Australia-India: removal of double taxation of offshore technical services
The Australian Government has released draft legislation to remove the double taxation of technical services provided remotely by Indian businesses (offshore services) to customers in Australia.
In April 2022, the Australia-India Economic Cooperation and Trade Agreement (AIECTA) was signed to strengthen the relationship between the two countries, facilitate bilateral trade and create opportunities for workers and businesses. This included an agreement that Australia will amend its domestic tax laws to prevent the double taxation offshore income arising to Indian entities from the provision of technical services to Australia.
The Australian Government has now released draft legislation to implement this agreement reached between the two countries regarding double taxation for services provided remotely and not through a permanent establishment in Australia.
Background on Australia-India double taxation
This resolves the issue raised by the Indian government about the Double Taxation Avoidance Agreement between the two countries, with the Australia-India Double Tax Agreement (DTA) first implemented in 1991.
Australia has been taxing payments or credits for technical services that are provided remotely by non-resident Indian firms even if they are not provided through a permanent establishment in Australia, due to the operation of both the Royalty definition (Article 12(3)(g)) and the Source Article (Article 23) under DTA.
Explanation of the royalty definition
The definition of royalty in Article 12(3)(g) is broader than the definition as provided in Income Tax Assessment Act 1936 (ITAA 1936) and captures any services which make available:
- technical knowledge
- know-how; or
It also includes the development and transfer of a technical plan or design.
The example in the explanatory memorandum explains how payment for services is caught by the broader definition of royalty in Article 12(3)(g).
An Australian resident for tax purposes owns inventory control software for use in its own chain of retail outlets throughout Australia. It expands its sales operation by employing a team of travelling salespeople to travel around the countryside selling the company’s wares. It wants to modify its software to permit salesperson to access its central computers for information on what products are available in inventory and when they can be delivered. It hires a computer programming firm that is a resident of India for tax purposes to modify its software for this purpose.
The payments which the Australian resident pays are royalties within the meaning of Article 12(3)(g). The Indian firm performs a technical service for the Australian company remotely, and it transfers to the Australian company the technical plan (i.e. the computer program) which it has developed for that company.
What are the new changes?
The exposure draft legislation amends the International Tax Agreements Act 1953 to exclude such payments or credits from Australian tax. New section 11J of the International Tax Agreements Act 1953 will stop Australian taxation on such payments or credits if three criteria are satisfied:
- Payment must be a consideration for service covered by Article 12(3)(g) – services that make available technical knowledge, experience, skill, know-how or processes or consists of the development and transfer of a technical plan or design.
- Payments or credits for services are not royalties within the meaning of the ITAA 1936 – where payment or credit is also considered a royalty under the ITAA 1936, then the amendment will not apply, and the payment or credit will continue to be subject to Australian tax.
- Payments or credits must only be subject to Australian tax because of the operation of Article 12(3)(g) and Article 23. If the payment is covered or dealt with by another article of the DTA, it will continue to be subject to Australian tax. For example, technical services provided through a permanent establishment in Australia will continue to be taxed as business profits (Article 7).
Further, where there is a permanent establishment (PE) that is engaged in providing such services, then the exclusion shall not apply. It will be beneficial to render these services from such PE so as to avoid the gross basis of withholding tax instead of a net basis where expenses can be claimed against the payment or credit.
The amendments made by this schedule will commence on the later of:
- the day this Act receives Royal Assent; and
- the day the AI-ECTA enters into force for Australia.
This is a significant relief for Indian Information Technology firms after Tech Mahindra lost an appeal against the Commissioner in the Federal Court in 2018. These amendments are an important step in the cooperation between the two countries.
How can SW help
SW Australia and SW India work closely with our mutual clients to navigate the complex tax regimes in each country to ensure that your international tax obligations are complied with.
If you have any questions or would like further information about the double taxation between Australian India, please contact one of our tax experts based in Australia or India.
Senior Manager, Tax
Practice Leader, International Tax & Transfer Pricing