WebJournal on International Taxation
in Sweden, WITS, no 2/2014.
December 2014
In WITS no 1/2014 I reported on various
tax problems that Swedish companies have been running into when
providing (technical) services to customers in Brazil, China and
India.
Concerning India I wrote that Sweden's
treaty with this country under Article 12 subparagraph 2 allows the
services to be taxed also in the contracting state where they arise
but that the tax shall be limited to 10 percent of the gross payment.
Sweden may also tax but under the elimination of double taxation
article, no 24, but must provide a credit for the 10 percent Indian
tax that has been levied.
The meaning of what is meant by a
service fee is taken care of in Article 12 subparagraph 3.b. Of the
treaty which reads as follows: ” The
term 'fees for technical services' means payment of any kind in
consideration for the rendering of any managerial, technical or
consultancy services including the provision of services by technical
or other personnel...”
Moreover, which I, however, did not
mention, was that Article 12 subparagraph 5 also has a source rule determining
where a technical service fee is deemed to arise. The answer hereto
is that a service fee has its source or is deemed to arise in the
state where the payor of the fee is resident, Article 12 subparagraph
5. Consequently, when ever an Indian company makes a payment to Sweden for services rendered India may claim its 10 percent tax that income.
But,
as I also wrote, this is not the whole story. In this specific case,
one must also observe a
special and extremely unusual provision
tucked away in the special protocol of the Sweden-India treaty, a so
called ”most-favoured-nation” clause applying to both dividends,
interest payments as well as to royalties and technical service fees.
It reads as follows:
”If
India according to any treaty, agreement or protocol between India
and a third State, which is a member of the OECD, reduces its source
taxation under articles 10 (dividends), 11 (interest) or 12 (royalty
and technical services fees) on dividends, interest or royalties and
technical services fees to a lower level or limits its field of
application of these incomes, the same level of tax or field of
application in that treaty, agreement or protocol shall apply also
according to this treaty.”
And quoting again my earlier report, ”India has indeed, since it
made its treaty with Sweden (1997), concluded a treaty (with Finland
amended in 2010) under which India, as source state, reduces its tax
on technical services fees to nil. This, consequently, shall then
apply also visavi Sweden according to our most-favoured-nation
clause. India must correct this situation by reimbursing the Swedish
companies involved and the 10 percent credit that has been granted by
Sweden should be repaid to the Swedish treasury.”
After
having been brought to attention by a Finnish reader of this blog for
which I am most grateful, it turns out after further analysis of the
Finland-India treaty that my information about the tax rate on
service fees in that treaty is incorrect. (And my Finnish friend also
reports that Nokia is entangled in very big tax problems concerning
payments of service fees received from India.) Thus, the
Finland-India treaty also
provides
for a ten percent source tax to be charged on services. Our Swedish
most favoured nation-clause can therefore not be invoked visavi India on account
of this rule.
But
on the other hand and more importantly regarding the Finland –
India treaty is that the
scope for applying this source tax has been limited
when determining where a service fee arises.
Thus, the relevant part of Article 12 subparagraph 5 of the
Finland-India treaty reads as follows:
...fees
for technical services shall be deemed to arise in a Contracting
State when the payer is that State itself, a political sub-division,
a local authority, or a resident of that State. Where, however,the
fees for technical services relate to services performed within a
Contracting State, then such ... fees for technical services shall be
deemed to arise in the State in which ... the services are performed.
Consequently,
and comparing the treaties concluded by India, on the one hand with
Sweden and on the other hand with Finland, service fees with regard
to Sweden are considered to arise only in the state in
which the payor is resident. With
regard, however, to the treaty concluded by India with Finland, and
presuming reasonably that the payment for the services can be
considered to arise in one state only,
the second sentence of the above paragraph requires an additional condition
to be fullfilled for triggering the source tax.And that is that the
service has
been performed
in the state from where the payment is made. Consequently, for
example, a payment made by an Indian company to a Finnish company for
technical services performed not in India but in Finland is considered to arise in Finland which thus
prevents India from levying tax on the payment. Only if the Finnish
company performs the services in
India may India tax.
Interpreting
the text as giving India the right to tax by applying the nexus rule
of residence of the payor does not make sense as it would provide
that the payment – a thought which has been dismissed above - has a
source in both states. And suggesting that Finland would be
completely deprived of its taxing right would indeed be quite absurd
as Finland as the state of residence of the tax payor, the Finnish
company, always preserves the right to tax under subparagraph 1 of
Article 12 (and the obligation to provide a credit for the Indian
tax.) For the purpose in this example of determining Finlands right
to tax, the question where the income arises is thus irrelevant.
The
nexus rule of performance must thus, as already mentioned, be
interpreted as excluding the performance state from taxing the
payment for the service to the extent that the services have been
performed in the state of residence of the tax payor, Finland in this
case.
This,
in consequence, gives rise to the practical
problem of establishing where the services have been performed. In
many cases one would imagine, especially in the digital service
providing 'industry', that such services will have been performed only in the
residence state of the tax payer. In other cases the services may be
performed wholly in the source state or sometimes of course in both
states. In this latter case it will be up to the service providing
company to determine and prove to the tax authorities how the income
shall been apportioned for tax purposes.
In
conclusion therefor, Swedish companies that have been subjected to
tax in India for services performed in Sweden should claim repayment
of that tax under our most favoured nation clause with reference to
India's tax treaty with Finland. It is suggested that one should do
so through the Swedish competent authority.
India's
tax treaty with Portugal
With
regard again to our most favoured nation-clause with India it is also
of interest to study India's treaties with other OECD member states. When doing so one will find that India's treaty with Portugal also is of interest with regard to our most-favoured-nation clause with India and its application to service fees.
In
article 12 subparagraphs 4 and 5 of the India - Portugal treaty one
will thus find the following text determining the meaning of
the term technical (or included) services
which focuses not on the source of the payment but on the character of
the service:
4. For
the purposes of this Article, fees for included services means
payments of any kind, other than those mentioned in Articles 14 and
15 of this Convention, to any person in consideration of the
rendering of any technical or consultancy services (including through
the provisions of services of technical or other personnel) if such
services :
(a) are
ancillary and subsidiary to the application or enjoyment of the
right, property or information for which a payment described in
paragraph 3 is received, or
(b) make
available technical knowledge, experience, skill, know-how or
processes or consist of the development and transfer of a technical
plan or technical design which enables the person acquiring the
services to apply the technology contained therein.
5. Notwithstanding
paragraph 4, fees for included services does not include payments :
(a) for
services that are ancillary and subsidiary, as well as inextricably
and essentially linked, to the sale of property;
(b) for
services that are ancillary and subsidiary to the rental of ships,
aircraft, containers or other equipment used in connection with the
operation of ships or aircraft in international craft;
(c) for
teaching in or by educational institutions;
(d) for
services for the personal use of the individual or individuals making
the payment;
(e) to
an employee of the person making the payments or to any individual or
firm of individuals (other than a company) for professional services
as defined in Article 14;
(f) for
services rendered in connection with an installation or structure
used for the exploration or exploitation of natural resources
referred to in paragraph 2(g) of Article 5;
(g) for
services referred to in paragraph 3 of Article 5.
Of
greatest interest is perhaps subparagraph 5 itemizing services which
are not covered by article 12 most importantly (under (a))
services performed in the source state which are linked to the sale
of property.
Also
in these cases Sweden can invoke its most favoured nation-clause with
India. Or in other words, if, for instance, a Swedish company has
performed services in India for an Indian customer and if the
services are linked to the sale of property to that same customer,
then the services may not be taxed in India.
As
I mentioned in my earlier article most favoured nation clauses are
difficult for ordinary tax payers to keep track of. (And I haven't
gone through all of the technical services provisions of India's
treaties made after the treaty with Sweden!) It would therefore be
appropriate for the competent authority of either Sweden or India to
make information available in these matters.
To
be noted is that the (10 percent) tax on services to be charged by the source
state never applies when Sweden is the source state. This is because such taxation does
not exist under Swedish national tax law. Thus, when an Indian
company supplies services to Swedish customers, also when they are
performed in Sweden, there will be no Swedish tax on the income
(unless the Indian company has a permanennt establishment in Sweden).
But this is due to Sweden's own and selfimposed principle regarding
national law visavi treaty law that tax cannot be imposed under a
treaty where there is no tax under Swedish law. So the treaty as far
as tax on services is concerned is not reciprocal.
But,
as I was indeed born in India, a country which is therefore one of my
personal most favoured nations, I don't mind this little irregularity
in our treaty!
peter.sundgren@gmail.com
