AUSTRALIA: Country to stop taxing offshore income of Indian firms.

As published on financialexpress.com, Monday 4 April, 2022.

IT majors, including TCS, Infosys and Wipro, stand to gain in a big way from a trade deal that India and Australia signed on Saturday, as Canberra has agreed to amend its domestic laws to stop taxing the offshore income of Indian firms providing technical services there.

A top source told FE that the move will correct an anomaly in the 1991 Double Taxation Avoidance Treaty (DTAA) between the two countries and enable Indian IT and ITeS players to scale up their operations in Australia. The anomaly is expected to have cost Indian IT companies about $1.3 billion since 2012, according to an industry estimate.

Canberra’s decision to tweak the law is a part of the India Australia Economic Co-operation and Trade Agreement (ECTA). Both commerce and industry minister Piyush Goyal and his Australian counterpart Dan Tehan have formally endorsed this decision through official letters, said the source. It will come into effect when the ECTA enters into force, after the agreement is ratified by the Australian Parliament, which is expected to take 3-4 months.

Using the provisions of the India-Australia DTAA, Canberra has been taxing income generated from offshore IT services rendered from India as royalty, even when the same income is being taxed in India as well.

Usually, most projects that IT companies take up involve some on-site work and some from India. Interestingly, Australia’s own domestic laws don’t have any provision to tax such offshore income. However, the DTAA treaty in 1991 had been worded in such a manner that the Federal Court of Australia, in a verdict against Tech Mahindra in October 2018, ruled that the payments received by an Indian company from its clients in Australia will be taxed in Australia as ‘royalty’, even though provisions to tax such income don’t exist in local laws there.

The DTAA is typically a tax treaty between two or more nations to avoid taxing the same income twice. It kicks in when a tax-payer resides in one country and earns income in another country if those two countries have got into such a treaty. But ironically, India’s DTAA with Australia inadvertently went against this basic tenet of such treaties. Instead of acting as a shield for the taxpayer, the DTAA has proved to be a sword by the taxman.

Hailing the proposed change, a spokesperson with IT industry body Nasscom said, “Nasscom will continue to work with both the governments and is confident that amendments in the Australian domestic law will be made soon in the upcoming Parliament session to seal this intent.”

Since 2000, key IT firms such as Infosys, TCS, Wipro, Tech Mahindra Satyam and HCL have stepped up their operations in Australia but this taxation continues to be an issue for them. So, once it’s resolved, these firms can significantly ramp up their business there, according to a senior IT industry executive.

The Indian IT services industry grew 2.7% on year in FY21 to $99 billion, according to Nasscom. The broader industry, including e-commerce, business process management and global back offices, grew 2.3% to $194 billion in FY21. According to the RBI data, Australia and New Zealand together accounted for 3.1%, or $4.2 billion, of India’s software services exports in FY21.

Rohinton Sidhwa, partner at Deloitte India, said: “If the negotiations were to yield that the Australian government is conceding its right to tax such income, it would be a big victory for the Indian government.”

The Australian Federal Court’s ruling that a right to tax income under a DTAA could be exercised even if the income was not taxable under Australian domestic tax law, in effect, runs counter to the principles of why treaties are signed in the first place, Sidhwa said.

“Treaties are generally not meant to create a charge that does not primarily exist. An amendment would be required to the Australian domestic law to nullify the Federal court’s judgement,” he said.

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