Article 14 Independent Personal Services

Transcription

1 Independent Personal Services & Dependent Personal Services Workshop on Basics of DTAA 1 st WIRC st October, 2011

2 Article 14 Independent Personal Services

3 OECD Model (pre-2000) INDEPENDENT PERSONAL SERVICES 1. Income derived by a resident of a Contracting State in respect of professional services or other activities of an independent character shall be taxable only in that State unless he has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities. If he has such a fixed base, the income may be taxed in the other State but only so much of it as is attributable to that fixed base. 2. The term "professional services includes especially independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, dentists and accountants." CA Ganesh Rajgopalan 3

4 Background UN Model includes additional alternative conditions Number of days stay Paid by a resident of source state or borne by a PE/FB there & exceed threshold amount Conditions similar to Art. 15 but worded positively US Model Applies only to individuals Article largely unchanged since 1963 but for one in 1977 Article deleted in 2000 Exclusive taxing rights to Residence State Primary taxing rights to Source State when There is a fixed base Number of days threshold met Residence State to give relief Whether Source State taxes is not relevant CA Ganesh Rajgopalan 4

5 Professional services Professional services defined in para 2 includes especially independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, dentists and accountants." Profession under domestic tax law any vocation carried on by an individual, or group of individuals, requiring predominantly intellectual skills, dependent on individual characteristics of the person(s) pursuing that vocation, requiring specialized and advanced education or expertise [86 ITD 384, 96 TTJ 1009] To be distinguished from business or trade (industry or commerce) CA Ganesh Rajgopalan 5

6 Activities of independent character Other activities of independent character other independent activities of a similar character (1963 MC) replaced in 1977 Much wider in scope than the 1963 version Most Indian Treaties adopt the 1963 version Independent If not based on contractual or other form of employment and if the taxpayer is not integrated into the enterprise [Klaus Vogel on Double Tax Conventions Art 14 mno. 53] Integration test from the perspective of taxpayer, not the enterprise Characteristics Must be a service Input of capital of secondary importance CA Ganesh Rajgopalan 6

7 Contractor v. employee Combination of various factors Extent of control exercised on taxpayer Integration test Whether taxpayer is in business for himself Ownership of tools Who provides the facilities Chance of profit or risk of loss Who bears the risk & reward of his activities CA Ganesh Rajgopalan 7

8 Fixed base Comparison with permanent establishment Fixed place of business and fixed base similar fixed a link with specific geographical point & sufficient duration No minimum length of time condition Thailand Treaty [ maintain a fixed base in the other State for a period or periods exceeding in the aggregate 183 days in such year ] Only an identifiable location not sufficient; control over base required [Re. William Dudney Tax Court of Canada] Other PEs (construction, Agency) not similar PE fixed place where business is carried on; FB only to be regularly available CA Ganesh Rajgopalan 8

9 Days of presence rule UN Model [Art. 14(1)(b)] If his stay in the other State is for a period or periods amounting to or exceeding in the aggregate 183 days in the fiscal year concerned; in that case, so much of his income as is derived from his activities performed in that other State may be taxed in that other State; CA Ganesh Rajgopalan 9

10 Days of presence rule Present in most India s treaties Exceptions: Brazil, Korea, Mauritius Some examples- amounting to or exceeding in the aggregate 183 /120 / 90 days in any period of 12 month / In year of income/ In relevant fiscal year Requires physical presence Days when not performing activities? Vacation, social visits, weekends, illnesses Literal meaning- to be counted for threshold Days how counted Man days or solar days To avoid multiple counting of common days attribution of income CA Ganesh Rajgopalan 10

11 Paid by resident/pe rule UN Model [Art. 14(1)(c)] If the remuneration for his activities in the other Contracting State is paid by a resident of that Contracting State or is borne by a permanent establishment or a fixed base situated in that Contracting State and exceeds in the fiscal year (amount to be established through bilateral negotiations. Found in a few Indian treaties Canada (Canadian Dollars 2500) Jordan (USD 2000) Malaysia (USD 2000) Trinidad & Tobago (INR 40000) Thailand (no de minimis limit) paid by and borne by CA Ganesh Rajgopalan 11

12 Income Art 7 deals with net income while Art 14 deals with income (gross or net) Should services be performed personally by taxpayer? Income derived by a resident in respect of services. for the purpose of performing his activities Attribution in line with rules of Art. 7 Days of presence rule v. attribution CA Ganesh Rajgopalan 12

13 Applicability to non-individuals OECD 2000 Report Not appropriate to restrict to individuals Use of the pronoun his not significant More common for professionals to incorporate number of professionals (e.g. engineers) provide their services through companies. Transparent partnerships Applicable to partners or partnership Mixed partnerships (with some non-individual partners) personal significance Relevance of FTS? CA Ganesh Rajgopalan 13

14 Article 15 Income from Employment

15 Para 1 Subject to the provisions of Articles 16, 18 and 19, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State.(rule 1). unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State. (rule 2) CA Ganesh Rajgopalan 15

16 Exclusive right to tax to RS shall be taxable only Primary right to tax to WS Para 1 If employment exercised if any of three conditions in para 2 not fulfilled RS to give relief Whether WS taxes is not relevant Manoj Kumar Reddy [34 SOT 180 (Bang)] Exclusive right to tax to WS India-Bangladesh Treaty If the employment is so exercised such remuneration as is derived therefrom shall be taxable only in that other Contracting State. CA Ganesh Rajgopalan 16

17 Para 1- Exclusions Directors fees and other similar payments derived by a resident of a Contracting State in his capacity as a member of the board of directors of a company which is a resident of the other Contracting State may be taxed in that other State [Art. 16]. Notwithstanding the provisions of Articles 7 and 15, income derived by a resident of a Contracting State as an entertainer, such as a theatre, motion picture, radio or television artiste, or a musician, or as a sportsman, from his personal activities as such exercised in the other Contracting State, may be taxed in that other State [Art. 17(1)]. Subject to the provisions of para 2 of Article 19, pensions and other similar remuneration paid to a resident of a Contracting State in consideration of past employment shall be taxable only in that State [Art. 18]. Salaries, wages and other similar remuneration paid by a Contracting State or a political subdivision or a local authority thereof to an individual in respect of services rendered to that State or subdivision or authority shall be taxable only in that State [Art. 19]. CA Ganesh Rajgopalan 17

18 Employment defined Klaus Vogel on Double Tax Conventions An employee makes his capacity for work available to another (the employer) and, in performing such activities, the employee is obligated to follow the directions and instructions of the employer (control test) integration of dependent activity into the enterprise of the employer so that the employee is under the directions of the employer and must follow his instructions. Resort to domestic law [art 3(2)] A servant acts under direct control and supervision of his master. supervision does not imply continuous exercise of power to oversee or superintendence. [Ram Prashad 86 ITR 122(SC)] CA Ganesh Rajgopalan 18

19 Exercise Sufficient economic connection for the Work State to tax employment is so exercised Where employment exercised Tokyo Doctrine Exercised where central point of employee s activities situated E.g. employee of holding company on supervisory visits to subsidiaries Physical presence services rendered in India regarded as salary earned in India [s. 9(1)(ii) of IT Act] Though exercise does not imply presence, presence required to exercise! CA Ganesh Rajgopalan 19

20 exercise vis a vis inactivity Joining bonus/sign on fee Stand-by fees Sickness benefits State where employment would have been exercised otherwise or State where employee is present during illness? Non-compete fees Where employee is present for fulfilling his obligation? Severance payments CA Ganesh Rajgopalan 20

21 Para 2 Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if: a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in any twelve month period commencing or ending in the fiscal year concerned, and b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State, and c) the remuneration is not borne by a permanent establishment which the employer has in the other State. (rule 3) CA Ganesh Rajgopalan 21

22 Art. 15(2) - General Applies only if employment exercised in other State Reinstatement of rule 1 if all three conditions are met No allocation of income to WS Conditions worded negatively Condition 1 sufficient connection reqd with the WS for allocating taxing rights Condition 2 & 3 Purpose Deductibility of expense and taxability of salary in WS Avoiding administrative burden in absence of employer/pe in WS CA Ganesh Rajgopalan 22

23 Days of presence rule -Art. 15(2)(a) Rolling period /moving scale method To include (as per OECD Commentary) Part of a day, day of arrival, day of departure and all days spent inside the other State such as Saturdays and Sundays, national holidays before, during and after the activity, short breaks (training, strikes, lock out, delays in supplies), days of sickness Day recourse to domestic law Period of days General Clauses Act To exclude days spent in WS as resident CA Ganesh Rajgopalan 23

24 Example: A is resident of State R 1 in FY He leaves on 30 th April, 10 for employment in R 2. He becomes resident of State R 2 in FY He is sent by his employer on a short deputation to State R 1 on 1 st September, 10 and is present in State R till 31 st December, State R 1 State R 2 A A E CA Ganesh Rajgopalan 24

25 A is resident of State R 1 in FY He leaves on 30th April, 10 for employment in R2. He becomes resident of State R 2 in FY He is sent by his employer on a short deputation to State R 1 on 1st September, 10 and is present in State R1 till 31st December, Days R1 Jan Feb Mar Apr R2..remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State [Para 2, 1 st sent.] OECD MC Commentary para 5.1 May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar CA Ganesh Rajgopalan 25

26 derived in respect of employment derived used interchangeably with received/paid Time when actually paid /received not relevant Salary allocation to time spent Days activities performed in WS * Total days activities performed in the fiscal year Annual remuneration Exceptions to specific elements of salary (e.g. hardship allowance) for working in RS/WS Deferred compensations (eg holiday payments, annual bonuses, severance payments) to be included Contract and conduct of parties determinative Presence when not exercising employment e.g. holidays, leave period, stay unconnected to employment CA Ganesh Rajgopalan 26

27 Object & purpose Art. 15(2)(b) & (c) To avoid source taxation of short-term term employments to the extent employment income is not allowed as deductible expense in source State since the employer is not a resident or has PE in source State To avoid administrative burden (Commentary para 6.2) CA Ganesh Rajgopalan 27

28 Para 2(b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State Paid by or, on behalf of, Not synonymous Object and purpose of Art. 15(2)(b) & (c) WS entitled to tax remuneration if it reduces taxable profit Paid by actually paying salaries as well as bearing the cost thereof Act of paying alone insufficient; implies employer also bears the cost Paid on behalf of employer ultimately bearing the cost of salaries paid by an affiliate / intermediary CA Ganesh Rajgopalan 28

29 Secondment An Example Formal Employer RS Recharge of salary cost WS User-Affiliate A A CA Ganesh Rajgopalan 29

30 Secondment Whether WS considers user an employer? Domestic law of WS Control test, integration test, economic reality test Who exercises control, who owns the tools, who has the chance to profit and who bears the risk of loss Lack of integration into affiliate s business due to short stay (less than 183 days) not decisive Dual employer situation an employer Two distinct functions & two reporting But, two parts remuneration, too! CA Ganesh Rajgopalan 30

31 Secondment Some criteria to decide whether he is the employee of the affiliate- Whether he is required to obey orders of affiliate; Whether he performs activities under direction & control of the management or the board of that affiliate; whether such management or board issued job description for the period of secondment; whether he reports to such management or board; whether affiliate has the right to terminate the secondment; which of the group entities has the right to fire the employee while he is on secondment CA Ganesh Rajgopalan 31

32 International hiring-out of labour The Cypriot Route Netherlands Cyprus Non-treaty states A Labour co. Employer Notional tax in Cyprus on salaries Double tax relief by way of exemption Dutch internal law Dutch Supreme Court denied employer status to Cypriot intermediary; held the arrangement as sham. CA Ganesh Rajgopalan 32

33 Para 2(c) the remuneration is not borne by a permanent establishment which the employer has in the other State. Borne by Connection with Art. 7 Employee s activities attributable to PE That part of activities attributable to PE covered reasonable apportionment CA Ganesh Rajgopalan 33

34 PE exposure If user-affiliate not the employer Fixed place PE Business of parent is carried on through the services of employee Fixed place of business at parent s disposal from which employee functions Agency PE Employee habitually exercises authority to conclude contracts Service PE Parent furnishes services to others through the employee CA Ganesh Rajgopalan 34

35 Para 3 Notwithstanding the preceding provisions of this Article, remuneration derived in respect of an employment exercised aboard a ship or aircraft operated in international traffic, or aboard a boat engaged in inland waterways transport, may be taxed in the Contracting State in which the place of effective management of the enterprise is situated. In line with Art. 8 of MC In Indian treaties Germany, Denmark CA Ganesh Rajgopalan 35

36 Tax computation Domestic law will be applied for Salary computation Esops, bonus, social security, tax perquisites Perquisites valuation Rent-free accomodation, motor car, club facilities TDS obligations CA Ganesh Rajgopalan 36

37 Thank you! CA Ganesh Rajgopalan 37