The U.N. model tax convention subcommittee was hearing a case as to whether payments for software from a country to its parent could be taxed at source. Many countries including India want to expand the definition of royalty to include software payments.
The Indian tax department has been pushing for this for a while now but multinationals are protected by tax treaties. Under India’s tax treaties with other countries, software payments are not part of the royalty.
Tax experts say that the recommendations of the UN Committee could give credence to the position taken by India that software license payments should be taxed as royalty.
“This is a major litigation issue currently pending before the Supreme Court. The UN recommendation is important because most of India’s treaties are based on the UN Model treaty. There is already legislative precedence on this because the domestic law as well as treaties with some countries like Russia and Malaysia tax software license payments as royalties,” said Rajesh H Gandhi, partner, Deloitte India.
The UN model tax convention subcommittee has not opined on the issue as yet. Tax experts however say that the UN’s position could impact on several tax treaties that would be negotiated in the coming years. Many countries—mainly developed countries including the US—that were opposing the change said that the UN must coordinate with OECD (Organisation for Economic Co-operation and Development) as it too was dealing with digital taxation.
ET on Tuesday reported that Google, Facebook, Amazon, LinkedIn and Netflix could face larger domestic tax liability after OECD postponed a common tax framework for global economies, a move that will allow countries like India to go ahead with their own plans to tax the digital giants.
Many countries including India and France have been pushing for taxing digital giants domestically. The US has already threatened reciprocal treatment against any economy that attempts to tax the digital giants. The US in June has already launched an investigation on how some of the countries including India are taxing digital companies.
This also comes at a time when many companies are struggling to figure out whether the software purchases could be taxed in India. This is mainly due to the newly introduced 2% equalisation levy.
The government had recently expanded the scope of the equalisation levy – imposed on cross border digital transactions in 2016 in a bid to tax internet giants’ digital advertising revenues from India to include any purchase by an Indian or India-based entity through an overseas ecommerce platform with effect from April 1. Now, many firms fear that all kinds of transactions including hotel bookings, software purchase and even buying certain components from overseas could come under the gamut of equalisation due to the way the law is worded, tax experts said.