Deadline for comments on the tax treaty between Australia and India
Future treaty amendments might result in higher costs for non-resident Indian service providers.
By the end of today, August 8, the Australian government will have concluded a consultation on removing certain income tax obligations for non-resident Indian businesses that deliver technical services remotely to Australian clients.
The week-long consultation is on proposed legislation that modifies Articles 12(3)(g) and 23 of the Agreement between the Governments of Australia and the Republic of India for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Regard to Taxes on Income as well as the International Tax Agreements Act of 1953. (Australia-India tax treaty).
According to the head of tax at a Bangalore-based provider of financial technology, "this is a sign that both countries are paying even closer attention to what sort of payments and credits non-resident Indian firms get with the treaty provision."
He continues, "as part of the treaty, Australia taxes Indian IT companies for offshore work done in India under the so-called royalty head, though the same income is taxed in India as well."
The treaty change takes place at a time when statistics from India's Central Board of Direct Taxes show that the taxpayer base and direct tax-to-GDP ratio remain lower than expected - at less than 6% - due to the way the tax system is set up, according to sources.
Because of the existing Articles 12(3) and Article 23 of the Australia-India Tax Treaty, which both target dividend income and other source incomes that are subject to withholding taxes, the income from non-resident Indian service providers is currently only taxable in Australia (WHTs).
Some advisors draw attention to the possibility that the modification may result in higher local tax obligations for service providers who have a permanent establishment in India. In addition, the amendment will repeal treaty exemptions from India's local taxes, such as the country's 25% corporate tax.
According to Steve Towers, founder of the media outlet International Tax Bytes and a former partner at Deloitte Southeast Asia, "this is an interesting example of a tax treaty effectively increasing tax liabilities."
In a letter to Australian lawmakers dated August 2, Indian Minister of Commerce and Industry Piyush Goyal requested that the tax amendments be made concurrently with the upcoming Australia-India Economic Cooperation and Trade Agreement (AIECTA), which is expected to become law in the coming weeks. If the AI-ECTA does not go into effect, the amendments will not start at all.
This temporary agreement covers changes to regulations, as well as trade in goods and services. April, when India first proposed the modification to the double tax treaty, saw the approval of the agreement by both governments.
In addition to some treaty benefits, like Australian tax credits for remote Indian service providers, both countries agreed to end targeted taxation. This is so that Flipkart and other tech firms could use treaty incentives to offset local taxes.
The Indian government has previously brought up the possibility of double tax avoidance with Australia, which Indian lawmakers said would be resolved by the upcoming treaty change.
The government's opportunity to hear from non-resident Indian taxpayers regarding how the impending changes may affect their long-term treaty protections or obligations under the agreement is likely to end with Australia's consultation.
To stop other types of corporate tax avoidance, Australia's newly elected Labor government is also addressing lax thin capitalization rules and transparency gaps in the tax code.
In the months leading up to the mid-year budget due on October 25, it is also anticipated that it will speed up a number of other significant international tax reforms.
The government wants to prevent deductions for royalty payments made to low-tax jurisdictions in other upcoming treaty updates.
According to Toby Eggleston, a tax partner at Melbourne's Herbert Smith Freehills, "the Australian Tax Office is concerned that taxpayers are entering arrangements that interpose their entities in certain treaty jurisdictions to obtain a more favourable tax outcome under a double tax agreement in the form of reduced WHT rates."