India_ tax treaties with the US/Thailand
Questions1: Please elaborate on the 'Caveat' added to the
US-India tax treaty in the Excel file in cell D12 . We need specific guidance
on the application of the Arm's Length Principle (ALP) when the US entity's branch in Singaporean (SG) /Australian(AU) personnel provide field services in India, and
the Indian entity (IN) invoices the customer directly, including how to
characterize the intercompany charge and related intercompany markups.
Response:
Caveat
was added to bring to your attention that as per US treaty irrespective of number
of days the activities are carried out in India, a Service PE may be
constituted when the services (other
than included services as defined in Article 12) are provided by an AE.
The US
treaty applies in the case of Australia or Singapore Branch (explained in the
Question #1 of the word document.
As per
the US treaty irrespective of number of stays in India, a Service PE may be
constituted in the case of transaction between AEs within the meaning of
paragraph 1 of Article 9.
Article
9 – Very specifically mentioned that in order to bring a connected enterprise within the meaning of AE, only when the transactions
differs from independent parties ( that
is ALP ) .
Conclusion
In this case,
service (other than included
services as defined in Article 12) provided by AE would constitute a service PE
when such transactions are not confirmed with ALP standards . The ALP standards
are subjective to the factual analysis.
The relevant extracts
of India USA treaty
The India US treaty –
with respect to service PE reads as ;
2. The
term "permanent establishment" includes especially:
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(a) |
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a place of management; |
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(b) |
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a branch; |
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(l) |
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the furnishing of services, other than
included services as defined in Article 12 (Royalties and Fees for Included
Services), within a Contracting State by an enterprise through employees or
other personnel, but only if: |
|
(i ) |
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activities of that nature continue within
that State for a period or periods aggregating more than 90 days within any
twelve-month period ; or |
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(ii ) |
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the services are performed within that State for a related enterprise
[within the meaning of paragraph 1 of Article 9 (Associated Enterprises)]. |
ARTICLE 9
ASSOCIATED ENTERPRISES
1. Where
:
|
(a) |
|
an enterprise of a Contracting State
participates directly or indirectly in the management, control or capital of
an enterprise of the other Contracting State ; or |
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(b) |
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the same persons participate directly or
indirectly in the management, control, or capital of an enterprise of a
Contracting State and an enterprise of the other Contracting State, |
and in either case conditions are made or imposed between the two
enterprises in their commercial or financial relations which differ from those
which would be made between independent enterprises, then any profits which,
but for those conditions would have accrued to one of the enterprises, but by
reason of those conditions have not so accrued, may be included in the profits
of that enterprise and taxed accordingly.
Questions 2:
(1)
How does
this 'Caveat' affect our business operations? If SG/AU branch personnel perform work and the Indian entity bills the customer for
such work, we expect that they would either be invoiced intercompany 1) under a
secondment agreement with no mark-up or 2) under a service agreement where the
Singapore/Australia entity charges its cost plus a 5% mark-up. We fully
expect that this would be considered as applying the Arm’s Length
Principle.
Response.
When the personnels
are provided under a secondment agreement. The question of PE does not arise.
It would be good to
review the Secondment agreement by external consultant .
When the services are
provided under service agreement with cost plus markup of 5 % the ALP test need
to be analysed. Would fall within the purview of FIS under Article 12 and WHT
to be paid .
With respect to ALP
of the mark up of 5% lets consult with TP . Marking Archit to comment on this.
Questions 3:
(2) What are the differences in implications between SG/AU branch
invoicing directly to an Indian customer and invoicing IN? We
understand that there may be risk if there is a related party transaction – so
we are wondering about practical implications if the SG/AU branch were to directly invoice the end customer and whether that increases or
decreases the risk. We’d also like to understand the administrative
considerations (is a PAN necessary? Withholding tax? Filing
obligations?)
Response:
When
SG/AU branch directly deal with third party customers, Service PE constitute
only when the activity of that nature continues for period or periods aggregating
more than 90 days within any twelve-month period. There by reducing
the risk of PE exposure.
The
said payment may be subject to WHT under Article 12.
Questions 4:
(3) It seems that the comments on Malaysia and Thailand focus on
“activities” and less on projects – which means that it appears that we would
need to aggregate work across projects. Please confirm –because if this
is the case – we believe that we need to update the language in rows 14 &15
to show that we need to aggregate across projects – which in turn may have an
impact on whether we would want to second the individuals or charge for them as
an intercompany service charge as part of our PE risk management.
Response:
No of days of each
project is separately counted for project PE.
With respect to
Service PE the number of days for activities of the same nature irrespective of
the projects need to be counted.
Questions 5:
Word
document:
(1) Article 12 - Fee for included service (FIS) in
the Word document: Please provide practical guidance on how to
analyze Article 12 regarding fees for included services. We need to understand
whether our services are subject to this article and how to ensure we avoid
creating a Service PE.
Make
available clauses are included in Singapore/USA treaty.
(2) Below the table on page 3 of the Word document, I’d
like to better understand what Note 1 is referring to. What is IPR in
this context?
In
the case of Transfer of drawings, blueprint etc – where WHT on royalty applies.
(this was alleged in the recent audit and we could successfully defend )
Questions
1.
In
the case of Singapore/Australia branches of US entity, which treaty to apply.?
Ans: It is the US tax
treaty.
Explanation/arguments
As the income form branches are taxed in HomeOffice (USA)
irrespective of the source the branch can be considered as part of the USA
entity and a resident of USA. On the other hand, in Singapore the branches are taxes
only on the source in Singapore. (The source rule right of taxation does not
constitute a ‘resident in’ status. Further the branch which is controlled (most
likely argued to be controlled) by HO (USA) satisfying the (POEM) test in USA.
Cases relied.
Shell Technology India P Ltd A.A.R. No.850
of 2009
However, a contrary
view may be possible as per the literal reading of the India Singapore treaty
As per the Article 1.
(j) of the Treaty – ‘person’ inter alia includes …. any other entity which is
treated as taxable unit under the taxation laws in force in the respective contracting
state.
As per Article 4. (1) resident
1. For the purposes of this Agreement, the term "resident of a
Contracting State" means
any person who is a resident of a Contracting State in accordance with the
taxation laws of that State.
One need to analyze:
a.
Are the
branches treated as taxable unit in Singapore tax laws?
b.
Are the
branches taxes in Singapore a resident or nonresident?
(note in India the branches
are taxed as nonresident)
2.
PE
how many days of stay constitutes Project PE.
Ans: No PE risk because (1) the project is owned by
Solar India (STIPL) and (2) the economic ownership (IN entity pays the remuneration
under the Secondment) of those people are also in India. If individuals are not seconded, then there
is risk of PE if the activities do not meet the terms of the treaty.
The number of days
briefly outlined below:
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USA |
Singapore |
Australia |
Malasia |
Thailand |
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Project PE (installation/ Supervisory Activities) |
Project duration >/120 Days in any
twelve-month period |
Project duration >/183Days in any fiscal
yea r) |
Project duration >/ 6 months |
Project duration >/ nine months |
Project duration >/183Days |
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together with other such sites, projects, or activities |
Each project separate |
together with other sites, projects, or activities |
Each project separate |
Each project separate |
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Service PE |
Activities of that nature continue for a period or periods aggregating: By non-AE - more than 90 days within any twelve-month period.
(uncontrolled transaction). By AE if not at ALP irrespective of no of
days stay constitute PE. (Note Service PE does not arise if the said services are considered
as FIS under Article 12)
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Activities of the same nature. By non-AE 90 days. By AE 30 Days (Note Service PE does not arise if the said services are considered
as technical service under Article 12) |
Activities of the same nature.> 183 days in any 12-month period
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Activities of the same nature.> 90 days in any 12-month period |
Activities of the same nature.> 183 days in any 12-month period |
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3.
With
holding tax on FTS/FIS .
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USA |
Singapore |
Australia |
Malasia |
Thailand |
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Article 12 |
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15% 1.Fee for included service ( Art.12.a.(ii) |
10% |
10% |
10% |
Nil No Article on FTS. ARTICLE 22 OTHER INCOME |
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10% 2. fees for included services
ancillary and subsidiary to the enjoyment of the property (industrial,
commercial, or scientific equipment) 12(2)(b)/12(3)(b) |
0% (for services that are ancillary and subsidiary, as well as
inextricably and essentially linked, to the sale of property other than that
involves transfer of IPR)) Art.12.5.a |
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Note 1
1.
Make
available clause need not be satisfied if the IPR is transferred. (12.4.a)
Summary of US-India Tax Treaty Implications and Operational Guidance
1. The 'Caveat' and Service PE under the US-India Treaty (Question 1 & Response):
* Core Issue: A "Service Permanent Establishment" (Service PE) can be created in India for a US entity if its Associated Enterprise (AE) provides services (other than "included services" as defined in Article 12) in India.
* Critical Point (The Caveat): If services are provided by an AE, a Service PE can be constituted irrespective of the number of days the activities are carried out in India, if the transactions between the AEs are not at Arm's Length Price (ALP).
* ALP is Key: Article 9 (Associated Enterprises) states that if conditions between AEs differ from those between independent parties (i.e., not at ALP), profits can be adjusted. This links directly to the Service PE risk.
* Application to SG/AU Branches: This US-India treaty provision applies even if services are rendered by personnel from the US entity's Singapore (SG) or Australian (AU) branches, as these branches are generally considered part of the US entity for treaty purposes (though a nuanced counter-argument for the India-Singapore treaty is noted).
* Guidance on Intercompany Charge & Markups:
* When SG/AU personnel provide field services in India and the Indian entity invoices the customer, the intercompany charge from the SG/AU branch to the Indian entity must be at ALP.
* The charge would be for services rendered.
* Any markup on these intercompany services must be justifiable under ALP standards, which requires a factual, case-by-case (TP) analysis.
2. Business Impact of the 'Caveat' (Question 2 & Response):
* Secondment Agreement (No Mark-up):
* If SG/AU personnel are provided under a true secondment agreement (where the Indian entity likely bears the economic cost and has control), the risk of creating a PE is generally low.
* It's recommended to have the secondment agreement reviewed by an external consultant.
* Service Agreement (Cost + 5% Mark-up):
* If services are provided under a service agreement with a cost-plus markup (e.g., 5%), this transaction must pass the ALP test.
* A 5% markup is not automatically ALP compliant; it requires specific transfer pricing (TP) analysis.
* Such services might fall under "Fees for Included Services" (FIS) as per Article 12 of the US-India treaty, potentially triggering Withholding Tax (WHT) obligations in India. (Note: If services are FIS and WHT is paid, this can sometimes preclude them from forming a Service PE).
3. Implications of Invoicing Structures (Question 3 & Response):
* SG/AU Branch Invoicing Indian Customer Directly (Third Party):
* This scenario reduces the risk of an AE-triggered Service PE (which can arise irrespective of days if not at ALP).
* Instead, a Service PE would typically only arise if the activities of that nature continue for more than 90 days within any 12-month period (as it's a transaction with a third party, not an AE in this direct flow).
* However, payments from the Indian customer to the SG/AU branch may still be subject to WHT under Article 12 (FIS).
* Administrative considerations like obtaining a PAN in India, WHT compliance, and tax filing obligations would arise if a PE is constituted or if income is otherwise taxable in India.
* SG/AU Branch Invoicing Indian Entity (Related Party):
* This is an intercompany transaction subject to the stricter Service PE rules for AEs (PE risk if not at ALP, irrespective of days) and rigorous ALP scrutiny for the charges.
4. Aggregation of Activities for PE (Malaysia & Thailand Focus) (Question 4 & Response):
* Project PE: The duration for each project is typically counted separately.
* Service PE: The number of days for activities of the same or similar nature needs to be aggregated across different projects to test the Service PE threshold.
* Confirmation: Yes, you need to aggregate work (activities of the same nature) across projects for Service PE assessment. This impacts PE risk management and the decision between secondment and intercompany service charges.
5. Practical Guidance on Article 12 - Fee for Included Services (FIS) (Word Doc Q1 & Response):
* "Make Available" Clause: A key element in analyzing FIS (especially under treaties like India-US and India-Singapore) is whether the service "makes available" technical knowledge, experience, skill, know-how, or processes to the service recipient, enabling them to apply the technology independently.
* Avoiding Service PE via FIS: If services are classified as FIS and subject to WHT under Article 12, they are generally excluded from the definition of services that can create a Service PE under Article 5(2)(l) of the India-US treaty. This means WHT is paid, but the more complex and potentially higher taxation of a full PE might be avoided.
* IPR Transfer: The "make available" clause might not need to be satisfied if Intellectual Property Rights (IPR) are transferred (as per US treaty Art. 12.4.a, relating to services ancillary to the enjoyment of property/IPR).
6. Clarification on "IPR" (Word Doc Q2 & Response):
* IPR: Intellectual Property Rights.
* Context (Note 1): Refers to situations where the transfer of items like drawings, blueprints, etc., could be considered a transfer of IPR, leading to WHT as royalties (rather than FIS). This was an issue raised in a past audit.
7. Applicable Treaty for SG/AU Branches of a US Entity (Word Doc Q1 - Numbered Questions):
* Primary View: The US tax treaty applies.
* Reasoning: Income from branches is generally taxed in the Head Office country (USA). The branch is part of the US entity and considered a US resident for treaty purposes. Singapore taxes branches on Singapore-sourced income only. The Place of Effective Management (POEM) is likely in the USA.
* Contrary (but less likely) View (India-Singapore Treaty):
* A literal reading of the India-Singapore treaty suggests a branch could be a "taxable unit" and a "person." If Singaporean tax law treats the branch as a resident for treaty purposes, the India-Singapore treaty might be argued. This requires analysis of Singaporean domestic law.
8. Permanent Establishment (PE) Day Thresholds (Word Doc Q2 - Numbered Questions):
* General Point on Secondment: If personnel are properly seconded to the Indian entity (Solar India/STIPL), which then bears the economic ownership (e.g., pays remuneration), the PE risk for the US entity is low. Without secondment, PE risk arises if treaty activity/duration thresholds are met.
* Project PE (Installation/Supervisory Activities):
* USA: >120 days in any 12-month period (aggregate sites/projects).
* Singapore: >183 days in any fiscal year (each project separate).
* Australia: >6 months (aggregate sites/projects).
* Malaysia: >9 months (each project separate).
* Thailand: >183 days (each project separate).
* Service PE (Activities of the same nature):
* USA:
* Non-AE (uncontrolled): >90 days within any 12-month period.
* AE: If not at ALP, PE irrespective of the number of days (unless services are FIS under Art. 12 and WHT is paid).
* Singapore:
* Non-AE: >90 days.
* AE: >30 days (unless services are technical services under Art. 12 and WHT is paid).
* Australia: >183 days in any 12-month period.
* Malaysia: >90 days in any 12-month period.
* Thailand: >183 days in any 12-month period.
9. Withholding Tax (WHT) on FTS/FIS (Word Doc Q3 - Numbered Questions):
* USA:
* 15% on FIS (Art. 12(2)(a)(ii)).
* 0% for services ancillary and subsidiary to the sale of property (not involving IPR transfer and other conditions met - Art. 12(5)(a)).
* "Make available" clause is generally key for FIS.
* Singapore: 10% on FIS.
* Australia: 10%.
* Malaysia: 10%.
* Thailand: Nil (No specific FTS article; Article 22 - Other Income might apply, potentially at 10%).
This summary should provide a clearer picture of the tax implications and guidance based on your questions. The central theme for US entity operations in India involving SG/AU branches is the critical importance of ALP for intercompany transactions to manage Service PE risk, alongside understanding the nuances of FIS and WHT.
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