H. Jacob Lager

Posts Tagged ‘Indian tax law’

Indian Retroactivity: Fact or Fiction?

In Foreign taxes, Offshore Accounts on April 30, 2012 at 8:34 am

Vodafone verdit, Indian tax law

What was supposed to be a final decision in the Vodafone case has instead given rise to an aggressive Indian effort to impose retroactive taxes on foreign investors and significant consternation in the global investment community.

To quickly recap the issue, India attempted to tax the $ 11.2 billion purchase of an Indian subsidiary between two non-Indian parties.  Earlier this year, the Indian tax authorities lost this fight in front of India’s Supreme Court.  The Indian government responded by enacting legislation retroactively imposing a capital gains tax on merger and acquisition deals conducted overseas where the underlying asset is located in India.

The rest of the world has, not surprisingly, freaked out.

Among others, U.S. Treasury Secretary Timothy Geithner has pressed Indian Finance Minister Pranab Mukherjee for reassurances that US investors will not be subject to Indian taxes on years-old transactions.  Mukherjee has attempted to soothe concerns, stating at an April 20 conference that older tax cases would not be reopened.  According to Mukherjee, “No case can be reopened which is more than six years old.” He further added that “there is no uncertainty” in Indian tax law for foreign investors and that India would hold transparent, open discussions with those who have concerns about the law.

Right or not, the recent tax fight does not appear to be slowing Indian investment.

“We are seeing lots of outbound US investment in India right now,” says Lisa Sergi, a senior tax director at WTAS.  “India remains a strong option for our clients in technology and manufacturing as an area with low costs and a terrific market.”

And as for the potential uncertainty of Indian taxes?

“There are clear laws on the books in India, but in practice, the government will fight and hold out until the client pays something more.  But in that way, they are no different than California’s Franchise Tax Board,” says Sergi.

So there you have it:  Indian tax uncertainty is no less onerous than our own.

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Control key ingredient for Spanish, Indian aggressive pursuit of permanent establishments

In Foreign taxes, Offshore Accounts on March 19, 2012 at 9:05 am

What might cause a business to be taxed in a foreign jurisdiction?  Control, according to a pair of recent decisions out of Spain and India.

No stranger to aggressive long-arm taxation (see Vodafone litigation), India’s Authority for Advance Rulings (AAR) just issued a February 7 ruling that deemed a French data network provider’s control over certain undersea cables in Indian territory a sufficient presence to justify permanent establishment status in India.  The ruling specifically noted that whether the French company owned or leased the equipment was irrelevant, so long as it has the power to control the equipment.  Similarly, the AAR further noted that a PE could be triggered by a mere computer or data server in India if a business is conducted through such equipment.

One month earlier, Spain’s Supreme Court teached its long-awaited decision in Roche Vitamins Europe Ltd., ruling that the company’s Spanish subsidiary created a permanent establishment via agency for Roche Vitamins Europe, a Swiss company.  Because all of the Spanish company’s activity was directed, organized, and managed by the Swiss company, the Court held that the subsidiary operated as a dependent agent as it carried on, under the two contracts, activities (manufacturing and distribution) that could have been performed directly through a fixed place of business.

The fact that the Spanish sub had no capacity to contract or negotiate for its Swiss parent did not prevent the court from broadly applying the dependent agency clause of the Spain-Switzerland tax treaty. Even though the sub did not “habitually [exercise] authority to conclude contracts that are binding for the” parent (as required by the treaty), the court nonetheless ruled that the parent’s control of the sub was sufficient to attribute to the Spanish PE the profits derived from the sub’s activities (manufacturing and distribution).

These two cases present strong reminders for multinational taxpayers to reexamine structures in which a group member performs, under one or more contracts, activities for nonresident related entities.  In particular, taxpayers should determine whether the evidence supports an argument that the local entity has sufficient autonomy and that its operations and/or assets are not subject to a foreign parent’s discretion.