Post by Sapphire Capital on Aug 13, 2008 0:53:46 GMT 4
Ruling could increase tax on joint ventures in India
Joanna Faith
Joint ventures with local taxpayers in India could become more expensive for overseas companies after the decision by the Authority for Advance Rulings (AAR) in the Geoconsult case.
Austria's Geoconsult argued that income from its joint venture with Rites and Secon, an Indian construction group, should be taxed as fees for technical services as it did not have a permanent establishment (PE) in India.
The tax authorities contested that the consortium arrangement between the Geoconsult and its Indian partners was an Association of Persons (AOP) and should be assessed on a net income basis.
"An AOP is a fictional person created under Indian law purely for tax purpose," said Rajendra Nayak, a partner at Ernst & Young in India. "There's no definition of AOP in the law and whether an arrangement can create an AO ot is case law driven."
The AAR concluded that the joint venture was an AOP because of the following principles:
• the AOP could be considered as being resident in India under domestic tax law even if partial control & management of the AOP is in India (which could normally be the case if even one of the AOP members is resident in India);
• as an AOP is a fictional entity existing purely for tax purposes, it is unclear as to whether such an entity would be eligible for benefits under a tax treaty and how a treaty could be applied. In addition to the issues in determining residency under a tax treaty for a notional entity, there could be classification conflicts as India would attribute the income to the AOP while the country of residence could attribute the same income to the taxpayer. This could create double tax risks/exposures;
• as the AOP member is a foreign company, India would tax the share relating to the member at 40% under domestic tax law, as opposed to a 10% withholding tax which would have normally applied for technical service fee paid to a foreign company (which does not have a PE in India).
The ruling shows the existence of an AOP is determined by the tax authorities on a case-by-case basis and that it is something that should be considered by companies entering into a joint venture.
"When two or more persons join in a common purpose or common action, with an object of producing income, profits or gains then such association is assessable as AOP," said Ankita Maheshka of BMR Advisors in India.
"This ruling brings out the key ingredients required to be assessed as an AOP," Nayak said. "Although the ruling is only binding on the applicant in respect of the transaction, it does have persuasive value and the Indian courts, revenue authorities and appellate authorities do recognise the principles and ration laid down by the AAR while deciding other cases," he said.
Joanna Faith
Joint ventures with local taxpayers in India could become more expensive for overseas companies after the decision by the Authority for Advance Rulings (AAR) in the Geoconsult case.
Austria's Geoconsult argued that income from its joint venture with Rites and Secon, an Indian construction group, should be taxed as fees for technical services as it did not have a permanent establishment (PE) in India.
The tax authorities contested that the consortium arrangement between the Geoconsult and its Indian partners was an Association of Persons (AOP) and should be assessed on a net income basis.
"An AOP is a fictional person created under Indian law purely for tax purpose," said Rajendra Nayak, a partner at Ernst & Young in India. "There's no definition of AOP in the law and whether an arrangement can create an AO ot is case law driven."
The AAR concluded that the joint venture was an AOP because of the following principles:
• the AOP could be considered as being resident in India under domestic tax law even if partial control & management of the AOP is in India (which could normally be the case if even one of the AOP members is resident in India);
• as an AOP is a fictional entity existing purely for tax purposes, it is unclear as to whether such an entity would be eligible for benefits under a tax treaty and how a treaty could be applied. In addition to the issues in determining residency under a tax treaty for a notional entity, there could be classification conflicts as India would attribute the income to the AOP while the country of residence could attribute the same income to the taxpayer. This could create double tax risks/exposures;
• as the AOP member is a foreign company, India would tax the share relating to the member at 40% under domestic tax law, as opposed to a 10% withholding tax which would have normally applied for technical service fee paid to a foreign company (which does not have a PE in India).
The ruling shows the existence of an AOP is determined by the tax authorities on a case-by-case basis and that it is something that should be considered by companies entering into a joint venture.
"When two or more persons join in a common purpose or common action, with an object of producing income, profits or gains then such association is assessable as AOP," said Ankita Maheshka of BMR Advisors in India.
"This ruling brings out the key ingredients required to be assessed as an AOP," Nayak said. "Although the ruling is only binding on the applicant in respect of the transaction, it does have persuasive value and the Indian courts, revenue authorities and appellate authorities do recognise the principles and ration laid down by the AAR while deciding other cases," he said.