Headline Verdana Bold - Deloitte US€¦ · • Manufacturing not to including Software...
Transcript of Headline Verdana Bold - Deloitte US€¦ · • Manufacturing not to including Software...
India tax landscape update© 2019 Deloitte & Touche LLP 2
1. Current India tax landscape 3
2. Tax ordinance 5
• Key amendments
• Key announcements
• Tax considerations
• Case studies
2. MLI impact and recent Permanent Establishment (PE) rulings 20
• MLI impact on tax treaties—Case studies
• Recent direct tax ruling on PE
3. Unified approach 37
Content
India tax landscape update© 2019 Deloitte & Touche LLP 4
01Changes in tax and regulatory framework
• New Direct Tax Code unlikely—Select suggestions of the tax
force to be incorporated in the current laws
• MLI ratified by India—Effective from 1 April 2020
• Synthesised text of tax treaty giving effect to MLI realised for
UAE, Serbia, Japan, Singapore …
• Sunset clause on exemptions—Talks of reintroducing sops
• Consultation paper on Unified approach for profit allocation
02Litigation trends
• PE, expense cross charge, transfer pricing emerging as latest
trends of litigation
• Tax authorities invoking GAAR during court proceedings for
restructuring approvals
• Income-tax audits not yet initiated for GAAR
03Increased disclosure norms
• SFT, FLA, DPT-3, ultimate beneficial owners—ITR, SBO
under company laws
Tax Administration
• Aggressive audits and interpretation of laws continue
• Co-ordinated approach and flow of information between
regulators
• On-ground implementation of various schemes lagging
• E-assessment scheme notified
05Dispute resolution
• Judiciary continues to be burdened with high volume of
cases
• Supreme Court saddled with other judicial matters—
Important tax rulings struck
• Special Bench of ITAT to decide on taxability of
reimbursement of salary
06
Regulatory reform to match emerging business trends
• Relaxation of ECB policy
• Law on unregulated deposits
• Changes in allied laws—Exchange control, Securities Law04
Current India tax landscape
India tax landscape update© 2019 Deloitte & Touche LLP 7
Key amendments
Tax ordinance
• No tax holiday /relief /incentives [additional deprecation, weighted deduction for R&D etc..] being claimed [exception
for IFSC, 80JJAA]
• Loss / unabsorbed depreciation attributable to the above are not carried forward
• Adjustment in the written down value of the block for unabsorbed depreciation
• MAT provisions not applicable
• Unutilized MAT to be forgone
• Option once exercised cannot be reversed
Scheme 1—
Lower headline rate of 22% plus surcharge and cess [25.17%] subject to
India tax landscape update© 2019 Deloitte & Touche LLP 8
Key amendments
Tax ordinance
• Commence manufacture prior to March 31, 2023
• Engaged only in manufacturing/production
• No tax holiday /relief /incentives [additional deprecation /R&D deductions etc..]
• New plant and machinery [20% threshold]
• Not formed by splitting up /reconstruction
• MAT provisions not applicable
• Option once exercised cannot be reversed
• Manufacturing not to including Software development, Mining, Conversion of marble blocks into slabs, bottling gas into
cylinder, printing books or production of cinematograph film or any other business as ma be notified by the central
government
• Non manufacturing income (neither derived nor incidental) shall be taxable at 22% without any deduction for expenses
where there is no specified rates
Scheme 2—
Lower headline rate of 15% plus surcharge and cess [17.16%] for new manufacturing companies set up post Oct 1, 2019 subject to:
India tax landscape update© 2019 Deloitte & Touche LLP 10
Key announcements
Tax ordinance
• From FY 2019-20, MAT rate shall stand reduced 18.5% to 15% plus applicable surcharge and cess [17.47 at the
highest rate]
Change in MAT rate
• Enhanced surcharge not to apply on capital gains in respect of STT paid securities
• Enhanced surcharge not to apply to capital gains, in the hands of Foreign Portfolio Investors (FPIs)
• Relief from buyback tax has provided to listed companies that have made a public announcement of buy-back before 5
July 2019
Other changes
India tax landscape update© 2019 Deloitte & Touche LLP 11
Comparative table of tax rates
Tax ordinance
Particulars
Pre amendment scenario Post amendment scenarios
Branch LLP Company [Turnover >400 Cr for pre amendment]
30% 22% 15%
Taxable income 100.00 100.00 100.00 100.00 100.00
Less: Indian tax liability (A) 43.68 34.94 34.94 25.17 17.16
Profit after tax 56.32 65.06 65.06 74.83 82.84
Profit available for distribution 56.32 65.06 65.06 74.83 82.84
Less: DDT (B) 0.00 0.00 11.09 12.76 14.13
Distributed amount 56.32 65.06 53.96 62.07 68.71
Total tax outflow (A+B) 43.68 34.94 46.04 37.93 31.29
% increase in Cash Flow 8.11 14.75
India tax landscape update© 2019 Deloitte & Touche LLP 12
Comparative tax rates—Asia Pacific region
Tax ordinance
Revised tax rates puts India into competitive position as compared to its peers in Asia Pacific region
0
5
10
15
20
25
30
35
India tax landscape update© 2019 Deloitte & Touche LLP 14
Tax considerations
Tax ordinance
I. No carry forward & Set-off of MAT Credit
II. Brought forward loss on additional depreciation
• Generation of power
• Contract manufacturing/ Toll manufacturing
• Construction related activity
III. Companies qualifying for the lower rate of 15%
• Adjustment of unabsorbed depreciation to the written down value of the block
• Adjustment of brought forward loss /unabsorbed depreciation in respect of tax holiday entitled units under old and new regime
• Splitting up /reconstruction – disputes as in tax holiday provisions
• Will transfer of an entire undertaking lead to ‘splitting up/ reconstruction’
• Transfer of ‘capital work in progress’ to new company
IV. Splitting up or Reconstruction for Section 115BAB
India tax landscape update© 2019 Deloitte & Touche LLP 15
Choice of existing scheme vs new scheme
Tax ordinance
Scenario Existing regime New regime Analysis
• Companies not claiming any relief
• No past losses/unabsorbed depreciation related to identified
clauses
• No MAT credit carried forward
Higher of
• Normal tax –
25%/30%; or
• MAT –
18.5%/15%
• Normal Tax at
22%
• Relief to be
given up where
applicable
• To pursue existing regime until ETR
is lower than 22% [25.17%
including surcharge and cess]
• To analyze based on projections in
case of
• In case of liability under MAT, to
continue old regime based on
analysis regarding ability and
timing to encash MAT credit
• Entitled Relief [Tax holiday /additional depreciation benefit]
being claimed for unexpired period
• Entitled Relief [Tax holiday /additional depreciation benefit]
eligible for a future period
• Past losses /unabsorbed depreciation available
• MAT Liability on account of past losses /difference in
depreciation rates /unabsorbed depreciation
• Past MAT credit available
India tax landscape update© 2019 Deloitte & Touche LLP 17
Determination of preferred option
Case study 1
Year 1 profits - 100
Brought forward MAT credit - 100
MAT tax under old regime FY 2020-21 onwards -17.47%
Brought forward loss/Unabsorbed depreciation -200
MAT tax under old regime forFY 2019-20 -21.55%
Year on year growth in profit - 10%
Normal tax under old regime -34.94% Tax rate
under new regime -25.17%
Assumptions
India tax landscape update© 2019 Deloitte & Touche LLP 18
Taxation Laws (amendment) Bill, 2019—Changes in corporate tax rate
Analysis:
• In the red highlighted cells represent years under the current/old regime that are subject to MAT liability—portion of the liability is claimed as MAT credit• The blue highlighted cells represents years where the tax liability is after utilization of MAT credit
Determination of preferred option
Case study 1—Analysis
S/NoFinancial Year
Current/Old Regime New Regime
Profits Tax liability Cumulative tax impact (old regime)
Tax liability Cumulative tax impact (new regime)
Ideal scenarioCash tax outflow
1 2019-20 100 21.55 21.55 - - Old regime 21.55
2 2020-21 110 19.22 40.77 2.52 2.52 Old regime 19.22
3 2021-22 121 21.14 61.91 30.45 32.97 Old regime 21.14
4 2022-23 133 23.26 85.16 33.50 66.47 Old regime 23.26
5 2023-24 146 25.58 110.75 36.85 103.32 Old regime 25.58
6 2024-25 161 28.14 138.88 40.53 143.85 Old regime 28.14
7 2025-26 177 30.95 169.84 44.59 188.44 Old regime 30.95
8 2026-27 195 59.89 229.73 49.05 237.48 Old regime 59.89
9 2027-28 214 74.91 304.63 53.95 291.43 New regime 53.95
Total 304.63 291.43 283.68
India tax landscape update© 2019 Deloitte & Touche LLP 19
Determination of preferred option in a scenario which involves litigation exposure
Regime adopted in the Return of Income
Position post assessment proceedings
Litigation exposure
Case study 2
Financial Year RegimeTax liability under normal provisions
Tax liability under MAT
MAT credit Tax outflow
2017-18 Old regime 100 60 NIL 100
2018-19 Old regime 150 90 NIL 150
2019-20 New regime 125 Not applicable MAT credit lapse 125
TOTAL 375
Financial Year RegimeTax liability under normal provisions
Tax liability under MAT
MAT credit Tax outflowProbable tax outflow
2017-18 Old regime 100 60 NIL 100 100
2018-19 Old regime 150 300 150 300 300
2019-20 New regime 125 Not applicable MAT credit to lapse
125 86.77
TOTAL 525 486.77
India tax landscape update© 2019 Deloitte & Touche LLP 21
Overview
MLI impact and recent Permanent Establishment (PE) rulings
• MLI is an outcome of BEPS Action Plan (AP) 15 of the Organization for Economic Co-operation and Development (OECD)/G20 Inclusive Framework
• MLI modifies the operation of existing tax treaties between parties
- None of the bilateral double tax treaties will actually be amended
- MLI and tax treaty have to be read together
• Each party to the MLI specifies which existing treaties the MLI would apply to Covered Tax Agreements (CTAs)
• Flexibility to implement BEPS tax treaty measures in various ways
- Choices where a minimum standard can be satisfied in multiple ways
- Choices to apply optional and alternative provisions
- Reservations to opt out of provisions or parts of provisions that are not minimum standards (either with respect to all CTAs, or a subset of CTAs with defined characteristics)
India tax landscape update© 2019 Deloitte & Touche LLP 22
Broad architecture
MLI impact and recent Permanent Establishment (PE) rulings
39 Articles
Articles 1 and 2 Scope of MLI and the interpretation of terms used therein
1Articles 3 to 17—BEPS tax treaty measures
2
Articles 18 to 26 Provisions related to mandatory binding arbitration
3Articles 27-39—procedural provisions such as provisions relevant to adoption and implementation of the MLI including ratification, entry into force and entry into effect dates, withdrawal, etc.
4
India tax landscape update© 2019 Deloitte & Touche LLP 23
How MLI operates
MLI impact and recent Permanent Establishment (PE) rulings
Each party to the MLI must notify tax treaties to which the MLI provisions would apply. MLI provisions would apply to a tax treaty only if both parties to the tax treaty notify it as CTA.
For a specific bilateral tax treaty, MLI would have effect after both parties to a CTA have deposited their ratification instrumentswith the OECD Secretariat
MLI would modify application of all CTAs at least to the extent of implementation of following minimum standards viz:
• Counter treaty abuse (Article 6—Purpose of CTA and Article 7—Prevention of treaty abuse)
• Improve dispute resolution (Article 16—mutual agreement procedure)
Flexibility to implement BEPS tax treaty measures in various ways:
• Choices to apply optional and alternative provisions
• Reservations to opt out of provisions or parts of provisions that are not minimum standards (either for all CTAs, or a selectCTAs)
India tax landscape update© 2019 Deloitte & Touche LLP 24
The India story
MLI impact
*That is, on the first day of the month following the expiration of three months beginning on the date of deposit of ratification instrument by India with the OECD Secretariat
**That is, Indian tax treaties with jurisdictions that have already deposited their ratification instrument with the OECD Secretariat latest by 30 June 2019 and have notified tax treaty with India as CTA
24 Nov 2016Publication of MLI
7 Jun2017
Signing ceremony:68 jurisdictions including India signed MLI
25 Jun2019
Deposit of ratification instrument (along with final MLI positions) by India
13 Jun 2019Indian Government approved ratification of MLI
1 Oct2019*
MLI enters into force for India
MLI provisions to enter into effect for 23 Indian bilateral tax treaties**
1 Jul 2018MLI entered into force
1 Apr2020
India tax landscape update© 2019 Deloitte & Touche LLP 25
Indian CTAs—MLI to enter into effect from 1 April 2020
MLI impact and recent Permanent Establishment (PE) rulings
“Entry into effect” with respect to CTA [Article 35]:
a) For Withholding Taxes (WHT): On or after the first day of the next calendar year following the latest of the dates on which MLI enters into force for each of the party to the CTA. India has chosen to substitute “calendar year” with “taxable period”
b) For other taxes: Taxable period beginning on or after the expiry of six calendar months following the latest of the dates on which MLI enters into force for each of the party to the CTA
In relation to Indian tax treaties with jurisdictions tabulated (23), MLI to enter into effect for India from 1 April 2020 (for WHT and other taxes)
List of jurisdictions that have notified tax treaty with India as CTA and have deposited their ratification instruments with OECD Secretariat
Austria Australia Belgium
Finland France Georgia
Ireland Israel Japan
Lithuania Luxembourg Malta
Netherlands New Zealand Poland
Russia Serbia Singapore
Slovak Republic Slovenia Sweden
United Kingdom UAE
CTAs that get modified next …
• Where CTA party deposits ratification instrument latest by 31 December 2019, MLI to come into effect from 1 April 2020 for WHT and 1 April 2021 for other taxes. For instance: Norway, which deposited its ratification instrument on 17 July 2019
• MLI will not impact a) India-USA tax treaty (since USA has not signed MLI) and b) India tax treaties with China*, Germany, and Mauritius (since Indian tax treaties are not notified by said parties/ India)
India tax landscape update© 2019 Deloitte & Touche LLP 27
Norway
Entry into effect
MLI impact—Case studies
What would be the Entry into Effect for each India and France:• With respect to taxes withheld?• With respect to other taxes?
What would be the Entry into Effect for each India and Norway:• With respect to taxes withheld?• With respect to other taxes?
Signature to MLI—7 June 2017
Ratification instrument deposited—25 June 2019
IndiaSignature to MLI—7 June 2017
Ratification instrument deposited—26 September 2018
France
Signature to MLI—7 June 2017
Ratification instrument deposited—17 July 2019
Signature to MLI—7 June 2017
Ratification instrument deposited—25 June 2019
India
India tax landscape update© 2019 Deloitte & Touche LLP 28
Foreign Co
Agent of Foreign Co
Overseas
India
Provision of services
Sells goods to customers in India
Employee of
Foreign CO
Advertises/ explain/convince/assess
Case study 1—Agency arrangements (Article 12 of MLI)
MLI impact—Case studies
Query 1
• An agent of the Foreign Co visits customers in India for promoting sales. With the help of the agent the customer would directly place an order on the company’s website and the order acceptance is electronically signed by an executive of the Foreign Co sitting outside India. Will the same trigger a PE in India. [Para 88 of OECD MC Commentary 2017].
• Whether the answer would differ if instead of the agent, an employee of the Foreign Co is visiting customers? [Para 83 of OECD MC Commentary 2017]
Query 2
• The Foreign Co has standard terms & conditions for entering into any sales contract with the customers in India. The Foreign Co has given a range for negotiating the sales price to it’s agents in India. Will the same trigger a PE in India [Para 87 of OECD MC Commentary 2017]
• Whether the answer would differ if the Foreign Co also fixes the sales price (i.e. standard contract)?
Query 3
• The Foreign Co carries on the sales and marketing function from offices located outside India. A customer can place on order on the online portal (complex and not user friendly) of the Foreign Co and also has an option to visit Foreign Co’s agent’s office in India for requisite assistance to place an order on the online portal. Will the same trigger a PE in India
India tax landscape update© 2019 Deloitte & Touche LLP 29
Case study 2—Preparatory or auxiliary activities (Article 13 of MLI)
MLI impact—Case studies
Facts
• Foreign Co is a Company incorporated outside India and is an e-commerce company.
• Foreign Co sells goods in India online through its own website
• Foreign Co maintains a very large warehouse in India in which significant number of employees work for the main purpose of storing and delivering goods owned by Foreign Co.
Query
• Will such an activity carried out by Foreign Co through a warehouse in India constitute ‘preparatory and auxiliary activity under MLI? [Para 62 of OECD MC Commentary 2017]
Foreign Co
Overseas
India
Provision of services
Sells goods online to customers in India
Storing and delivering goods owned by Foreign Co
Employees
Warehouse
India tax landscape update© 2019 Deloitte & Touche LLP 30
Case study 3—Preamble to MLI (Article 6 of MLI)
MLI impact—Case studies
Facts
• F Co and R Co are Companies incorporated in Netherlands.
• I Co is a subsidiary of F Co and is incorporated in India.
• F Co transfers its shares held in I Co to R Co.
• F Co enjoys participation exemption in Netherlands with respect to gains from transfer of shares in I co to R Co.
Query
Impact on taxability of the capital gains on transfer of I Co shares under the following case:
• Shares are transferred prior to 1 April 2020;
• Shares are transferred post 1 April 2020.
F Co
Netherlands
India
I Co
R Co
Article 6 of MLI—Preamble Text
Intending to eliminate double taxation with respect to the taxes covered by this agreement without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in this agreement for the indirect benefit of residents of third jurisdictions)
India tax landscape update© 2019 Deloitte & Touche LLP 31
Case study 4—Principal Purpose Test vs General Anti Avoidance Rules
MLI impact—Case studies
Facts
• Foreign Co is a Company incorporated outside India.
• Indian Co is a subsidiary of Foreign Co and is incorporated in India.
Assumptions
• Assumption 1—The investment is before 31 March 2017
• Assumption 2—The investment is after 31 March 2017
Queries
• Analysis under the following scenarios:
― Is the scope of PPT wider than GAAR—‘one of the main purpose’ test vs ‘main purpose’ test
― Applicability of GAAR and/or PPT on transfer of investments acquired post 1 April 2017
― Applicability of GAAR and/or PPT on transfer of investments acquired prior to 31 March 2017—Impact of the CBDT circular grandfathering pre 31 March 2017 investment
Foreign Co
Indian Co
Overseas
India
Subsidiary
s
India tax landscape update© 2019 Deloitte & Touche LLP 33
Liaison Office carrying on activity other than preparatory and auxiliary services constitutes PE in India per DTAA between India and Singapore
Recent direct tax ruling on PE
1. Background and Facts
• The taxpayer, a wholly owned subsidiary of a Japanese Company—a Liaison Office (LO) in India since April 1988 for carrying market research and liaison activities.
• The LO had offices in Delhi, Bangalore and Mumbai.
• In July 2007, the offices in Bangalore and Mumbai were closed and the LO was converted into a branch office in India.
• Under an income-tax survey, the Assessing Officer (AO) alleged that the LO was engaged in executing/negotiating contracts for the taxpayer in India
• The AO concluded proceedings and computed the total income of the taxpayer in the hands of the PE (i.e. LO) applying the Global Profit Margin of the taxpayer, to the sales revenue made by the taxpayer in India and attributed 50 percent thereof to the PE in India aggregating to INR 7.21 crores for all these years.
• In the first round of litigation before Income Tax Appellate Tribunal (ITAT), the matter was remanded back to Dispute Resolution Panel (DRP) for passing a speaking order
• In the re-adjudication proceedings, the final assessment order was passed by the AO assessing the aggregate total income at INR 123.16 crores for all the years, by applying 16.5 percent as sale commission for the total sales value made to India, less the expenses.
TaxpayerSingapore
Overseas
IndiaMarket research and liaison activities
Employees
LO
India tax landscape update© 2019 Deloitte & Touche LLP 34
Liaison Office carrying on activity other than preparatory and auxiliary services constitutes PE in India per DTAA between India and Singapore
Recent direct tax ruling on PE
2. Issue under consideration before the ITAT
• Had the DRP exceeded the directions of the ITAT?
• Whether there was a PE of the taxpayer in India?
• If there was a PE of the taxpayer, what was the profit amount that could be attributed to the PE?
3. Decision of the ITAT
Issue 1
• The ITAT held that “in all fairness, the entire proceedings should now be restricted to adjudication upon the assessed income for all the fiveyears under consideration to the extent of INR 7.21 crores.”
India tax landscape update© 2019 Deloitte & Touche LLP 35
Liaison Office carrying on activity other than preparatory and auxiliary services constitutes PE in India per DTAA between India and Singapore
Recent direct tax ruling on PE
3. Decision of the ITAT (cont.)
Issue 2
• Based on documentary evidence during search/survey proceedings and key employee statements and email exchanges with tax consultant, that:
− At least six employees were working in LO.− The employees were actively involved in ascertaining customer requirements, price negotiation, obtaining of purchase orders, following
up on delivery of material and payments, etc.− There was clear relation between the business of the taxpayer and the activities in India, as business of the taxpayer was trading and
activities of the LO are core activities for a trading business.− As per communication with a tax consultant of taxpayer, it was clear that he was advising the taxpayer on the probable tax litigation
which may arise after survey operations, owing to substantial commercial activities carried out by LO.
• “As per India-Singapore DTAA, unless fixed place of business [LO in the case of the taxpayer] was being used only for the purpose of advertisement, for supply of information, for scientific research or for similar activities which have preparatory or auxiliary character, it could not have been excluded from the definition of PE” unlike DTAA with India-USA/Canada. Accordingly, the taxpayer was held to have a PE in India.
India tax landscape update© 2019 Deloitte & Touche LLP 36
Liaison Office carrying on activity other than preparatory and auxiliary services constitutes PE in India per DTAA between India and Singapore
Recent direct tax ruling on PE
3. Decision of the ITAT (cont.)
Issue 3
• With regards to profit attribution:
− The PE (taxpayer), though a distinct and a separate enterprise, is to be treated as an associated enterprise.
− The profits of the PE should be determined on the basis of what an independent enterprise under similar conditions would derive or is expected to derive on its own.
− Based on the facts, LO is performing routine and limited functions and is operating in a risk immune environment. Accordingly, based on the intensity of its function, attribution made by the Revenue leading to operating margins in the range from 163 percent to 2357 percent is not only excessive but absurd and abnormal.
− Allocation of profit to the PE should be done by applying Transaction Net Margin Method (“TNMM”) as being the most appropriate method.
India tax landscape update© 2019 Deloitte & Touche LLP 38
G20/OECD: Tax challenges of the digitalized economy—Work to date
Unified Approach
• BEPS action 1: 2015 final report—October 2015
• 2018 OECD interim report—March 2018
• OECD policy note—January 2019
– Sets out the two pillar approach
• Public consultation document—February 2019
– Comments sought on policy issues and technical aspects
– Followed by public consultation meeting—March 2019
• Programme of work—May 2019
– Roadmap towards agreeing consensus solution by the end of 2020
• OECD secretariat proposal—9 October 2019
– Unified approach: nexus and profit allocation rules
• OECD secretary general report to G20
India tax landscape update© 2019 Deloitte & Touche LLP 39
New nexus and profit allocation rules
Unified Approach
OECD secretary-general report to G20 Finance Ministers—October 2019
“…it is essential to move forward now
to construct the architecture of a
global long-term solution through
the G20/OECD Inclusive Framework”
“…the current rules do not fit
the growing challenges of
the digitalization of the
economy…”
“…providing more certainty and
stability in the international tax system
for all countries and jurisdictions in the
world”
“…a proposal aimed at facilitating
consensus on common rules on
nexus and profit allocation…”
India tax landscape update© 2019 Deloitte & Touche LLP 40
New nexus and profit allocation rules
Unified Approach
The unified approach proposal draws on the commonalities identified in the May programme of work
Reallocating taxing rights in favour of the user/market country
Searching for simplicity, stabilisation of the tax system, and increased tax certainty in implementation
Going beyond the arm’s length principle and departing from the separate entity principle
The proposal does not, at this stage, have consensus political support from the G20/OECD inclusive framework on BEPS
Envisaging a new nexus rule not dependent on physical presence in the user/market country
India tax landscape update© 2019 Deloitte & Touche LLP 41
New nexus and profit allocation rules
Unified Approach
Key features of OECD secretariat’s proposed unified approach
• Scope of new taxing right
– Large consumer-facing businesses
• New nexus rules
– Not dependent on physical presence
• New profit allocation rules
– Calculated using a three-tier mechanism
• Robust dispute prevention and resolution
– Including binding arbitration
India tax landscape update© 2019 Deloitte & Touche LLP 42
New nexus and profit allocation rules
Unified Approach
Scope
Possible exclusionsPossible revenue threshold?
“Businesses that generate revenue from supplying consumer products or providing digital services that have a consumer-facing element.”
Approach covers highly digital business models but goes wider...
...broadly focussing on consumer-facing businesses
Extractives commodities financial services
€750 million revenue
India tax landscape update© 2019 Deloitte & Touche LLP 43
New nexus and profit allocation rules
Unified Approach
New nexus in a market country
Largely based on sales
Self-standing treaty provision in addition
to existing permanent establishment and
business profit articles
Applicable where a business has sustained
and significant involvement in the
economy of a market country...
1
6
Captures all forms of remote
involvement in the economy of a market
country e.g., remote selling, and groups
that sell in a market through a distributor
Possible country-specific sales
thresholds for smaller economies
3
...irrespective of level of physical presence
in the country
2
4
5
India tax landscape update© 2019 Deloitte & Touche LLP 44
New nexus and profit allocation rules
Unified Approach
Three tier mechanismProfit allocation—beyond the arm’s length principle
Amount
B
Amount
C
• Fixed “baseline” return for marketing and distribution functions
• Additional return based on transfer pricing analysis and subject to binding arbitration
New taxing right Modification of existing allocation
• New taxing right
– Allocates a portion of deemed residual profit to market jurisdictions using a formulaic approach
Amount
A
India tax landscape update© 2019 Deloitte & Touche LLP 45
Three tier mechanism—amount A
Unified Approach
New taxing right
4
1
2
3
• Possible use of consolidated financial statements
• Consideration is being given to the use of business line and/or regional segmentation
• Fixed percentages
• Possible variation by industry
• Fixed percentages
• Possible variation by industry
Determine the total profit of the group
Determine residual profit
by excluding deemed routine profit
Allocate a proportion of deemedresidual profit attributable to market
countries
Allocate a proportion of deemed residual profit attributable to market countries
Allocate profits between market countries using allocation keys
India tax landscape update© 2019 Deloitte & Touche LLP 46
Three tier mechanism—amount B
Unified Approach
Fixed return for baseline marketing and distribution functions
• Intention of OECD secretariat to
Establish a fixed return for “baseline” or routine marketing
and distribution activities
Reduce disputes Increase certainty
India tax landscape update© 2019 Deloitte & Touche LLP 47
Three tier mechanism—amount C
Unified Approach
Additional return based on arm’s length transfer pricing
Ensure profits are not
duplicated in market country
Preventdoubletaxation
Robust measures to
resolve disputes, including binding
arbitration
Provides businesses and tax authorities with the ability to recognise profit in excessof the return calculated under Amount B
where
the marketing and distribution activities taking place in the market country go beyond the baseline level of functionality
or
the group or company perform other business activities in the country unrelated to marketing and distribution
Any additional profit must be supported by the arm’s length principle
India tax landscape update© 2019 Deloitte & Touche LLP 48
Impact assessments—preliminary findings
Unified Approach
OECD secretary-general’s report to G20 finance ministers
Final outcomes “will depend on the reform design and the behavioural
responses of countries and multinational enterprises”
“Low and middle-
income
economies would gain from
pillar 1”
“Larger market jurisdictions
will benefit more in absolute”
“Pillar 1 involves a significant change to the
way taxing rights are allocated among
jurisdictions but it would also lead to a modest
increase in tax revenues”
“Investment hubs, where the analysis suggests that
levels of residual profit are high, would experience
significant losses in tax base”
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”), its global network of member firms, and their related entities. DTTL (also referred to as “Deloitte Global”) and each of its member firms and their affiliated entities are legally separate and independent entities. DTTL does not provide services to clients. Please see www.deloitte.com/about to learn more.
Deloitte is a leading global provider of audit and assurance, consulting, financial advisory, risk advisory, tax & legal and related services. Our global network of member firms and related entities in more than 150 countries and territories (collectively, the “Deloitte organisation”) serves four out of five Fortune Global 500® companies. Learn how Deloitte’s approximately 312,000 people make an impact that matters at www.deloitte.com.
Deloitte Asia Pacific Limited is a company limited by guarantee and a member firm of DTTL. Members of Deloitte Asia Pacific Limited and their related entities, each of which are separate and independent legal entities, provide services from more than 100 cities across the region, including Auckland, Bangkok, Beijing, Hanoi, Ho Chi Minh City, Hong Kong, Jakarta, Kuala Lumpur, Manila, Melbourne, Osaka, Shanghai, Singapore, Sydney, Taipei, Tokyo and Yangon.
About Deloitte SingaporeIn Singapore, services are provided by Deloitte & Touche LLP and its subsidiaries and affiliates.
Deloitte & Touche LLP (Unique entity number: T08LL0721A) is an accounting limited liability partnership registered in Singapore under the Limited Liability Partnerships Act (Chapter 163A).
This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the “Deloitte Network”) is, by means of this communication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this communication.
© 2019 Deloitte & Touche LLP