tax notes international - Tuck School of Business - Dartmouth College

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has operations in Germany and subsidiaries across the world, including two in India. During the year under consideration, the German arm of Epcos AG supplied services such as marketing, sales support, and technology support to the Indian subsidiaries in return for royalty payments. In its Indian tax return, the German arm of Epcos AG classified the payments it received from the Indian subsidiaries as royalties and fees for technical services, which were subject to Indian income tax at a rate of 10 percent under article 12 of the Germany-India income tax treaty. The Indian tax officer requested details about the services supplied to the Indian subsidiaries by the assessee, and the company submitted that sales are handled by Epcos AG’s regional sales offices, whereas marketing efforts are centralized at the German headquarters in Munich. The company said it is organized by product divisions, and each division has a central marketing team that works for all the manufacturing subsidiaries in that division. Epcos AG charges an arm’s-length fee for the services that the central marketing team renders for the benefit of the various manufacturing subsidiaries. The transfer pricing officer (TPO) agreed that the services provided by the assessee were supplied to the Indian subsidiaries on an arm’s-length basis, as required by the transfer pricing provisions of the ITA. The tax officer, however, thought that the assessee had a PE in India in the form of the two subsidiaries because the assessee was conducting its business in India through those subsidiaries and more specifically, through the employees of the subsidiaries. He classified the payments at issue as business profits under article 7 of the Germany-India tax treaty and assessed tax on a gross basis at the 20 percent rate provided under the ITA. (For the year in question, the ITA did not allow a deduction for any expenses related to royalties and fees for technical services earned by a foreign company.) The commissioner of income tax (appeals) subsequently overturned the assessment, holding that the services supplied by Epcos AG were routine in nature and were provided to enable the Indian subsidiaries to carry on their own business activities, and not the business of the assessee. The Revenue Department then appealed to the tribunal. The Tribunal’s Decision In the tribunal’s own words, the commissioner of income tax (appeals) properly rejected the tax officer’s ‘‘overzealous approach.’’ The tribunal held that a tax treaty generally provides for an alternate tax regime and not an exemption regime. Therefore, the burden is first on the Revenue Department to show that the assessee has taxable income under the treaty, and then the burden is on the assessee to show that its income is exempt under the treaty. Unless a tax jurisdiction has a right to tax an income, it is irrelevant whether, under the domestic tax legislation of that tax jurisdiction, the income in question is taxable. In a situation in which India has no right to tax a particular income in the hands of the nonresident covered by a tax treaty, the provisions of ITA do not come into play at all. The tribunal confirmed that when an economic activity is carried out in a fixed place of business available to a foreign enterprise, that place will be a PE of the foreign enterprise regardless of whether the activities at issue are core activities or peripheral activities. However, if the PE carries on an activity that does not serve the overall purpose of the foreign enterprise or does not contribute to the profits of the foreign enterprise, the existence of such a PE is wholly academic and does not have any tax implications in the source jurisdiction (in this case, India). While Epcos AG’s business is to supply certain types of services to its Indian subsidiaries, the business of the Indian subsidiaries is to manufacture and sell their own products, the tribunal said. The fact that the employees of the Indian subsidiaries were also engaged in marketing and information technology support activities does not mean that those employees were doing the business of the assessee, it said. Further, the TPO had agreed that the payments made by the Indian subsidiaries to Epcos AG were at arm’s length, and the assessee had not reimbursed the subsidiaries for any costs incurred in connection with their employees in India, and as such, there could not be any payment for, or in connection with, the services rendered by those employees. The tribunal therefore held that the Indian subsidiaries did not constitute a PE of Epcos AG in India, and that the assesssee was not subject to taxation in India on royalties or technical service fees paid by the Indian subsidiaries. ♦ Shrikant S. Kamath, tax consultant, Hong Kong Indonesia Exit Tax Rules Revised INDONESIA Indonesia’s Directorate General of Taxation on December 21, 2008, issued Regulation PER-53/PJ/2008 (later amended by PER-1/PJ/2009 of January 9, 2009), regarding the procedures for payment, exemption, and administration of the fiscal (exit) tax for resident individuals traveling overseas. TAX NOTES INTERNATIONAL FEBRUARY 2, 2009 • 397 (C) Tax Analysts 2009. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
INDONESIA As of January 1 and continuing through December 31, 2010, the new rates for the fiscal tax are IDR 2.5 million for travel by air and IDR 1 million for travel by sea. Indonesian tax residents who are 21 years and older and who have not registered and received a tax identification number (NPWP) are required to pay the fiscal tax, which is creditable against the individual’s income tax payable at the end of the year (once the taxpayer has obtained an NPWP). The new regulation does not address the mechanism for crediting fiscal tax against an employer’s income tax payable at year-end. In contrast, taxpayers who have registered and received an NPWP are no longer required to pay the fiscal tax. The taxpayer’s spouse and dependent family members also will be exempt from the tax, provided that they are listed on the family card (Kartu Keluarga) of the NPWP holder. For families of foreign citizens with an NPWP, the taxpayer must attach a photocopy of a Certificate of Expatriate’s Family Structure or other official document equivalent to the certificate, indicating the family relationship status. Exemptions from the fiscal tax are granted to foreign taxpayers who do not reside in Indonesia or who stay in Indonesia for no more than 183 days in a 12month period. Diplomats and representatives of international organizations and their families, Indonesian citizens permanently residing abroad, hajj pilgrims, individuals crossing land borders, Indonesian students studying abroad, Indonesian workers with migrant worker cards, and individual tax residents with annual income below the nontaxable income threshold also are exempt from the fiscal tax. ♦ Firdaus Asikin and Connie Chu, Deloitte Touche Tohmatsu, Jakarta. Copyright © 2009 Deloitte Touche Tohmatsu. All rights reserved. Regulation Amends CFC Rules, Clarifies Export Duty Indonesia’s Ministry of Finance recently issued Regulation 256/PMK.03/2008 (dated December 31, 2008) revising the previous controlled foreign corporation rules under Ministry of Finance Decree 650/ KMK.04/1994. The new rules, which entered into force on January 1, no longer contain blacklisted countries; thus, Indonesia no longer distinguishes between the jurisdictions of foreign subsidiaries. Any undistributed profits of unlisted companies with Indonesian control of 50 percent or more that are incorporated in foreign countries will be deemed to be distributed if they are not distributed within four months of the most recent submission of an annual tax return in that foreign country. If there is no obligation to file an annual tax return in that foreign country, the undistributed profits will be deemed distributed if they are not distributed within seven months after the tax year ends. Distributed dividends received from foreign subsidiaries are taxed in the normal manner. The ordinary foreign tax credit with a per-country limitation does not extend to the underlying corporate tax. Like the old CFC regulations, the new rules apply only to foreign subsidiaries that are directly held by Indonesian tax residents and do not have grandfathering provisions that extend to foreign subsidiaries indirectly owned by Indonesian tax residents through their direct foreign subsidiaries acting as mixer companies. It is unclear whether the CFC rules are still applicable if the Indonesian shareholder does not have rights to receive dividends under the relevant laws in the jurisdiction of the foreign subsidiary. Export Duty The Ministry of Finance also issued Regulation 214/PMK.04/2008 (dated December 16, 2008), which clarifies Export Duty Regulation 214. Regulation 214, which entered into force on January 1, implemented Customs Law 17 of 2006 and articles 2(5), 14, and 18 of Regulation 55 of 2008 concerning the application of export duty. Generally, exported goods are subject to export duty, with the exception of: • goods owned by foreign missions or their officials who are posted in Indonesia, based on the principle of reciprocity; • goods that are owned and used by museums, zoos, and similar public places, as well as goods used for nature conservation; • goods used in scientific research and development; • goods that are used as samples and are not for commercial use; • belongings of individual passengers and carrier crew members traveling cross-border, and shipments up to a certain value of export duty or in specified amounts; • goods that were imported and reexported; and • exported goods that will later be imported. To be eligible for the export tax exemption, an exporter must file a written declaration with the head of the customs office reporting goods that fall into the first four categories mentioned above, and must file an application with the head of the customs office for the last two categories of goods mentioned above. The export duty rate is based on a percentage of the export value (ad valorum) or the specific amount of the export value. The rate is based on the export value stipulated on the date the export declaration is filed with the customs office. 398 • FEBRUARY 2, 2009 TAX NOTES INTERNATIONAL (C) Tax Analysts 2009. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
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