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E-Commerce : Streamlining Cross Border Taxation and Policy Issues

Rahul Garg

August 11, 2004

Agenda
Policy Issues : E-Commerce and BPO Cross Border Tax Issues Harmonization of Policy Issues E-Commerce / BPO and WTO

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Agenda
Policy Issues : E-Commerce and BPO Cross Border Tax Issues Harmonization of Policy Issues E-Commerce / BPO and WTO

PricewaterhouseCoopers

Importance

Small corporations and individuals can aspire to have a global presence.

Cost savings through reduced labour costs and greater efficiency.

Competitive advantage - companies can by-pass traditional links in the supply chain.

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Immediate Policy Issues


Conflict in Migrating Work Uncertainty

- future legislations
- infrastructure promises by Government Non-redressal will result in i. Decline in Shareholder confidence / risk perception ii. Reversal in outsourcing to India The Need

Technology is dynamic while government legislations are dated quick response from the regulator is required; or
Deregulate entirely
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E-Commerce - Policy Issues

Validity of Online Contracts

Authentication

Privacy of Information

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Policy Issues - India Position

Validity of Online Contracts Adopted the UNCITRAL Model Law provision vide Section 4 of the Information Technology Act (IT Act) 2000.

Authentication
Digital Signatures is legally recognized under the IT Act.

Privacy of Information
Encryption and Decryption technology available subject to DoT permission.
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E-Commerce - Legal Framework


Comparative Analysis of Indian IT Legislation
Countries
USA

Digital Signatures

Encryption

Privacy

IPR Protection

a a a a

a a
X

a a
Not Available

a a a a
X

U.K

Singapore

Malaysia

India

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BPO Policy Issues


International Outsourcing involves complexity and risks cultural, political, financial, technological, managerial and legal. Some of the legal considerations are highlighted here: What permits and licenses are required to conduct the proposed operations? Does foreign law provide any limitations w.r.t payment conditions, limitations of liability, covenants to perform services, the right of termination, and dispute resolution mechanism?

How should the contract be structured to obtain tax Benefits and minimize regulatory Operational or other intervention of Foreign government?

Is the customers data entitled to legal privacy and intellectual property protection?

What restrictions might apply to transborder flows of data, personnel, goods and other products?
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Agenda
Policy Issues : E-Commerce and BPO Cross Border Tax Issues Harmonization of Policy Issues E-Commerce / BPO and WTO

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Direct and Indirect Taxation in India


Direct Tax Explanation (b) to Section 9(1)(i) of the Income tax Act exempts foreign company from taxation in India if it procures goods for export out of

India.

Service Tax Currently, the services exported by a call center / BPO are not chargeable to service tax.

R & D Cess Act 1986 Section 3 levies cess @ 5% on payments made for import of technology.

Tax Exemption vide Section 10A/10B is available till 2009 to service exporters, call centers and BPO.
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Cross Border Tax Issues


Characterization: i. Goods Vs. Services? ii. Location - Source-based Vs. Residence-based taxation?

- Conclusion of Contract?
- Situs of Delivery? - Situs of Breach? - Sharing of Taxes?

iii. Characterization of Income - Business Profits - Royalty - Fee for Technical Services (FTS)

Permanent(?) Establishment(?) ?
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Tax Issues Characterization


Goods Vs Services Shrink Wrap Software vs Other Software Importing intangibles on Media Income Royalty Payments of any kind received as a consideration for the use of or the right to use any copyright of literary, artistic or scientific work; any patent, trade mark, design or model, plan, secret formula or process; for information concerning industrial, commercial or scientific experience. OECD Model - use of copyright vs copyrighted Article - Interpretation of process and use

Business Profits - Electronic ordering and downloading of digital products (Majority View)
FTS web site hosting, especially where host provides back-up and secure access services Indian Model (OECD Model treats this as Business Profits).
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Tax Issues Locating Situs


Source based Vs. Residence based Taxation HPC recommendations place of effective management concept should be applied after considering facts and circumstances of each case. In case this is indefinitive, then source based taxation should be used. Sharing of taxes Relevance of Double Taxation Avoidance Agreements (DTAA) viz-a-viz domestic law. (in case of conflict between the two, more beneficial provisions will prevail)

Concerted effort of representatives from all nations must evolve principles of sharing tax proceeds.

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Tax Issues Identification of Location


Conclusion of Contract? Acceptance is binding the moment the acceptance is out of the control of acceptor UNCITRAL Model Law. Section 13 of Information Technology Act

incorporates similar terms.


Situs of Delivery?
Online contract

Physical delivery of Goods

Situs of sale known

Online contract

Online delivery of Goods

Situs of sale unknown

Situs of Breach?

Which jurisdiction will have adjudication powers in case of breach of tax laws?
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Tax Issues - PE
OECD Model (Article 5) Fixed place of business through which the business of an enterprise is wholly or partly carried on. Article 5 para. 1 PE presupposes a fixed place of business (Fixed specific fixed

long term connection between place of business and a specific part of earths surface.
Indian Position - High Powered Committee (HPC) set up by CBDT in December 1999 submitted the following recommendations: i. The existing concept of PE should be abandoned. ii. Existing principles (Residence based taxation and Source based taxation) do not ensure (in the E-commerce world): - Certainty of tax burden - Equilibrium in sharing of tax revenue between two countries iii. Alternative to PE should be developed by OECD / UN

Indian Stand differs from OECD Model


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Characterization TAG vs HPC View

HPC has also examined the 28 categories of payments in the light of provisions of the ITA and treaties with UK & USA as illustrations (Judicial pronouncements also considered) Comparison of views of TAG and HPC (under ITA and treaties) in respect of 28 payments considered by TAG
Concurred Concurred under treaty provisions 1 Differed Total

15

12

28

Divergent view in 43% cases

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Characterization A Costly Affair

Nature of Payment
Payment for purchase of Software Software licensing payment made to non resident o/s India for business in India Rendering of services (including training) Connectivity charges

Indian Revenue Position


Royalty Royalty

FIS Royalty Royalty

Payment for access to remote CPU

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PE Sensitive and Qualitative Hurdle

Exposure on account of Permanent Establishment (PE) is asserted due to:


Expatriates working in ICo as employees of FCo Execution of service contracts in India through employees/ICo ICo securing orders/ concluding contracts on behalf of FCo Inter Company services FCo owned equipment

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Attribution of Income
Marketing function (comprising 50-people strong sales force) constitutes 15% of the physical activity in brick-n-mortar transaction whereas in ecommerce environment the physical sales force becomes redundant
Contention 1 : Mode of undertaking activity is not relevant for the purpose of attribution of income and hence, marketing still comprises 15% of the total transaction activity - income and profits attributable would remain the same Contention 2 : Cost of marketing function goes down and hence while income attributable to it may remain the same, profits in absolute terms may go up Contention 3 : Overall significance of the marketing function in the transaction reduces considerably and therefore the percentage of profits attributable to such function should also go down

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Agenda
Policy Issues : E-Commerce and BPO Cross Border Tax Issues Harmonization of Policy Issues E-Commerce / BPO and WTO

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International Tax Dialogue


Representation of International Organizations
World Bank and IMF bilateral technical assistance in tax policies and administration issues The Committee on Fiscal Affairs of OECD key policies and administrative issues on international tax policy agenda, tax treaties, transfer pricing, international tax avoidance and E-commerce. UN Ad Hoc Group on International Co-operation in Tax Matters focuses on International Tax issues Committee of International Organizations on Tax Administration umbrella group of many regional and international tax organizations.
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5 Principles for International Tax Policy (ITP)

Neutrality between taxation of e-commerce and the commerce carried

on in traditional manner.
Efficiency full protection to taxpayer against double taxation, and facilitating international flow of trade, investment and technology.

Certainty and Simplicity clear and transparent framework for easy


understanding of taxpayer and the taxation authorities. Effectiveness and Fairness with respect to tax sharing between countries. Flexibility in adapting changing technology.
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Need to Converge to ITP

Avoid Asymmetry - Tax credit - presumptive tax rationalization

- tax attributes alignment by period


- APA / APM for TP

- Quick MAP

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Facilitate Operations

Allow tax efficient consolidation - of industry - of vendors

Integrated tax free zones - satellite cities

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Improve Understanding

Other countrys processes Global business Practices Technology impact New E-Money System

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Agenda
Policy Issues : E-Commerce and BPO Cross Border Tax Issues Harmonization of Policy Issues E-Commerce / BPO and WTO

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E-Commerce and WTO


E-commerce and Council on TRIPS

Copyright Protection digital networks has changed the way that works and other protected materials are created, produced, distributed and used. Some of the measures taken to address this issue by WIPO include: i. WIPO Copyright Treaty ii. WIPO Performances and Phonograms Treaty

Protection of Trademarks concerns in this regard include applying the territorial nature of trademarks to internet, protection of well-known trademarks and the relationship between trademark and Internet Domain Names. To address the latter

issue, WIPO published The management of Internet Names and Addresses:


Intellectual Property Issues. The standing committee in WIPO is involved in redressing other concerns highlighted herein.
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BPO and WTO

The General Agreement on trade in Services (GATS) treaty provides for 4 modes for supply of services: Mode 1 Cross border supply of services a call center in India providing back office support to British Airways. Mode 2 Consumption Abroad Tourism would ideally fit into this category Mode 3 Establishment of Commercial Presence A US bank starting a branch in India. Mode 4 Movement of Natural Persons An Indian software professional working on site of a client based in US.

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BPO WTO Policy and India


What India should ideally bargain for under the GATS Treaty: -

Mode 1 Cross border supply of services Measures like the New Jersey Bill in US
typically defeat the objective under this mode of supply of services, which in turn has serious repercussions on the Indian IT sector. Though the Bill has been stalled in the New Jersey State Assembly, adequate steps under negotiations should be taken by India preventing such precedents from occurring.

Mode 4 Movement of Natural Persons GATS quotas for visas over and above the visa currently being issued on a discriminatory basis. 1. Facilitates free movement of professionals in the WTO member countries. 2. Impetus to the Indian IT sector considering the competitive advantage it holds in the form of cheap, highly skilled labor force.
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Current Status The Positives

International Companies still optimistic about India. Domestic Companies and IT professionals inclination to embrace technology.

Soft infrastructure (human side) open to accept latest technology Hard infrastructure (connectivity, networking) still lacking

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Thank You

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