India Tax Update
Embassy of the Republic of Korea 16 December 2008
1. Provident Fund Scheme for “International Workers”
2. “EPC” Contracts
3. Transfer Pricing (“TP”)
Agenda
Korean Business Services Team
► Partner of Infrastructure, Real Estate and Government Services
► Satish has worked for Ernst &
Young India over the last 13 years, and has gained wide experience in various corporate tax and
regulatory matters relating to multinational clients operating in India with a special emphasis on infrastructure and real estate
Place image here.
Refer to guidelines
Satish Aggarwal Partner
Mobile: 98104 95991
Email: [email protected]
신 재 완
Senior Manager
► Senior Manager of Korean Business Services
► Over the last 6 years, Joe has gained wide experience in various brokerages and investment
transactions in real estate sector including cross-border investment.
► INPACT G.C.F
Mobile: 99718 17037 Email:[email protected]
1. Provident Fund Scheme
for “International Workers”
Overview
Government of India, Ministry of Labour has introduced new regulations
►
A notification has been issued modifying the provisions of the existing Employees’ Provident Fund Scheme (‘EPFS’) and Employees’ Pension Scheme (‘EPS’) to include ‘International Workers’ as a new class of participants in the schemes.
►
The amendment is effective October 1, 2008 and International Workers are mandated to join the schemes with effect from
November 1, 2008 in respect of salary starting from November 2008.
►
Option for opting out not available even for employees having salary
more than INR 6,500 per month
Overview
►
International Workers has been defined to include:
►
Non Indian employees, not holding an Indian passport, and working for an establishment in India to which EPFS applies;
►
Indian employees having worked or going to work in a foreign country with which India has entered into a Social Security agreement.
►
International Workers employed to do any work, in or in relation to any establishment to which the schemes apply have to mandatorily participate in the schemes unless they fall under the category of
“excluded employee”
Overview
The category of “Excluded Employee”
►
International Workers contributing to the social security of their country of origin, with whom India has entered into a Social Security Agreement (SSA) and enjoying the status of detached worker are considered as “excluded employees”.
►
However, India has Social Security Agreement only with Belgium,
Germany and France as of now - Expatriates from other countries
are affected
Coverage
► Covered Establishment
► An establishment employing 20 or more persons engaged in specified industry or notified by the Central Government from time to time.
► Any establishment employing even less than 20 persons can opt to be covered voluntarily under the Act.
► Once an establishment is covered the employees would continue to be covered even if the number of employees fall below 20
►
The amendments shall not be applicable to any establishment
(whether it is a Liaison Office, Branch Office or a Project Office of a Foreign Company)
which employees less than 20 persons.
► For counting the number of employees, both International Worker and Local employees will be counted
Contribution to EPFS, EPS and EDLI
1. Employees’ Provident Fund Scheme (‘EPFS’) 2. Employees’ Pension Scheme (‘EPS’)
3. Employee’s Deposit linked Insurance Scheme (‘EDLI’)
► The employer is required to contribute 24% of monthly pay and may then deduct 12%
of monthly pay from the employee’s monthly pay
► Out of the employer’s contribution, 8.33% of monthly pay or Rs. 541 (8.33% of Rs.
6,500, roughly USD 145 per annum) whichever is less, is allocated to the Employee Pension Scheme (EPS)
► Employer has to additionally contribute 0.5% of monthly pay or Rs. 65 (0.5% of Rs.
6,500, roughly USD 15 per annum) whichever is lower, to the Employee’s Deposit
Withdrawal of Funds on Repatriation
A member can withdraw from the “Employee’s Provident Fund” (EPF) under the following circumstances:
► On retirement from service on reaching the age of superannuation,
► On account of permanent and total incapacitation,
► On migration from India for permanent settlement abroad,
► On termination of services in case of mass or individual retrenchment,
► On termination of service under a Voluntary Retirement Scheme (VRS),
► Transfer of employment to an establishment which is not covered under the scheme.
Definition of ‘Monthly Pay/ Salary’
►
Salary for the purpose of computing contribution includes:
► Basic Wage
► Dearness allowance (including the cash value of any food concession)
► Retaining allowance
►
“Basic Wage” means all emoluments paid or payable in cash while on duty or on leave / holiday but does not include the following:-
► House rent allowance, overtime allowance, performance bonus, incentives, commission or any other similar allowance payable in respect of employment
► Presents made by the employer
►
The followings are needed to check:
Case Study
► Mr. Kim, a Korean national, is seconded to work in India for a period of 2 years.
He is paid the following during the period of assignment – Outside India
► Basic Salary paid in Korea : US$ 2,500 (equivalent to INR 125,000 per month approximately)
In India
► Basic Salary paid in India : INR 75,000 per month
► Mr. Kim will be liable to become a member of PF from November 1, 2008.
► Amount of Contributions:
► Employer’s Contribution : 12% of Basic Salary paid in Korea and India i.e.
INR 24,000 [= (125,000 + 75,000)*12%]
► Employee’s Contribution : 12% of Basic Salary paid in Korea and India i.e.
2. “EPC” Contracts
Typical EPC contract
Design & Engineering Commissioning
• Preparation of designs, plans,
& technical specifications of equipments
• Preparation of performance standards maintenance and training manuals
• Designing and planning layout
• Documenting delivery schedules of equipments, instructions for erection, etc
• Manufacture of equipment
• Procurement from third parties
• Clearing of goods at ports
• Delivery to the site
• Provision of spare parts
• Civil works
Construction
• Erection,
commissioning, testing and completion of the facility
• Correction of defects Manufacture,
Procurement and Supply
EPC Contracts – Overview
Taxation in EPC contracts
- Offshore and on-site income
►
Can be claimed exempt in India, subject to
satisfaction of certain conditions;
►
Situs of sale and conduct of parties – determining
factor;
► Taxable in India on net income basis at the corporate tax rate applicable to a foreign company ie.
42.23% (including surcharge)
currently
► Can be claimed as Fee for Technical Services taxable at a reduced Tax
Treaty rate;
► Taxable as
business income - on having nexus with place of business of the
Onshore supply &
Onshore services Offshore services
Offshore supply
Offshore supplies Offshore
supplies
Offshore services Offshore services
Direct/
Sub-contract Direct/
Sub-contract
EPC Contractor
EPC Contractor
Project Owner Project Owner
Onshore
Onshore Onshore Onshore
Indian Scope of Work
Total Scope of Work Outside India
India Turnkey Responsibility
• Engineering Services (designs, drawings,
technical specifications etc) – Equipment Supply
– Facilities
• Preparation of performance standards and maintenance manuals
• Training
• Planning, etc
• Civil Construction – Erection,
Commissioning, Testing and Completion
• Project Management Direct /
Sub-contract Direct / Sub-contract
Direct / Sub-contract
Direct / Sub-contract
• Equipment
• Machinery
EPC Contracts – Key Constituents
Taxation in EPC contracts
- Taxability as Association of Persons (“AOP”)
► AOP’ not defined under the domestic law of India
► Meaning to be enunciated from judicial precedents in India
► Implications if consortium of companies are regarded as an AOP in India
► High possibility of AOP becoming ‘Tax Resident’ of India
► when control and management of affairs of the consortium does not wholly lie outside India
► Worldwide income of the consortium to get taxed in India
► Possibility of tax treaty benefits getting jeopardized
► Appropriate structuring of contracts required to mitigate risk of constituting a resident AOP
Where consortium is regarded as resident AOP, income from
3. Transfer Pricing (“TP”)
Transfer Pricing (“TP”)
Current Trends Current Trends
►►
TP legislation, introduced with effect from April 1, 2001 TP legislation, introduced with effect from April 1, 2001
►►
Requires international transactions between two associated Requires international transactions between two associated enterprises to be at arm
enterprises to be at arm’ ’s length s length
►►
Recently, a Recently, a ggressive approach of Revenue authorities on TP ggressive approach of Revenue authorities on TP issues
issues
►►
Audits intensive in IT, Pharmaceuticals, Financial services, Audits intensive in IT, Pharmaceuticals, Financial services, Automobiles and Chemicals Sector
Automobiles and Chemicals Sector
►►
Absence of Absence of Advance Pricing Agreements Advance Pricing Agreements (APA) (APA) / Transfer Pricing / Transfer Pricing Rulings
Rulings
Asia-Pacific Trends:
Transfer Pricing Audit Experiences
65%
42%
24%
0% 6%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Australia India Japan Korea
45%
New Zealand
81% 80%
67%
52%
45%
55%
Percentage of respondents who believe it is ‘highly likely’ or ‘fairly likely’ that they will be audited in the next two years
60%
China*
Risk mitigation strategies
►
Robust TP Documentation
► Maintain data on a transaction by transaction basis
►
Identify potential risks areas
► Review of transaction flows and structures
►
Document commercial substance of intangibles owning entity,
► support contribution and decision making function of legal owner of intangibles
►
Public documents to be in sync with tax strategy
► Reflect actual activities undertaken in the value chain
► Avoid unnecessary glorification
►
Maintain additional documents
Assessing Officer
Commissioner (Appeals)
Appellate Tribunal
High Court
Supreme Court
• Order passed within 33 months from end of financial year
• No specific time limit for Appeal hearings
• Generally, order passed within 1-2 years from filing of appeal
• Disputed tax would need to be immediately paid, unless
• Final fact-finding Authority
• No specific time limit
• Generally, order passed within 2-4 years from filing of appeal
• Revenue can also go on appeal if
Commissioner decides in favor
• Only questions of law can be referred to High Court and Supreme Court
• Cases generally take 10 years at each level
