International Tax Issues inEntertainment Industry andProfit Attribution to AgencyPEWestern India Regional Council - ICAI,I...
ContentsSector OutlookInternational Tax Issues ~ Entertainment IndustryAgency PE and Profit AttributionTax Planning Avenue...
Sector Outlook | Industry Growth                     Media & Entertainment Industry in India    1500                      ...
Sector Outlook | Global Association•   India’s association with overseas entertainment industry is growing over    the yea...
International tax issues    in Entertainment    industry5                              CA Romesh S A Sankhe
International Film Co-production (1)• Benefits of international film co-production are as under:    •   the ability to poo...
International Film Co-production (2) | Taxation of AOPKey tax implications are explained hereunder in brief:              ...
International Film Co-production (3) | Taxation of AOP                            Consortium                              ...
International Film Co-production (4) |Alternate structuresComparison of key tax imperatives between these structures is as...
International Film Co-production (5) | LLPLLPs brought under the ambit of Alternate Minimum Tax (AMT) fromFY 2011-12•    R...
International Film Co-production (6) | LLPIncomes which are still out of AMT are as under: Stream of income             No...
Shooting of Films in India• Section 9(d) - No income accrued on shooting of films in India, if     • The producer is      ...
Production of Films - Indian branch (1)• At the initial stages of Indian business, the production of movies may  be undert...
Production of Films - Indian branch (2)• Rule 9A - Deduction of ‘Cost of Production’ for film producer     •   Outcome of ...
Production of Films - Indian branch (3) | Other issues• Exhibition on a commercial basis’ - Whether it includes paid previ...
Film Artist and Other Professionals | Non-residents• Income tax Act     •   No specific section or rule dealing with taxat...
Sportsperson and Sports Association (1) | Non-residents• Income tax Act - Section 115BBA and CBDT circular No. 787 (supra)...
Sportsperson and Sports Association (2) | Non-residents         • In all the other cases, may be taxable at net income per...
Foreign Telecasting company (1)• Income streams of foreign telecasting companies     • Lease of decoders to cable operator...
Foreign Telecasting company (2)• Profit attribution incase of PE     •   If non-resident’s operations are solely carried o...
Foreign Telecasting company (3)• Profit attribution incase of PE     •       The withdrawal of circular 23/1969 may not af...
Payment for Transponder (1) | New Skies ruling• Facilitating the                                   Facts  signal  transmit...
Payment for Transponder (2) | New Skies ruling• Facilitating the                                   Issues  signal  transmi...
Payment for Transponder (3) | New Skies ruling• Facilitating the                                   Ruling of Special Bench...
Payment for Transponder (4) | New Skies ruling• Facilitating the                                   Comments  signal  trans...
Payment for Transponder (5) | New Skies ruling• Facilitating the                                   Comments  signal  trans...
Payment for Transponder (6) | After New Skies ruling Verizon Communication Singapore (Chennai ITAT) [January 2011] •   Whi...
Tax Planning Avenues28                      CA Romesh S A Sankhe
Intangible Management | Overseas IPR Company          Step 1                                                              ...
Onshore services (1)Whether onshore services is taxed in India ?•    “Fees for technical services” under the Act includes ...
Onshore services (2)           B Inc                                                                           B Inc      ...
Lease of equipment (1)Whether lease of equipments is taxed in India ?•    After the amendment in finance Act 2002, “Royalt...
Lease of equipment (2)        B Inc                                                                                B Inc  ...
Direct Taxes Code34                   CA Romesh S A Sankhe
Key amendments for Entertainment industry (1) Tax provisions                            Income tax Act                    ...
Key amendments for Entertainment industry (2)• Increase in withholding tax rate from 10.51% to 20% for royalty and fees  f...
Open house ..37                   CA Romesh S A Sankhe
CA Romesh S A Sankhe(M) 9892 892504(E) romesh_sankhe@rediffmail.comThe views expressed in this presentation are solely tha...
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International Tax Issues In Entertainment Industry_WIRC_5 July 2011

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International Tax Issues In Entertainment Industry_WIRC_5 July 2011

  1. 1. International Tax Issues inEntertainment Industry andProfit Attribution to AgencyPEWestern India Regional Council - ICAI,Intensive Study Course on InternationalTaxation, Mumbai5 July 2011CA Romesh S A Sankhe
  2. 2. ContentsSector OutlookInternational Tax Issues ~ Entertainment IndustryAgency PE and Profit AttributionTax Planning AvenuesDirect Taxes Code2 CA Romesh S A Sankhe
  3. 3. Sector Outlook | Industry Growth Media & Entertainment Industry in India 1500 1275 1104 Size (in INR Billions) 957 1000 834 587 652 738 500 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• 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 upcoming Formula One Grand Pix (F1 Race) the sports entertainment industry in India is on rise3 CA Romesh S A Sankhe
  4. 4. 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 four 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 for two months every year • International sensations such as Akon, Bryan Adams, Ricky Martin all had their concerts in various cities of India and more such artists will be visiting India in coming months such as Lady Gaga, Shakira, etc. • All are targeting the 700 million plus Indian population below 30 • F1 Race circuit in India is scheduled at Noida in October 2011 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 industry4 CA Romesh S A Sankhe
  5. 5. International tax issues in Entertainment industry5 CA Romesh S A Sankhe
  6. 6. International Film Co-production (1)• 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; and • the opportunity to learn from the partner• 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.6 CA Romesh S A Sankhe
  7. 7. International Film Co-production (2) | Taxation of AOPKey tax implications are explained hereunder in brief: Consortium AOP• Status & • Not treated as ‘separate entity’ • Treated as a separate taxable taxation and hence profits & gains are entity and hence entire profits taxable in the hands of each of the project is taxable at member separately maximum rate of 30.90%/ 32.45%/42.02%• Treatment of • Losses, if any, will be eligible • Losses, if any, will not be Losses for set off in the hands of each eligible for set off in the hands member against the gains from of members, due to separate its other business income, entity treatment• Head office • Deduction of common • Deduction of common expenses business expenses possible business expenses difficult7 CA Romesh S A Sankhe
  8. 8. International Film Co-production (3) | Taxation of AOP Consortium AOP• Applicability of • Each member can avail the • Treated as a separate taxable tax treaty treaty benefits as per its entity, hence each member is eligibility not eligible for treaty benefits• Treatment of • Members are eligible for tax • May not be eligible for the foreign tax credit in their host country foreign tax credit credit• Remuneration • Cross charges may be • Remuneration to members is cross charges deductible not allowed• Taxability of global income • Not possible for non-residents • May be treated as resident, hence possible If co-production contracts are indivisible contracts then it may result in significant tax inefficiencies8 CA Romesh S A Sankhe
  9. 9. International Film Co-production (4) |Alternate structuresComparison of key tax imperatives between these structures is as under; Particulars AOP LLP Ind. Co. Maximum rate of tax on net profits incase of 30.90% 30.90% 32.45% foreign resident members Maximum rate of tax on net profits incase of 42.02% 30.90% 32.45% foreign resident companies as members Payment to corporate members for services Not allowed Not allowed Allowed rendered by them Payment of interest on capital Not allowed Allowed up Not to 12% allowed MAT @16.22%, DDT@16.22% & Deemed Not Not Applicable dividend distribution tax applicable applicable Liability of members Unlimited Limited Limited Perpetual succession No Yes Yes Limited Liability Partnerships (LLP) seems more favorable, however foreign participation in LLP can only be possible in open sectors after government’s approval9 CA Romesh S A Sankhe
  10. 10. International Film Co-production (5) | LLPLLPs brought under the ambit of Alternate Minimum Tax (AMT) fromFY 2011-12• Rate of tax = 19.06% on Adjusted Total Income (ATI)• ATI = Total taxable income before deduction under chapter VI A or section 10AA [profit linked incentives]• AMT Credit = AMT less regular income tax• Credit carry forward = Ten yearsSome key business advantages• Limited liability• Option of cash accounting• No mandatory 10% transfer to reserve unlike companies• No dividend distribution tax• Simpler entry and exist formalities10 CA Romesh S A Sankhe
  11. 11. International Film Co-production (6) | LLPIncomes which are still out of AMT are as under: Stream of income Normal tax Minimum Alternate Alternate Tax Minimum (Company) Tax (LLP) Businesses income under Nil 20% Nil investment linked incentives Capital gains exempt under Nil 20% Nil section 10(38) Dividends from foreign 15% 20% Nil subsidiary Loss under income tax Act Nil 20% Nil but profits as per books May still be a useful alternative for holding companies, business availing investment linked incentives or normal tax benefits, etc.11 CA Romesh S A Sankhe
  12. 12. Shooting of Films in India• Section 9(d) - No income accrued on shooting of films in India, if • The producer is • An Individual who is not a Citizen of India • 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, 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 CA Romesh S A Sankhe
  13. 13. Production of Films - Indian branch (1)• 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 ` 50,000 • Failure to comply may attract penalty of ` 100 per day under 272A13 CA Romesh S A Sankhe
  14. 14. Production of Films - Indian branch (2)• 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 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 cost14 CA Romesh S A Sankhe
  15. 15. Production of Films - Indian branch (3) | Other issues• 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 27-08-2008 • 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 dated 29th November 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 CA Romesh S A Sankhe
  16. 16. Film Artist and Other Professionals | Non-residents• Income tax Act • No specific section or rule dealing with taxation of artist and professionals in the entertainment industry except CBDT circular No. 787 dated 10 February 2000 • Artist / Others • If covered under ‘fees for technical services’ [section 9(1)(vii)] or ‘royalty’ [section 9(1)(vi)] then taxable at his/her gross income @10.30% in the absence of his/her fixed base and availability of PAN • In all the other cases, may be taxable at net income pertaining to operations carried in India @30.90%, also may have to file return and comply with other norms such as tax audit, etc.• Tax treaty • Artist - 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 days16 CA Romesh S A Sankhe
  17. 17. Sportsperson and Sports Association (1) | Non-residents• Income tax Act - Section 115BBA and CBDT circular No. 787 (supra) • Sportsperson - Person, who is neither Citizen nor resident of India, may liable to tax on gross basis @10.30%, subject to the availability of PAN on their income earned from participation in any game in India, advertisement and contribution of articles relating to any game in India • Sports Association - Association, who is not resident of India, may liable to tax on gross basis @10.30%, subject to the availability of PAN on their income earned in relation to any game played in India • 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• 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 and17 availability of PAN CA Romesh S A Sankhe
  18. 18. Sportsperson and Sports Association (2) | Non-residents • In all the other cases, may be taxable at net income pertaining to operations carried in India @30.90%, also may have 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) • 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 conditions18 CA Romesh S A Sankhe
  19. 19. Foreign Telecasting company (1)• Income streams of foreign telecasting companies • Lease of decoders to cable operators • Subscription charges for pay channel • Advertising revenues• Lease of decoders - May deemed to lease of commercial equipment and hence taxable as “royalty” under the Income tax Act• 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 2 May 1996 and no.765 dated 15 April 1998 • The above circulars were withdrawn vide Circular no.6/2001 dated 5 March 2001, w.e.f. 31 March 200119 CA Romesh S A Sankhe
  20. 20. Foreign Telecasting company (2)• 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 23 July 1969 CBDT Circular No. 5/2004 dated 28 September 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) Rolls Royce Plc v. DDIT (Delhi ITAT) Amadeus Global Travel v. DDIT (Delhi ITAT) Circular 23/1969 was withdrawn vide Circular no. 7 dated 22 October 2009 - Whether this withdrawal will effect the above stated position ?20 CA Romesh S A Sankhe
  21. 21. Foreign Telecasting company (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 does 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 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 CA Romesh S A Sankhe
  22. 22. Payment for Transponder (1) | New Skies ruling• 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 Uplink Downlink stations to uplink and downlink the Earth Earth signals station station • The transmission facility was availed of by telecasting companies according • Encryption of data • Downlinking of the to their needs into TV signals signals • Uplinking of the • Distribution of signals signals in the footprint area 22 CA Romesh S A Sankhe
  23. 23. Payment for Transponder (2) | New Skies ruling• Facilitating the Issues signal transmitting Satellite • Whether the payment received by Dutchco process from its customers for use of its satellite will• Amplifying the satisfy the definition of “royalty” under the signals 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 treaty: Uplink Downlink “….means payments…. received as a Earth Earth consideration for the use of, or the right to use, any …., secret formula or process, station station or for information….” The missing comma • Encryption of data • Downlinking of the “…., secret formula or process, ….” into TV signals signals Should this be interpreted as: • Uplinking of the • Distribution of A. “secret formula or secret process” ; or signals signals in the B. “secret formula, or process” ? footprint area What is the significance of there being no comma after “formula”? 23 CA Romesh S A Sankhe
  24. 24. Payment for Transponder (3) | New Skies ruling• Facilitating the Ruling of Special Bench of the signal transmitting Satellite Tribunal process • The services rendered by Dutchco• Amplifying the signals through its satellite amounts to a “process” • Payment by telecasting companies is for the use of or right to use the “process” • The process in a transponder is not secret Uplink Downlink • Process need not be “secret” to be Earth Earth characterized as “royalty” under the station station treaty – i.e. interpretation B. (“secret formula, or process”) is correct • Encryption of data • Downlinking of the into TV signals signals • The payment made to Dutchco by • Uplinking of the • Distribution of telecasting companies will be taxable signals signals in the as “royalty” footprint area 24 CA Romesh S A Sankhe
  25. 25. Payment for Transponder (4) | New Skies ruling• Facilitating the Comments signal transmitting Satellite • Key observations of the Tribunal: process • The process of uplinking and• Amplifying the downlinking is embedded in the signals transponder which is used by the telecasting companies as per 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 Uplink Downlink • Dutchco has no right to interfere in the Earth Earth transmission process station station • Without knowing the process involved in the transponder, the telecasting • Encryption of data • Downlinking of the companies will not be able to telecast into TV signals signals their programmes in the desired area at • Uplinking of the • Distribution of the desired time signals signals in the footprint area 25 CA Romesh S A Sankhe
  26. 26. Payment for Transponder (5) | New Skies ruling• Facilitating the Comments signal transmitting Satellite • PanAmSat decision is overruled process • The word “secret” does not qualify the word• Amplifying the “process” in the royalty definition under the signals 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 Uplink Downlink • ISRO decision is distinguished Earth Earth • The ruling in ISRO was in context of a station station navigational transponder which is different from the communication transponder used • Encryption of data • Downlinking of the by the telecasting companies into TV signals signals • Uplinking of the • Distribution of signals signals in the footprint area 26 CA Romesh S A Sankhe
  27. 27. Payment for Transponder (6) | After New Skies ruling Verizon 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 upon Asia Satellite Telecommunication (Delhi HC) [January 2011] • The High Court observed that: • 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 Harima27 Heavy Industries (SC) and OECD commentary CA Romesh S A Sankhe
  28. 28. Tax Planning Avenues28 CA Romesh S A Sankhe
  29. 29. Intangible Management | Overseas IPR Company Step 1 Step 2 Benefits of Royalty IPR holding co i. WHT of 10.51% on repatriation IPR holding co in offshore instead of 16.22% on DDT in offshore jurisdiction ii. Claim of tax credit possible jurisdiction unlike DDT iii. Deduction of expenses can be claimed unlike DDT iv. Reduction in overall group taxation Vital considerations before planningPayment of Sale of IP i. Domestic laws direct as well as Non Payment ofsale located in indirect of all the countries exclusive royaltyproceeds India ii. Other incidental taxes such as transfer of R&D cess etc. IP iii. IP valuation iv. Transfer Pricing v. Logistics vi. General Anti Avoidance rules vii. Controlled Foreign Company rules A Ltd A Ltd 29 CA Romesh S A Sankhe
  30. 30. Onshore services (1)Whether onshore services is taxed in India ?• “Fees for technical services” under the Act includes any payment for rendering of any managerial, technical or consultancy services• Hence, taxed @10.51% on gross income under the Act in the absence of PE Avenues for Mitigating onshore services taxation in India ?• Under certain tax treaties of India, services which does not make available any technical knowledge, skill, etc. are excluded from purview of FTS and some tax treaties does not have FTS and service PE clause• Hence services procured from tax residents of these countries may not be liable to withholding tax in the absence of non-resident’s fixed base PE in India Tax planning is vital in terms cost saving, as most of the times service recipient bears the tax liability30 CA Romesh S A Sankhe
  31. 31. Onshore services (2) B Inc B Inc Payment of fees Onshore 100, no WHT (if no How can we save services PE) due to the tax of 10.51% supply tax treaty Operating coOnshore Payment of Onshore in offshoreservices services 100 jurisdictionsupply + Withholding tax Vital considerations (Grossing up) 10.51 before planning ------------------------------- Payment of fees i. Domestic laws direct Total cost to as well as indirect of Onshore 100, no WHT (if the project 110.51 all the countries services no PE) due to ii. Other incidental taxes supply tax treaty such as personnel etc. iii. Transfer Pricing iv. Logistics v. General Anti Avoidance rules A Ltd A Ltd31 CA Romesh S A Sankhe
  32. 32. Lease of equipment (1)Whether lease of equipments is taxed in India ?• After the amendment in finance Act 2002, “Royalty” under the Act includes payment for use of right to use of any industrial, commercial or scientific equipments,• Hence, taxed @10.51% on gross income under the Act in the absence of PEAvenues for Mitigating taxation on lease of equipments in India ?• Most of India’s tax treaties on the line of the domestic law, includes payment for equipment in the definition of royalty except some countries,• Hence, equipments procured from tax resident of the above countries may not be liable to withholding tax in the absence of non-resident’s PE in India Tax planning is vital in terms cost saving, as most of the times lessee bears the tax liability while leasing the equipments32 CA Romesh S A Sankhe
  33. 33. Lease of equipment (2) B Inc B Inc Payment of Rent How can we save Supply of 100, no WHT (if no equipment PE) due to the tax of 10.51% tax treaty Operating coSupply of Payment of Rent 100 in offshoreequipment + Withholding tax jurisdiction (Grossing up) 10.51 ------------------------------- Vital considerations Total cost to before planning Payment of the project 110.51 i. Domestic laws direct Supply of Rent as well as indirect of equipment 100, no WHT (if all the countries , no PE) due to ii. Other incidental taxes tax treaty such as stamp duty etc, iii. Transfer Pricing, iv. Logistics v. General Anti A Ltd Avoidance rules A Ltd 33 CA Romesh S A Sankhe
  34. 34. Direct Taxes Code34 CA Romesh S A Sankhe
  35. 35. Key amendments for Entertainment industry (1) Tax provisions Income tax Act DTC Use or right to use of Not taxable in certain Included in ‘royalty’ transmission by satellite, cable, cases, based on the optic fiber or similar technology judicial precedents the transfer of all or any rights Not taxable due to specific Included in ‘royalty’ in respect of cinematographic exemption vide explanation films 2 to section 9(1)(vi) Shooting of films in India by Not taxable due to specific There is no specific non-resident who is not a Indian exemption vide section exemption citizen 9(1)(d) Deduction to film producer and Rule 9A and Rules are yet to be notified film distributor Rule 9B Income earned from house May be considered as Included in ‘income from property such Multiplex, studio, business income, based on letting of house property’ and stadium, etc. the judicial precedents the standard deduction reduced to 20% Development and transfer of a Not taxable, based on the Included in ‘fees for technical design, drawing, plan or judicial precedents services’ software35 CA Romesh S A Sankhe
  36. 36. Key amendments for Entertainment industry (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 India for a day or more Gross-up contracts with the non-residents will have be analysed carefully, as the same may increase the cost of overseas transactions36 CA Romesh S A Sankhe
  37. 37. Open house ..37 CA Romesh S A Sankhe
  38. 38. CA Romesh S A Sankhe(M) 9892 892504(E) romesh_sankhe@rediffmail.comThe views expressed in this presentation are solely that of the speaker and do not constitute any kind of professional advice. Theseviews or opinion expressed in this presentation should not be applied or used without a prior professional advice, as the review of thefacts and prevailing judicial position is of utmost importance in the analysis of tax implications.38

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