambyrnes.com

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Transcript of "Legal Process Outsourcing (LPO) "

  1. 1. Prof. William H. Byrnes, IV Page 1 of 12 Walter H. & Dorothy B. Diamond International Tax & Financial Services Program 2121 San Diego Ave. San Diego, California 92110 T +1 (619) 297-9700 F +1 (619) 374-6957 I: http://www.llmprogram.org - www.tjsl.edu Legal Process/Service Outsourcing India Florida Bar Association November 14, 2008 Prof. William H. Byrnes, IV As. Dean, Thomas Jefferson School of Law D +1 (619) 297-9700 ext. 6955 C +1 (786) 271-5202 Email wbyrnes@tjsl.edu
  2. 2. Prof. William H. Byrnes, IV Page 2 of 12 Walter H. & Dorothy B. Diamond International Tax & Financial Services Program 2121 San Diego Ave. San Diego, California 92110 T +1 (619) 297-9700 F +1 (619) 374-6957 I: http://www.llmprogram.org - www.tjsl.edu 1. Introduction These lecture notes present an overview of issues related to the discussion of today’s panels regarding legal process / service outsourcing to India. My particular discussion topic is intended to focus upon our groundbreaking technology and pedagogical developments for educating your Indian legal process outsourcing workforce, for which I will refer to my power-point slides. Finally, time allowing, I will discuss two tax issues mentioned below, those being (1) India source based taxation / permanent establishment considerations, and (2) transfer pricing considerations. Each of the other issues will be addressed thoroughly by the relevant subject matter expert chosen by our distinguished Florida Bar conference chair Rahul Ranadive. I have provided citations to relevant sources that you may jump start your research for legal process outsourcing for India. Please contact me if you require more detailed suggested resources to continue you research. 2. Background Relevant to Legal Process Outsourcing Presentation In 1994-95, William H. Byrnes, IV, was a senior consultant for a significant non-resident Indian acquisition of an India manufacturer, requiring leveraging of the Mauritius double tax agreement and working with Mauritius and Indian tax and exchange control authorities. In 1996, Prof. Byrnes outsourced to India a substantial text capture project in agreement with Kluwer Law International for the creation of HTML hyperlinked online materials for a law program. Since 1995, Professor Byrnes has spoken numerous times in India at conferences and trainings held by organizations such as the Bombay Management Association and for Bangalore’s charted accountants. Last year he was invited to address the All India Federation of Tax Practitioner on legal education for Indian tax process outsourcing. He co-authored the Indian chapter for Oxford University Press/IBLS in its 2009 forthcoming treatise: E-COMMERCE TAXATION. Prior to his tenured academic career, Prof. Byrnes was a senior manager then associate director, international tax, Coopers and Lybrand (South Africa), which subsequently amalgamated into Price Waterhouse. His primary clients at Coopers & Lybrand were FORBES 1000 MNEs and also private banks, insurance companies, technology companies, and company service providers, including HSBC PLC, Comparex (Persetel-QData), and Commercial Union. He sourced multinational structuring and investment projects, completing the work cost effectively for the clients via competently educated South African advisors. Since 1992 he has practiced law, consulted and taught in Asia, Europe, Africa and The Americas. Currently, Professor Byrnes is working with Thomas Jefferson School of Law to establish a roll out for India of the www.barsecrets.com bar preparation program and the Summit legal knowledge acquisition and performance system developed via the neuro-learning research and empirical studies of world renown learning psychologists and lawyers Dr. Dennis Saccuzzo and Dr. Nancy Johnson. Professor Byrnes has been employed as a consultant to a number of governments on their fiscal policy, including South Africa, Botswana, The United Kingdom, The British Virgin Islands, The Turks and Caicos Islands, Anguilla and Montserrat. He is the primary author and team leader of the 900-page UK commissioned REPORT ON THE ECONOMIC, SOCIO-ECONOMIC, AND REGULATORY IMPACT OF THE TAX SAVINGS DIRECTIVE AND EU CODE OF CONDUCT ON BUSINESS TAXATION UPON SELECTED OFFSHORE FINANCIAL CENTERS as well as a COMPETITIVENESS REPORT FOR SELECTED OFFSHORE FINANCIAL CENTERS. Most recently, the Bureau of Labor Statistics, Department of Labor (USA), consulted Prof. Byrnes about the impact of the constricted financial markets upon a five year outlook for employment in financial services.
  3. 3. Prof. William H. Byrnes, IV Page 3 of 12 Walter H. & Dorothy B. Diamond International Tax & Financial Services Program 2121 San Diego Ave. San Diego, California 92110 T +1 (619) 297-9700 F +1 (619) 374-6957 I: http://www.llmprogram.org - www.tjsl.edu Besides co-authoring and editing several course books published in cooperation with Kluwer Law International for the Walter H. & Dorothy B. Diamond graduate program, such as PRINCIPLES OF INTERNATIONAL TAXATION, TAX TREATIES, and also OFFSHORE FINANCIAL CENTERS, he is an co- author for INTERNATIONAL TRUST/ COMPANY LAWS & WEALTH MANAGEMENT (Kluwer Law International) as well as ANTI MONEY LAUNDERING, FINANCIAL CRIMES, COMPLIANCE & ASSET RECOVERY (forthcoming Wolters Kluwer Financial Services). His textbook PRINCIPLES OF INTERNATIONAL TAXATION published through Central Law Training (Wilmington PLC) is used by the 12,000 member Society of Trust and Estate Practitioners for its diploma course. He is the revisions co-author for TAX AND TRADE BRIEFS (Matthew Bender), TAX HAVENS OF THE WORLD (Matthew Bender) as well as TAX TREATY WITHHOLDING GUIDE (Matthew Bender), all available through LexisNexis. Moreover, he co-authored the book TAX REFORM FOR SOUTH AFRICA and served as Managing Editor of the EXCHANGE CONTROL ENCYCLOPAEDIA, which was amalgamated into Butterworths’ EXCHANGE CONTROL ENCYCLOPAEDIA. For Thomson-West, he is a revisions author for MERTENS, including Nonresident Aliens & Foreign Corps (Mertens, no. 45), and a co-author for Claims for Refund (Mertens, no. 58), Income Tax Returns and Disclosure (Mertens, no. 47) and Alimony and Divorce (Mertens, no. 31A), all available through Westlaw. He is also the revisions author for the US Chapter for INTERNATIONAL TAX SYSTEMS AND PLANNING TECHNIQUES available on Checkpoint. In 1996, Prof. Byrnes pioneered real time online post graduate legal education, evolving from his correspondence and residential lectures. In 1998, an ABA accredited law school received acquiescence to host the online program. In 2005, Prof. Byrnes received tenure and full professor status at St. Thomas University School of Law (Miami), as well as his peers electing him Chairman of the Graduate Programs Committee of the American Association of Law Schools. In 2007, he was appointed Assistant Dean at Thomas Jefferson School of Law in San Diego. 3. Economic Comparison: BPO and LPO Growth Fees in India generated from USA sourced legal services are estimated to increase to $640 million within the next two years, employing 32,000 legal staff (from $146 million employing 7,500 in 2006, and only $80 million in 2005).1 In the past three years, legal outsourcing revenue has grown approximately 60% annually.2 From just 2006 to 2007, growth of US companies outsourcing legal services to India increased from 37% to 51%.3 By 2015 Forrester Research projects $4 billion in legal services outsourced to India. By contrasting example, this year India’s IT outsourcing revenues reached $64 billion, growing 33%, and breached the two million employment level.4 As Indian has accomplished phenomenal growth since 1994 with its BPO information technology sector, so it is likely to in the BPO legal services sector though as a much faster pace. 1 Offshoring Legal Services to India: an Update (Market Research Report), Valuenotes Database Pvt. Ltd., July 2007 and Legal Outsourcing to India is Growing, but Still Confronts Fundamental Challenges, Anthony Lin, New York Law Journal, January 2008. – see Mittal - NASSCOM 2 U.S. Legal Work Booms in India, Rama Lakshmi, Washington Post Foreign Service, May 11, 2008. 3 India Lures Corporate Outsourcing, Jonathan Hill, Law Technology News; October 14, 2008. 4 Indian IT-BPO Industry Factsheet, NASSCOM, August 2008 (available at http://www.nasscom.in/Nasscom/templates/NormalPage.aspx?id=53615).
  4. 4. Prof. William H. Byrnes, IV Page 4 of 12 Walter H. & Dorothy B. Diamond International Tax & Financial Services Program 2121 San Diego Ave. San Diego, California 92110 T +1 (619) 297-9700 F +1 (619) 374-6957 I: http://www.llmprogram.org - www.tjsl.edu 4. Conditioning Drivers for LPO Growth 4.1 Litigation Costs For medium size businesses, legal fees as a percentage of income are growing. In 2007 electronic data discovery expenditures increased 43% to $2.7 billion and are projected to reach $4.6 billion by 2010.5 A recent Fulbright & Jaworski client study found that approximately 10% of the clients responding reported legal fees represented about 5% of the company's gross annual revenues.6 4.2 Compliance Costs 4.2.1 The Regulatory Environment7 For the past several years, the US banking industry and its legal/audit counsel has focused on regulatory issues, such as the corporate governance provisions of the Sarbanes-Oxley Act (enacted in 2002) and the banking-related parts of the USA Patriot Act (enacted in 2001). These provisions are having a bottom line impact in terms of increasing expenditure resulting primarily from increased staffing and technology. The provisions of the USA Patriot Act require increasing investments in technology (though many in the industry have questioned the effectiveness of these investments in preventing the funding of terrorist groups or activities) and staff hours that smaller community banks have contended impact them disproportionately. 4.2.2 Increasing Compliance Costs Senior banking management perceives rising and unpredictable compliance costs that undermine US global competitiveness as the most significant threats to the future growth of banking.8 The cost of AML compliance increased around 58% globally but 71% in North America between 2004 and 2007.9 A 2005 survey of Florida, in particular Miami, banks engaged in international banking estimated the staffing cost of AML compliance at nearly $25 million. The study concluded that compliance costs are not uniform across institutions, even after making adjustment for size.10 Banks estimate that training costs and transaction monitoring will require the largest investment of all AML activities. Larger institutions (measured in terms of deposits) typically devote more resources and spend more on compliance than smaller ones, of course, but the compliance burden does not rise proportionately with size. That is, survey data indicates that economies of scale in compliance are present, and that compliance costs per dollar of deposits is greater for smaller institutions than for larger ones.11 Even after the dramatic increases in compliance costs and regulatory 5 India Lures Corporate Outsourcing, Jonathan Hill, Law Technology News, October 14, 2008. 6 India Lures Corporate Outsourcing, Jonathan Hill, Law Technology News, October 14, 2008. 7 STANDARD AND POOR'S INDUSTRY SURVEYS: BANKING (Dec. 6, 2007). 8 The Washington Economics Group, THE ECONOMIC IMPACTS OF INTERNATIONAL BANKING IN FLORIDA AND INDUSTRY SURVEY: 2005. 9 KPMG'S GLOBAL ANTI-MONEY LAUNDERING SURVEY 2007. 10 The Washington Economics Group, THE ECONOMIC IMPACTS OF INTERNATIONAL BANKING IN FLORIDA AND INDUSTRY SURVEY: 2005. 11 The Washington Economics Group, The Economic Impacts of International Banking in Florida and Industry Survey: 2005.
  5. 5. Prof. William H. Byrnes, IV Page 5 of 12 Walter H. & Dorothy B. Diamond International Tax & Financial Services Program 2121 San Diego Ave. San Diego, California 92110 T +1 (619) 297-9700 F +1 (619) 374-6957 I: http://www.llmprogram.org - www.tjsl.edu complexity since 2001, the regulatory environment is likely to become increasingly challenging in coming years. In a 2006 Economist Intelligence Unit survey, international senior bank executives were asked about the costs of compliance with government regulation. When asked what changes they expected in the regulatory environment over the coming three to five year, over 91% stated that they expected regulations affecting their institution to grow in complexity and breadth, 88% stated that compliance with industry regulations will become more onerous, and 81% reported that they expect penalties for non-compliance to increase in severity.12 As a result, the international banking industry in Florida has been characterized by consolidation and contraction since 2000. The number of foreign bank agencies operating in Florida fell from 38 in 2000 to 31 in 2005.13 There were 10 Edge Act banks operating in Florida in 2000, but only 7 in 2005. The number of international banking employees (in foreign agencies, Edge Acts and the international divisions of domestic banks chartered in Florida) declined from 4,660 in 2000 to 3,027 in 2005. Based on a survey of banks significantly engaged in international banking Florida International Bankers Association (FIBA) was able to estimate the Florida international bankers staffing cost for 271 full-time employees of anti-terrorism/anti-money laundering compliance at nearly $25 million in 2005. 14 The average survey respondents indicated that it devoted 2.9 FTE employment positions to BSA/AML compliance in 2002 versus 6.8 FTE positions in 2005. The number of full-time employees devoted to compliance represented 9% of the workforce in 2005. Staff resources devoted to compliance increased by 160% between 2002 and 2005. 4.3 Document Review & Customization Costs In 2003, a legal forms publisher, Socrates Media, reduced the cost for a fifty state customized residential lease from approximately $400,000 to $45,000 via the Hyderabad company QuisLex. 15 A company’s legal department can reduce its document review costs from $7 to $10 per page in the US to approximately $1 per page with Indian counsel. 16 Whereas New York associates undertaking document review may earn a $160,000 base annually, similarly reviewing Indian associates earn less than $10,000. 17 Contrast the annual increase of labor supply of 200,000 Indian law graduates (of a 1.2 billion population) versed in the Common law to that of the USA, being 50,000 for 300 million population. A US legal secretary’s average hourly cost is $63 under the realistic conditions of 80% annual time utilization ($50 if 100% hourly utilization) based upon an $85,000 annual employee cost including salary, benefits, and payroll tax.18 That of the New York associate will be double. In 12 Economist Intelligence Unit, Bank Compliance: Controlling Risk and Improving Effectiveness (2006) 13 In 2005, however, 7 of the 31 international banks had no deposits booked in Florida, while in 2000 only 2 of the 38 had zero deposits. 14 Note that these cost estimates only include manpower or staffing costs, and do not include costs such as transaction monitoring software, possible IT investments and services, legal counsel and similar support. 15 U.S. firms outsource legal services to India, Cynthia Cotts and Liane Kufchock, Bloomberg News, August 21, 2007. 16 Offshoring Legal Services to India: an Update (Market Research Report), Valuenotes Database Pvt. Ltd., July 2007 17 India Lures Corporate Outsourcing, Jonathan Hill, Law Technology News, October 14, 2008. 18 Why and What Lawyers Should Consider Outsourcing, Ron Friedmann LLRX.com, Sept 1, 2008 (available at http://www.llrx.com/features/legaloutsourcingoptions.htm)
  6. 6. Prof. William H. Byrnes, IV Page 6 of 12 Walter H. & Dorothy B. Diamond International Tax & Financial Services Program 2121 San Diego Ave. San Diego, California 92110 T +1 (619) 297-9700 F +1 (619) 374-6957 I: http://www.llmprogram.org - www.tjsl.edu 2003, University of California (Berkeley) reported that whereas US paralegals and legal assistants may average $18 hourly, the equivalent India positions earn between $6 and $8.19 5. Types of LPO Services The legal services outsourced to India include: (1) secretarial including presentations, (2) legal transcription, (3) legal publishing services, (4) document review including e-discovery, (5) legal research, (6) business/market research, (7) litigation support, (8) contract drafting and review services, (9) intellectual property, such as patent application and compliance, and (10) administrative such as accounting and billing.20 6. Type of LPO Providers The three categories of Indian outsource providers typically referred to are captive centers of corporate legal departments, third party niche providers, and third party multiservice providers.21 7. List of LPO Providers The website Prism Legal provides a vendor list of 111 firms providing outsourced legal service in India and elsewhere for the US and UK markets.22 The Prism Legal list also includes corporations and law firms leveraging legal offshore services, such as Dell, American Express, Dupont, Puarolator Courier Inc., General Electric and Microsoft, as well as top law firms such as Clifford Chance, Allen & Overy, Millbank Tweed, Jones Day, Kirkland & Ellis, White & Case; and Chadbourne & Parke.23 8. Risk Management of Important Issues of LPO The subject matter experts of the panels will address several important issues concerning avoiding the sinkholes in the road to outsourcing. 8.1 Attorney Ethical Issues In 2006 the New York City Bar Association published a formal opinion regarding the ethical considerations of overseas legal outsourcing of services. The New York City Bar considered 19 Outsourcing the lawyers, Krysten Crawford, CNN/Money October 15, 2004; Outsourcing Legal Services Abroad, K. William Gibson, Law Practice Magazine Volume 34 Number 5 July/August 2008 Issue Page 47. 20 Offshoring Legal Services to India: an Update (Market Research Report), Valuenotes Database Pvt. Ltd., July 2007. Also see Why and What Lawyers Should Consider Outsourcing, Ron Friedmann LLRX.com, Sept 1, 2008 (available at http://www.llrx.com/features/legaloutsourcingoptions.htm). 21 Contract with India: Legal outsourcing, Jim Middlemiss, Financial Post (Canada), April 25, 2008. 22 http://www.prismlegal.com/index.php?option=content&task=view&id=88&Itemid=70#Intro (last visited October 30, 2008). 23 Also see Contract with India: Legal outsourcing, Jim Middlemiss, Financial Post (Canada), April 25, 2008; U.S. firms outsource legal services to India, Cynthia Cotts and Liane Kufchock, Bloomberg News, August 21, 2007; and India Lures Corporate Outsourcing, Jonathan Hill, Law Technology News, October 14, 2008.
  7. 7. Prof. William H. Byrnes, IV Page 7 of 12 Walter H. & Dorothy B. Diamond International Tax & Financial Services Program 2121 San Diego Ave. San Diego, California 92110 T +1 (619) 297-9700 F +1 (619) 374-6957 I: http://www.llmprogram.org - www.tjsl.edu whether a New York lawyer may “ethically outsource legal support services overseas when the person providing those services is (a) a foreign lawyer not admitted to practice in New York or in any other U.S. jurisdiction or (b) a layperson?”24 That bar association concluded that a lawyer may do so, upon meeting the following conditions (quoted from its opinion)25 : (a) rigorously supervises the non-lawyer, so as to avoid aiding the non-lawyer in the unauthorized practice of law and to ensure that the non-lawyer’s work contributes to the lawyer’s competent representation of the client; (b) preserves the client’s confidences and secrets when outsourcing; (c) … avoids conflicts of interest when outsourcing; (d) bills for outsourcing appropriately; and (e) … obtains the client’s informed advance consent to outsourcing. Earlier this year, the Florida Bar Association addressed the same issue and it found no distinction between hiring contract paralegals in the US and contract foreign (specifically Indian) attorneys outside the US, concluding that contractual legal services do not aid the unlicensed practice of law if the Florida law firm provides adequate supervision. 26 8.2 Security The legal and operational issues that perhaps attracts the most attention, and deservedly so, because of a few highly publicized cases, are privacy, confidentiality and the preservation of privilege. These issues require a robust discussion of operational data security, institutional / LPO governance, and employee security as well as quality control for processes and compliance verification. By example of addressing security concerns, outsourcing contracts mitigate the disclosure of documents by mandating the LPO employees’ computers have Internet access limited. 27 Note that in India anyone with access to customer records is free to sell the data, or use it for direct marketing. However, pending legislation (the Personal Data Protection Bill, 2006) will if passed protect data provided to the Government and private entities from being sold or used for direct marketing. 8.3 Professional Indemnity By example of addressing professional indemnity and security liability concerns for which the US contracting source firm will inevitably be liable to its clients, LPO contracts may mandate professional liability coverage written by US based insurers, with a certificate of coverage provided annually. 28 Naturally, heightened insurance and compliance/verification will increases the LPO firm’s operational costs, pressuring its margin and pricing. 8.4 Expertise Legacy The subject matter experts of the panels will likely discuss the purported high attrition among US 24 The Association of the Bar of the City of New York Committee on Professional and Judicial Ethics, Formal Opinion 2006-3, August 2006. 25 The Association of the Bar of the City of New York Committee on Professional and Judicial Ethics, Formal Opinion 2006-3, August 2006. 26 Professional Ethics Of The Florida Bar (Opinion 07-2); January 18, 2008. 27 Legal Outsourcing to India Is Growing, but Still Confronts Fundamental Issues, Anthony Lin, New York Law Journal, January 23, 2008. 28 Legal Outsourcing to India Is Growing, but Still Confronts Fundamental Issues, Anthony Lin, New York Law Journal, January 23, 2008.
  8. 8. Prof. William H. Byrnes, IV Page 8 of 12 Walter H. & Dorothy B. Diamond International Tax & Financial Services Program 2121 San Diego Ave. San Diego, California 92110 T +1 (619) 297-9700 F +1 (619) 374-6957 I: http://www.llmprogram.org - www.tjsl.edu contract attorney staffing versus the high retention, thus legacy experience, of Indian LPO providers. Moreover, LPO proponents state that Indian LPO multiservice providers may be leveraged by their US counterparts to (1) reduce fixed staffing costs of associates and paralegals, (2) mitigate the capital investment and IT operational costs necessary for purchasing, implementing, and keeping abreast of, legal technology for document review, and (3) cross-fertilization obtained form experience with multitudes of varying projects.29 8.5 Functional Equivalency & Education / Training However, while India may have four times the amount of law graduates, are these graduates the functional equivalent of a US associate? One of my colleagues poses the question that if the Indian graduate attorney was the functional equivalent, then why doesn’t his and other firms, like the technology industry, import Indian trained lawyers? While it is not uncommon for United Kingdom trained solicitors to be employed by US firms, the same cannot be said of Indian graduates. Is the equivalency up to par with US paralegal training? How can a US firm verify professionalism and level of expertise? More importantly for the LPO industry, if components are missing in India’s legal education that impact functional equivalency, what are these components and can these be effectively transferred? By example, many India law graduates do attend one-year Master of Laws in the United States. Is the LL.M. necessary to rectify any (perceived) differences? Will staff’s passage of the penultimate multistate bar examination, by example in Washington DC, New York or California, provide Indian LPO firms competitive advantage to obtaining work, or disadvantage because the (now US) attorney may command a higher wage? Some LPO providers state that as long as a Indian based U.S.-trained lawyer oversees the Indian staff, the work product will be of equivalent quality. May a US firm consider this supervision sufficient for certain contracted skill sets, such as document review? As a counterpoint to this equivalency issue, some LPO marketers state that Indian law graduates are better, rather than equivalent, to their US associate counterparts, by example, because of motivation. 8.6 Tax Issues 8.6.1 Attraction of Income Tax An Indian resident's total income includes their worldwide income "from whatever source derived." Thus, a resident's income need not be received in India to be subject to the income tax. An Indian resident's total income includes income received in India, income "accruing or arising in India," and income "accruing or arising outside India." 30 The total income of a person who is not ordinarily resident in India does not include foreign source income unless the income is derived from an Indian company.31 29 Why and What Lawyers Should Consider Outsourcing, Ron Friedmann LLRX.com, Sept 1, 2008 (available at http://www.llrx.com/features/legaloutsourcingoptions.htm). 30 Income Tax Act § 5(1). 31 Income Tax Act § 5(1) (flush language).
  9. 9. Prof. William H. Byrnes, IV Page 9 of 12 Walter H. & Dorothy B. Diamond International Tax & Financial Services Program 2121 San Diego Ave. San Diego, California 92110 T +1 (619) 297-9700 F +1 (619) 374-6957 I: http://www.llmprogram.org - www.tjsl.edu The Indian government taxes some types of income based on the source of the income. Of particular importance to users of LPO services is the source-based taxation of income from a business connection in India. A nonresident's total income includes income received in India and income "accruing or arising" in India.32 Income is deemed to accrue or arise in India when it comes directly or indirectly from any business connection in India.33 Under Indian domestic tax law, some payments to nonresidents are subject to a non-final withholding tax. Income from sources other than royalties are subject to withholding at the current rates in force.34 Any person in India who has a business connection with a nonresident or from whom the nonresident receives income directly or indirectly is considered to be an agent of the nonresident.35 An agent is treated as a “representative assessee” of the nonresident and must deduct the tax at the source and pay that amount to the Government.36 However, India does not require withholding from remittances from a branch to a foreign parent. 8.6.2 Tax Treaty Protection Under India's Double Taxation Avoidance Agreements (DTAA), the business profits of a nonresident may only be taxed in India if the profits are attributable to a permanent establishment in India. India's DTAAs are more similar to the U.N. Model Double Taxation Convention rather than the OECD’s. The definition of "permanent establishment" (PE) under India's DTAAs is generally consistent with the definition found in the UN Model Convention. Included in the definition of PE is a person, other than an independent agent, who has the authority to, and does habitually conclude contracts in the name of the nonresident person. Also included is a person authorized to, and who habitually does, keep a stock of goods for the nonresident and regularly delivers the goods on behalf of the nonresident. 37 Business income is taxable in India if the income is attributable to a permanent establishment in India. A nonresident person may be taxed in India even if the nonresident does not have a physical presence in India. For instance, the Income Tax Appellate Tribunal has held that nonresident companies operating reservation systems servicing Indian residents are subject to the income tax under Indian treaty law (and domestic law).38 India's domestic tax law applies to nonresidents when the domestic tax law is more beneficial to the taxpayer.39 8.6.3 Recent Treaty Based Decision Impacting BPOs / Transfer Pricing Issue In a landmark Supreme Court decision in summer of last year that impacted many captive LPO providers, the Court substantively agreed with the conclusion of the 2006 Authority for Advance Ruling’s determination that Morgan Stanley’s Indian BPO subsidiary constituted a permanent establishment, though the Court’s and Authority’s analysis diverged.40 The Court’s analysis of 32 Income Tax Act § 5(2). 33 Income Tax Act § 9(1)(i). 34 Income Tax Act § 195(1) and. § 194(J). 35 Income Tax Act § 163(1)(b), (c). 36 Income Tax Act §§ 161, 190. 37 See e.g. Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, India-Austria, Nov. 8, 1999, India Income Tax Department, art. 5. 38 Galileo International Inc. v. DCIT, ITA No. 1733/Del/2001; 2473 to 2475/Del/2000; 820 to 823/Del of 2005 (Nov. 30, 2007). 39 Income Tax Act § 90(2). 40 Civil Appeal No. 2914 of 2007 arising out of S.L.P. (C) No. 12907 of 2006, M/s DIT (International Taxation), Mumbai v. M/s Morgan Stanley & Co. Inc., with Civil Appeal No. 2915 of
  10. 10. Prof. William H. Byrnes, IV Page 10 of 12 Walter H. & Dorothy B. Diamond International Tax & Financial Services Program 2121 San Diego Ave. San Diego, California 92110 T +1 (619) 297-9700 F +1 (619) 374-6957 I: http://www.llmprogram.org - www.tjsl.edu the permanent establishment issue focused on the oversight/quality control employees of Morg Stanley deployed to its Indian subsidiary. an However, the inevitable question of determination of taxable income of the subsidiary whether in its own right or as a permanent establishment is answerable via a transfer pricing functional analysis. The Court ruled that the Transaction Net Margin Method was an appropriate method for determining the arm’s length price between the associated parties. We can discuss the facts, reasoning, and criticisms, in the session or during break as time permits. 9. LPO Education & Training - Bridging Gaps of US Knowledge Requirements Thomas Jefferson School of Law, via its Bar Secrets.com program, has uniquely created a full US bar review program based upon the latest discoveries in learning psychology, neuro learning linguistics and its own empirical testing. Moreover, only Thomas Jefferson School of Law has initiated a DVD delivered quality multipoint video conferencing system that transforming a mere webcam and headset into a $30,000 collaborative interaction equipment. Thomas Jefferson’s Best of Class Solution Summit is the best-of-class, proprietary learning system for efficiently acquiring, recalling, and cognitively processing information in order to establish a subject area expertise. “Efficiently” in this context is measured by both the time and effort employed to obtain this expertise. Summit is partly rooted in the work of the Swiss scientist Jean Piaget and his theory of cognitive development. Piaget introduced the concept of schemata, or learning frameworks as they are more modernly called. Learning frameworks provide the anchor points upon which detailed knowledge can be organized and retained. The power of learning frameworks in the development of expertise was first demonstrated in work by de Groot with chess grandmasters. De Groot found that a major difference between grandmasters and non-grandmasters was in the ability of the grandmasters to recognize patterns. Grandmasters had acquired a repertoire of learning frameworks in chess that were available to them in active memory. Modern day thinking holds that the difference between experts and novices in any field can be found in the expert’s ability to recognize patterns in the areas of expertise. Summit integrates the schematic approach with a proprietary memory system Cumulative MemorizationTM . Cumulative MemorizationTM integrates a number of key memory components to allow learners to put into active memory huge amounts of information, easily retrievable, and thereby increase the scope of working memory. These memory components include (1) memory organization, (2) chunking, (3) deep processing, (4) use of cues, and most importantly, (5) automation of the skills of the actual task, whether it be essay writing, oral presentation, or multiple choice testing. 2007 arising out of S.L.P. (C) No. 16163 of 2006, M/s Morgan Stanley & Co. Inc. vs. Director of Income Tax, Mumbai. See Jefferson VanderWolk’s interesting commentary at 47 TNI AUGUST 13, 2007, P. 631. Email me for copies of the decision and lecture notes thereto.
  11. 11. Prof. William H. Byrnes, IV Page 11 of 12 Walter H. & Dorothy B. Diamond International Tax & Financial Services Program 2121 San Diego Ave. San Diego, California 92110 T +1 (619) 297-9700 F +1 (619) 374-6957 I: http://www.llmprogram.org - www.tjsl.edu Moreover, Summit integrates Cumulative MemorizationTM with a proprietary motivational system in which learners are taught to set a series of intermediate short-term goals that lead to longer-term goals. By setting specific concrete and attainable goals, students are able to achieve their maximum capacity for learning. Finally, Summit transfers a process for extracting the structure of the law – Mapping the Closed UniverseTM . As learners master the concepts and add ever increasing detail, their multiple-choice test-taking skills improve dramatically. To further this mastery, Summit employs a set of skill- building techniques to automate the sub-processes that go into successful multiple choice performance. About our online and residential LL.M. and Masters programs We pioneered 11 years ago online interactive classes and best-in-industry Certification. Our students normally have some experience which enhances our distinguished team of alumni from banks, governments, multinational companies, and firms. Current students include International Trade Counsel -Tyco; Head of Compliance (North America) - HSBC; Chair of Faculty - Rochester Institute of Technology; Compliance – Citigroup; Revenue Authority, Nigeria; the IRS; Partner, Duane Morris (Vietnam); Boeing, and so on. Half of our students are not US persons - thus providing a global, professional perspective in each course. Because we developed as a contemporary program to serve the executives of the global industry from 1996, instead of a residential program trying to deliver itself to young students right out of college, our team is a collaborative network of faculty and alumni that reside globally (Asia, Africa, Europe, North & South America, the Caribbean), connect via our social / professional networks, who approach learning from the working realities of our professional lives, from client presentation deadlines to family vacation commitments. We have the largest online library of tax/financial service databases of any academic institution globally, and uniquely offer our students the opportunity to sit in on lectures of other courses not enrolled in. We guarantee not to over-fill a course with more than 15 students that everyone has an opportunity for engagement with the instructors and each other – and we maintain a low tuition of under $25,000 because of our alumni support and our professional education programming. Our new $100+ million dollar tech smart building http://www.tjsl.edu/files/news/Spring-2008- Declaration-Magazine.pdf allows us to transform education. Maybe this is why Matthew Bender has three international tax loose-leaf series based from our program, Wolters Kluwer another one, Oxford/IBLS asked us to write a majority of its new Ecommerce treatise and is pursuing us for yet another, and Edward Elgar sent us a proposal to write for it a manuscript on offshore centers. On a final note - our program graduates may continue to obtain the Ph.D. in law (J.S.D.), also via online but for the graduation ceremony wherein we encourage all to attend in San Diego for three days of festivities. We hope you can take advantage of our impressive career services while increasing your future opportunities – such as the recruitment lectures. Search us out on www.YouTube.com via “profbyrnes” PS: We have two residential LL.M. programs – one for foreign law graduates seeking to learn and experience U.S. law, the other in International Investment and Trade law.
  12. 12. Prof. William H. Byrnes, IV Page 12 of 12 Walter H. & Dorothy B. Diamond International Tax & Financial Services Program 2121 San Diego Ave. San Diego, California 92110 T +1 (619) 297-9700 F +1 (619) 374-6957 I: http://www.llmprogram.org American Bar Association accredited institution member of the American Association of Law Schools contemporary and collaborative learning models meeting today’s employment requirements residential and/or online - www.tjsl.edu

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