Workshop on Taxation of Foreign Remittances

Transcription

1 Workshop on Taxation of Foreign Remittances Chamber of Tax Consultants Income of Non Residents from Shipping and Aircraft Operation 20 th December 2013 Mumbai Pune Hyderabad New Delhi

2 Glossary 2

3 Glossary Abbreviations Word Full Form FAC Foreign Airline Companies FSC Foreign Shipping Companies ITA / Act Income Tax Act, 1961 OECD Organisation for Economic Cooperation and Development POEM Place of Effective Management UN United Nations 3

4 Taxability under the Income Tax Act 4

5 Taxability under the Income Tax Act Overview Taxability under ITA Shipping Aircraft Section 44B Section 172 Section 44BBA Above sections deal with presumptive taxation Purpose - provide simple manner of calculation of income Section 44B and 44BBA are similarly worded 5

6 Taxability of FSC under the Income Tax Act Section 44B and 172 Section 44B and Section 172 of the ITA deal with shipping profits of a non - resident Section 44B Section 172 Applies to regular shipping business Applies to occasional shipping activities Overrides only Section 28 to 43A of the ITA Income deemed at 7.5% of Export freight (wherever received) Import freight which is received in India Freight to include demurrage, handling charges or any other similar charges Procedure and time limit for assessment and collection of tax is not provided Return to be filed as per due date specified under Section 139 of ITA Overrides all other provisions of the ITA Income deemed at 7.5% of Export freight (wherever received) Freight to include demurrage, handling charges or any other similar charges Procedure and time limit for assessment and collection of tax is provided Return to be filed within 30 days of departure of ship Effective Rate of Tax 3.15% of the freight collected 6

7 Taxability of FAC under the Income Tax Act Section 44BBA Text of Section 44BBA Section 44BBA is similar to Section 44B Exception Section 44BBA provides a lower percentage of deemed income, i.e. 5% vis-a-vis 7.5% provided under Section 44B Effective Rate of Tax 2.10% of the freight collected 7

8 Taxability under the Income Tax Act Section 44B, 172 and 44BBA Topical Issues Whether the above presumptive provisions would be applicable even in case of losses? [Royal Jordanian Airlines (126 ITD 289)(Del)] Are provisions of section 44BBA applicable to Domestic Air traffic? [Lloyd Helicopters International Pty limited vs. CIT (249 ITR 162)(AAR)] Whether income accruing outside India is also taxable under section 44B? [CIT v. Nippon Yusen Kaisha Ltd (233 ITR 158)(Cal)] Whether section 90(2) overrides section 172? [Arabian Express Line Ltd. of United Kingdom v. Union of India (212 ITR 31)(Guj)] 8

9 Taxability under the Income Tax Act Section 44B, 172 and 44BBA Topical Issues Whether assessment of non resident ship owner under section 172 can be said to be assessment of its total income? [CIT v. Taiyo Gyogyo Kabushiki Kaisha (244 ITR 177)(Ker)] Whether dead freight can be treated as payment on account of carriage of goods under section 172? [CIT v. Pestonji Bhicajee (107 ITR 837)(Guj)] Does section 172 override section 44B? [(ITO v CMA CGM Agencies (India) Pvt. Ltd.)(Rajkot)] 9

10 Taxability of FSC under Tax Treaties 10

11 Model Conventions Article on Synopsis of OECD Model Synopsis of UN Model Alternative A Alternative B Profits from operation in International Traffic Profits from operation in international traffic taxable only in state of POEM Same as OECD If the shipping operations are more than casual, then mutually agreed percentage of profits would be taxable in Source State Inland Waterways Profits from operation of boats engaged in inland waterways transport taxable only in state of POEM Same as OECD Same as OECD POEM aboard a ship / boat POEM situated in home harbour. If no home harbour, then State of which operator is a Resident Same as OECD Same as OECD Participation in pooling arrangement Covered by Article 1 on International Traffic Same as OECD Same as OECD 11

12 Overview Objective of inserting specific article on Shipping & Aircraft Restrict taxing rights to One Country only Exception is Alternative B of UN Model Convention which allows taxability in both States (albeit with some concessions) e.g. India s tax treaty with Sri Lanka, Denmark, France, Japan Simplify taxability Due to source rule of taxation, taxpayer can be liable to tax in various countries fragmented taxation can be burdensome and hence needs to be mitigated Mitigate burden of profit attribution for PE constituted in various countries Overrides Article 7 (Business Profits) limited override though No need for detailed rules since taxing rights restricted to one State Plethora of interpretation issues 12

13 Article 8(1) Operation in International Traffic 13

14 Key ingredients Profits from operation of ships in international traffic taxable in contracting state in which POEM is situated (or state of residence in certain tax treaties) Conditions as per Article 8(1) Operation of ships POEM/ Place of Residence International traffic 14

15 Operation of Ships 15

16 Operation of ships Article 8 applies to an enterprise engaged in operation of ships Could be owned or leased Critical aspect is that it should be at the disposal of the enterprise Controlling and managing the ship is important Operation of Ships defined in some Tax Treaties E.g. Singapore, Brazil, Belgium, USA, China, Mauritius Expressions not defined in some Tax Treaty - meaning to be ascertained as per domestic laws [Article 3(2)] E.g. France, Germany, Japan, Korea 16

17 Operation of ships Under Indian domestic laws Sec115VB - Operation of ships shall mean operating any ship (owned or chartered) and includes arrangement such as slot charter (subject to certain exceptions) However, the definition is for only the specified Chapter and thus cannot be considered overall - Bombay HC in case of Balaji Shipping Thus reliance to be placed on OECD and UN Commentary Operation of ships to include: Actual operation Activities directly connected with operations Activities incidental or ancillary to operations 17

18 Operation of ships As per OECD Commentary What is covered by operation of ships Transportation of passengers or cargo by ships or aircraft operated in international traffic Activities directly connected with Operation Transportation of passengers or cargo on ships operated by other enterprises under code-sharing, slot-chartering arrangements or to take advantage of earlier sailing Inland haulage charges Lease of containers (in certain cases) Activities ancillary or incidental Make minor contribution relative to operation of ships and which cannot be regarded as separate business or source of income 18

19 Operation of ships and aircrafts food for thought Occasional business also covered? Taxpayer need not be engaged exclusively in shipping business? Manufacturing company owning ships for transportation of its own goods? Actual transportation necessary whether commission agents which act as link between owner of goods and actual transporter covered? What if Article 8 fails is it detrimental or is a taxpayer neutral? Whether income from software developed & maintained solely for the purpose of shipping operations would be taxable as Royalty or Fees for Technical Services or Shipping profits? [DDIT v. A. P. Moller (Mum)] Would income from wet leasing of an aircraft be considered as operation of aircrafts? [Caribjet Inc. vs. DCIT (4 SOT 18)(Mumbai)] Would income from security and scanning services provided to other airlines be considered as derived from operation of aircrafts? [ADIT vs. Delta Airlines Inc.] 19

20 Ancillary or Incidental activities food for thought Operation of shuttle service from airport to city Transportation of goods by truck connecting a depot with the port / airport Is the depot exclusively for goods in transit? In transit hotel 20

21 Ancillary or Incidental activities food for thought Interest income for accounts which briefly hold freight collections OECD view Protocol to India-Spain tax treaty, Belgium, China Treasury function covered? Interest receivable on refund of income tax [Hapag-Lloyd Container Line GMBH vs. ADIT (ITA No. 6214/M/07)(Mum)] Restaurants, snack shops, etc operated on ships Operated by shipping enterprise v/s outsourced to third parties Aircraft maintenance services on reciprocation basis [Lufthansa German (83 TTJ 113)(ITAT, Del)] 21

22 Bareboat Charter Meaning Bare ship is given on hire (i.e. without crew, equipment, etc.) Taxability Under IT Act Madras HC incase of Poompuhar Shipping Corporation [TS-528-HC-2013] Not considered as operation of ship by lessor since crew of lessee operating the ship Considered as Royalty for use of equipment Payment is for use and hire of vessel, not for services Under Tax Treaties Should be taxable as royalty if equipment royalty clause present in the tax treaty if equipment royalty clause is absent and the leasing is incidental to operation of ships, then covered by Article 8. Else, covered by Article 7. As per India s tax treaties with US, Canada and Singapore rental income from hire/ lease of ships excluded from definition of royalty As per OECD Commentary treated as business profits 22

23 Slot Charter Meaning Charterer allowed to place certain number of container slots as per its disposal in the vessel Taxability 2 different scenarios contemplated by Bombay HC in Balaji Shipping [315 ITR 62] Scenarios Slot hire facilities availed for carriage of goods from India to final destination Slot hire facilities obtained on feeder vessels for delivery to international hub port from where it was further shipped on vessels chartered by taxpayer Ruling Article 8 benefit granted by relying on Model Commentary since it is ancillary to operation of ships Article 8 benefit granted. Bombay HC stated that the slot hire agreements are inextricably interlinked with the operation of ships by the taxpayer 23

24 Feeder vessel Concept, Controversy & Rulings Meaning A short-sea vessel which transfers cargo between central hub ports & smaller spoke ports Controversy Whether such an activity be said to be in course of operation of ships in international traffic eligible for relief under the Treaty? Rulings Benefit of Treaty available if- Feeder Vessel is owned by the assessee or by members of consortium / pool Such transportation is ancillary to main activity Assessee to establish the link between transportation of cargo by feeder vessel with the transportation by mother vessels [DDIT vs. Delmas France (27 SOT 441)] [Hapag-Lloyd Container Line GMBH vs. ADIT (146 TTJ 279)] [DDIT v. Cia de Navegacao Norsul (121 ITD 113 (Mum.)] 24

25 International Traffic 25

26 Meaning of international traffic Generally defined under Article 3 of Tax Treaty Transport by ship or aircraft operated by enterprise which has its POEM / residence in a contracting state, except Operation solely between places in other contracting state (i.e. Coastal traffic) Illustrations What is International Traffic - Ships plying between Dubai (UAE) - Chennai (India) What is not International Traffic - Ships plying between Chennai (India) - Mumbai (India) 26

27 International traffic - Case Study Fact: Goods loaded at Chennai port to be delivered to Surat port Query: Whether International Traffic? Case 1 Singapore Chennai Surat (India) UAE Case 2 Singapore Chennai Surat (India) Case 3 Chennai Surat (India) 27

28 POEM & State of Residence 28

29 Meaning of POEM POEM not defined in Tax Treaties / Article 8 OECD commentary on Article 4(3) Tie breaker rule for residence Place where key management and commercial decisions are taken Place of top level management India s observations on OECD commentary (2008 update) on Article 4 Place where main and substantial activity carried also to be taken into account for determining POEM UN commentary on Article 4 Place where company is actually managed and controlled Place where decision making for important policies take place Place that plays a leading economic and functional part Place where most important accounting books are kept 29

30 Meaning of POEM Definition under IT Act [section 115VC (Tonnage Tax)] Place where board of directors or executive directors make decisions Cannot be considered as per Bombay HC in case of Balaji Shipping As per Indian Judicial Precedents, POEM refers to A place where factually and effectively the day-to-day affairs of the company are managed and controlled [Integrated Container Feeder Services v. JCIT [2005] 278 ITR 182 (Mum)] Not necessarily the place in which the ultimate control of the company (i.e. shareholders) reside [220 ITR 377 (AAR)] To be determined vis-à-vis only the contracting states entering into Tax Treaty? Yes - (220 ITR 377)(AAR) and DLJMB Mauritius Investment Co. vs. CIT (228 ITR 268) (AAR) 30

31 POEM Food For thought POEM for fiscally transparent partnerships? POEM in case of a PE? If the business operations are carried out by the PE, which is not the POEM of the enterprise as a whole, for the purpose of Article 8, the POEM would be in the State of PE. Can PE access the treaty? Illustration POEM in Denmark for non shipping operations PE in Norway which manages shipping operations Source of shipping income from operations in international traffic in Canada 31

32 POEM v/s Residence Criteria Although most tax treaties allocate taxing rights to the State of POEM, few countries grant taxing rights to State of Residence Eg USA, Singapore, UK Granting taxing rights to State of POEM and not State of Residence meant to mitigate tax avoidance? Conflict and elimination of double taxation of a taxpayer due to POEM rules and Residence rules can be interesting Eg UK is the Source State; Mauritius is State of POEM and India is Residence State Can result in double taxation if State of POEM does not grant residence based on POEM 32

33 Operation of boats in inland waterways 33

34 Article 8(2) - operation of boats engaged in inland waterways Profits from operation of boats engaged in inland waterways transport taxable in contracting state in which POEM situated Objective - to apply same treatment to transport on rivers, canals and lakes as to shipping in international traffic OECD commentary - provision applies to Inland waterways transport between two or more countries Inland waterways carried out by an enterprise of one country even between two places in another country None of the tax treaties entered into by India contains such a clause 34

35 POEM aboard a ship 35

36 Article 8(3) - POEM aboard a ship If POEM of shipping enterprise or inland waterways transport is aboard a ship or boat POEM deemed to be situated where home harbor of ship or boat situated No home harbor - POEM situated in contracting state in which operator of ship or boat is resident Captain of a Ship is a Single shareholder & single Director of the Company owning the ship? 36

37 Pool Arrangement 37

38 Article 8(4) - Profits from Pool Arrangement Provisions of Article 8(1) also apply to profits from participation in pool, joint business or international operating agency Meaning Terms pool, joint business or international operating agency not defined Typically, a pooling arrangement involves Pooling of resources by various shipping/ airline companies Provision of services to each other And dividing resultant profits amongst each other For Airlines - As per Delhi Tribunal in Lufthansa German Airlines [90 ITD 310], pool concept should flow from International Airlines Technical Pool ( IATP ), which would require: Reciprocity of rendering and receiving services / facilities recognised by IATP Use of standard agreement forms and levy of charges as per IATP manual Non existence of commercial activities in providing services to other airlines 38

39 Article 8(4) - Profits from Pool Arrangement Food for thought Reciprocal arrangement entitled to benefit of Article 8(4) - Lufthansa German (83 TTJ 113)(ITAT, Del) Only rendering of services and not availing services would not be participation in pool and accordingly, not covered under Article 8(4) British Airways Plc (80 ITD 90) (ITAT, Del) 39

40 Other Important Aspects Income from Alienation of Ships/ Aircrafts Generally taxable under Article 13 on Capital gains e.g. Tax Treaties with Canada, Denmark, France, Singapore Covered under Article 8 in certain tax treaties e.g. Tax Treaties with UK, USA Constitution of PE by FSC in India A ship, though movable, may be considered as a fixed place of business if it is not actually moved. Accordingly, a ship anchored in Indian waters, for a period exceeding that mentioned in the relevant tax treaty, may be considered to be a PE of the foreign enterprise [Fugro Engineers BV vs. ACIT (26 SOT 78) Delhi ITAT] 40

41 Practical Aspects Obtain provisional certificate In order to avail exemption under Article 8, FSC to obtain provisional / DIT certificate from the jurisdictional tax officer Documentary Requirements to procure provisional certificate Valid Tax Residency Certificate Certificate of POEM Form 10F Charter party agreements Ship registry Any other documents the jurisdictional tax officer may require 41

42 OECD Discussion Draft On 15 November 2013, OECD released a discussion draft on proposed technical changes, inter-alia, to Article 8 and Article 13 of OECD Model Convention Suggestions proposed by OECD Discussion Draft on Article 8 Taxation of shipping/ aircraft income be shifted from POEM to the State of residence of the enterprise To reflect above change, change definition of International Traffic as follows: any transport by a ship or aircraft except when the ship or aircraft is operated solely between places in a Contracting State and the enterprise that operates the ship or aircraft is not an enterprise of that State Remove application of shipping provisions to transport through inland waterways Suggestions proposed by OECD Discussion Draft on Article 13 (Capital Gains) Profits arising from sale/alienation of ships/ aircraft to be taxed in the State of residence of the enterprise 42

43 Thank You Presentation by Sudhir Nayak 2nd Floor, Ballard House Adi Marzban Path Ballard Pier Mumbai Tel: Mobile: Visit us at

44 Annexure 44

45 Annexure A India Singapore Tax Treaty - Article 8 - shipping and Air Transport Article 8 - shipping and Air Transport 1. Profits derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic shall be taxable only in that State. 2. The provisions of paragraph 1 shall also apply to profits from the participation in a pool, a joint business or an international operating agency engaged in the operation of ships or aircraft. 3. Interest on funds connected with the operation of ships or aircraft in international traffic shall be regarded as profits derived from the operation of such ships or aircraft, and the provisions of Article 11 shall not apply in relation to such interest. 4. For the purposes of this Article, profits from the operation of ships or aircraft in international traffic shall mean profits derived from the transportation by sea or air of passengers, mail, livestock or goods carried on by the owners or lessees or charterers of the ships or aircraft, including profits from : (a) the sale of tickets for such transportation on behalf of other enterprises; (b) the incidental lease of ships or aircraft used in such transportation; (c) the use, maintenance or rental or containers (including trailers and related equipment for the transport of containers) in connection with such transportation; and (d) any other activity directly connected with such transportation. Back 45

46 Annexure B Section 44B Section 44B - Special provision for computing profits and gains of shipping business in the case of non-residents. (1) Notwithstanding anything to the contrary contained in sections 28 to 43A, in the case of an assessee, being a non-resident, engaged in the business of operation of ships, a sum equal to seven and a half per cent of the aggregate of the amounts specified in sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession" (2) The amounts referred to in sub-section (1) shall be the following, namely : (i) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the carriage of passengers, livestock, mail or goods shipped at any port in India; and (ii) the amount received or deemed to be received in India by or on behalf of the assessee on account of the carriage of passengers, livestock, mail or goods shipped at any port outside India. Explanation. For the purposes of this sub-section, the amount referred to in clause (i) or clause (ii) shall include the amount paid or payable or received or deemed to be received, as the case may be, by way of demurrage charges or handling charges or any other amount of similar nature Back 46

47 Annexure C Section Shipping business of non-residents. (1) The provisions of this section shall, notwithstanding anything contained in the other provisions of this Act, apply for the purpose of the levy and recovery of tax in the case of any ship, belonging to or chartered by a non-resident, which carries passengers, livestock, mail or goods shipped at a port in India (2) Where such a ship carries passengers, livestock, mail or goods shipped at a port in India, seven and a half per cent of the amount paid or payable on account of such carriage to the owner or the charterer or to any person on his behalf, whether that amount is paid or payable in or out of India, shall be deemed to be income accruing in India to the owner or charterer on account of such carriage (7) Nothing in this section shall be deemed to prevent the owner or charterer of a ship from claiming before the expiry of the assessment year relevant to the previous year in which the date of departure of the ship from the Indian port falls, that an assessment be made of his total income of the previous year and the tax payable on the basis thereof be determined in accordance with the other provisions of this Act, and if he so claims, any payment made under this section in respect of the passengers, livestock, mail or goods shipped at Indian ports during that previous year shall be treated as a payment in advance of the tax leviable for that assessment year, and the difference between the sum so paid and the amount of tax found payable by him on such assessment shall be paid by him or refunded to him, as the case may be. Back 47

48 Annexure D Section 44BBA Section 44BBA - Special provision for computing profits and gains of the business of operation of aircraft in the case of non-residents. (1) Notwithstanding anything to the contrary contained in section 28 to 43A, in the case of an assessee, being a non-resident, engaged in the business of operation of aircraft, a sum equal to five per cent of the aggregate of the amounts specified in sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession". (2) The amounts referred to in sub-section (1) shall be the following, namely : (a) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the carriage of passengers, livestock, mail or goods from any place in India; and (b) the amount received or deemed to be received in India by or on behalf of the assessee on account of the carriage of passengers, livestock, mail or goods from any place outside India.] Back 48