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International Taxation Conference 2018: A View From India

David Stewart: Hello from Mumbai. This is Tax Notes Talk. Welcome to the podcast. I’m David Stewart, editor in chief of Worldwide Tax Daily. This week: A view from India. I'm here in Mumbai for the Foundation for International Taxation Conference, and I took this opportunity to sit down with Porus Kaka, the former president of the International Fiscal Association. We talked about a range of issues, from India's new approach to permanent establishment to the effects the Tax Cuts and Jobs Act is having on U.S. trading partners. Porus, thank you for being here.

Porus Kaka: Pleasure.

David Stewart: Let's start with an overview of what's happening in India in taxation these days.

Porus Kaka: Well, I think the two things that spring immediately to mind would be the new amendment that India made in its laws this February, which was perhaps the first digital PE in the world. We call it significant economic presence. It's now legislated into domestic law. There are thresholds beyond which if you cross in terms of users or interactions on a digital space, you will be chargeable to tax in India. Those thresholds have yet not been set and discussions are going on, but we do have the legislation in place. So this is the significant expansion of Indian's domestic tax law and extraterritoriality. And the second is that the government is continuing to work on trying to bring about a completely new direct tax code, and there is a report of the committee that's expected in February. I don't know whether this will ever get enacted because, if I look at the past, we've had at least four committees, and every time the committee has made the recommendation, either the government has fallen or the Parliament has changed.

David Stewart: Okay, so clearly some challenges ahead for them.

Porus Kaka: Yes.

David Stewart: Turning back to the significant economic presence. Would that be similar to this digital PE concept that's being talked about in Europe?

Porus Kaka: Absolutely. So it's a new criteria by which we define what we call as a business connection with India, and once you cross that, you will be chargeable to tax in India. You would have to comply with transfer pricing, attribution, etc., principles. Those thresholds are sales, those thresholds are users, etc., etc., which are under domestic law, but they haven't yet been settled, and I hope they do take some care in ensuring that we do not tax the small players. Because currently, if you look at the threshold in the equalization levy, which is a little more than $1,000, is an extremely small threshold.

David Stewart: Now, explain the equalization levy. What is that?

Porus Kaka: That's a tax where any person who advertises online as an advertiser from India is required to deduct tax at source allegedly from the advertiser. But the way it works is actually it's grossed up and mostly it has become a charge on the Indian companies. What happens is anyone who engages in online advertising and the recipient does not have a permanent establishment in India is required to pay this tax.

David Stewart: Alright, let's look at India's participation in the BEPS project. The OECD has completed most of the reports over the last few years. Have the concerns of India and countries similarly situated, have they been answered by the OECD's project?

Porus Kaka: Well, I think India was relatively an enthusiastic participant in this project and I think has taken on board mostly many of the recommendations. I think it had some concerns in mandatory arbitration, which was eventually removed as a part of the project. But when I look at India's concerns, I think they're much larger than just BEPS. BEPS was an issue on double nontaxation with tax havens, etc., etc., but I think India's looking at rewriting some of the, how should I say the tax sharing rules globally, rewriting the definition of permanent establishment, perhaps rewriting the source rules, perhaps a little a bit more in favor of source jurisdiction. And that's much larger than BEPS. I'm sure those concerns are still out there.

David Stewart: Do you see a potential consensus — there's tension between the market jurisdictions and the residence jurisdictions. Do you see a resolution to that tension where the OECD could reach new consensus?

Porus Kaka: Well, that's a very interesting question because the way I look at perhaps, and this is also the chatter that I've heard even from some other people, is that the new U.S. administration looks upon U.S. also as a market jurisdiction. And when it looks upon U.S. as a market jurisdiction, it is, in fact, changing perhaps some of its stand, which is bringing it a little bit more in line with, say, the developing world. Let me give you an example. The U.S. is totally opposed to a current digital services tax or a digital PE etc., etc., but some of the comments that I saw just yesterday coming up from Chip Harter etc., talking about marketing intangibles, which could be located in the source jurisdiction is a different way of looking at the market being a base for tax etc., or a value creation element. So I think that there are certain voices or there are certain things on which synergies could be built significantly even between China and India and the United States currently.

David Stewart: So since you mentioned the digital services tax, let's move on to the taxation of the digital economy in general. This is sort of a follow on to the BEPS project at the OECD. But other countries are moving ahead more quickly, as you mentioned some work that India is doing on this. Where do you see this project going? Where do you see this going at the OECD and beyond there?

Porus Kaka: Well, strange that you use the word “follow on” because this was actually action plan number one. So this was supposed to be the first part of BEPS that was supposed to be done. And I think action 1, to be fair, there was no consensus. I could say there was a disappointment, but at least there was no consensus, so OECD couldn't carry it forward. So I think this is a critical part of the BEPS work that's going on. And I don't see it as a follow on. 2019 is going to be critical for this work. I think there are a huge amount of countries which are clamoring for some action on this front. The EU, the majority seems to be in favor. Of course there is perhaps Sweden, Ireland, Germany to a certain extent, holding out on the digital services tax. As far as India goes with equalization levy and the significant economic presence, we have already legislated, so domestic law is there. The treaty provisions haven't come in. And there is a growing, I think, insistence on the world to change the tax laws, to take note of the new business model. And 2019 will be critical perhaps for the OECD. We do not wish to have more unilateral actions, which I think will only result in double taxation.

David Stewart: Do you think that the actions that India has taken so far might serve as a model to other emerging economies of how to approach being a market country.

Porus Kaka: Well, personally, I am not in favor of unilateral actions. My preference would be to have it at a multilateral level. I do understand, and perhaps sympathize, with some positions that the Indian revenue has taken because currently there is no consensus, and I think they do wish to make a point that there needs to be action on this. But ultimately, I do believe that, if you have things like diverted profits tax in the U.K. and Australia, if you have things like equalization levy in India, all these are basically income taxes which you then craft to put outside tax treaties, do not give a credit. You are going from a world of allegedly double nontaxation and clearly into a world of double taxation where you tax and do not give credit for that.

David Stewart: Where do you see the consensus in this? Where can all these parties meet?

Porus Kaka: I'm not an advocate or in favor or espousing a particular cause but I have done some work and I've even submitted to the OECD, so that's publicly available, that there is perhaps a need for recognizing that the business model has changed. The fixed place of business concept is no longer relevant. The question is what to take its place, what should be the PE threshold, what should be the attribution and the transfer pricing. I don't see a problem in defining a digital PE. I think the greater problem will be in attribution and transfer pricing for that, and I think that's a significant amount of work that remains to be done.

David Stewart: Can the profit attribution be done through the arm’s-length standard?

Porus Kaka: That's going to be a significant challenge, because once you start attributing the PE itself on formulary basis like thresholds or users etc., etc., then how to determine attribution on an arm’s-length principle is going to be a challenge. You will if you see the U.K. work, there is a tendency to get closer to formulary apportionment than probably most people want.

David Stewart: Well, let's turn, since we're talking about how you don't particularly care for unilateral actions, let's talk about the U.S. tax reform. There are many actions taken in U.S. tax reform that have effects on business. How is that affecting India and other markets that the U.S. trades with?

Porus Kaka: So I'll answer this in two parts. I think firstly there is a concern, but the concern hasn't still sort of flowed down into India and the other jurisdictions. Because there is a little bit of ambiguity as to how U.S. tax law or the act will actually pan itself out. There seems to be a certain amount of confusion. For example, if you take the provision called BEAT. That artificially disallows payments made to offshore centers and that could easily affect BPOs in India, etc., etc., if you cross a certain threshold. And my concern is that if that overrides article 9 of the Indo-U.S. treaty and overrides the arm's-length principle that's built into article 9, which allows the deduction provided you satisfy that principle, and still you have a threshold, which is an arbitrary threshold in domestic law, to override the tax treaty, then the same way I have concerns for India unilaterally amending its domestic laws to override tax treaties, I would have the same concern if the United States does it.

David Stewart: Well, Porus, it's been fascinating. It's been great talking to you. Thank you for being here.

Porus Kaka: Thank you.

David Stewart: And now, Coming Attractions. Each week we preview commentary that will be appearing in the Tax Notes magazines. Jasper Smith is back in our Falls Church studio to tell us what we can look forward to.

Jasper Smith: In Tax Notes, Rodney Mock and David Chamberlain address section 199A's effects on U.S. job creation. And Andrew Bishop and Daniel Brunello examine what a net unrealized depreciation election is and when to make one.

In State Tax Notes, Fredrick Nicely and Nikki Dobay encourage states to adopt the Multistate Tax Commission’s proposed model statute for reporting federal changes following a partnership audit. And William Hays Weissman argues that tax increases alone will not provide California with the revenue it needs to repay its debts.

And in Tax Notes International, Arthur Cockfield examines global digital taxation efforts in light of growing dissatisfaction with the taxation of values associated with global transactions, while a practitioner from EY Mexico considers whether the existing mechanisms in Mexico's tax system can effectively tax the digital economy.

David Stewart: You can read all that and a lot more in the December 10th editions of Tax Notes, State Tax Notes, and Tax Notes International. Well, that's it from Mumbai. You can follow me on Twitter @TaxStew, that's S-T-E-W. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.

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