Warehouses of e-commerce companies based in countries such as Australia, Japan, Italy, Spain, the Netherlands, and Russia may not be exempted from paying the income tax in India once the multilateral instrument (MLI) to prevent base erosion and profit shifting (BEPS) comes into force.
BEPS refers to exploiting gaps and mismatches in tax rules to shift profits by multinational companies (MNCs) artificially to low-tax regimes.
The representatives of 68 countries on June 7 signed an agreement (MLI) in Paris to amend their tax treaties to bring them in alignment with measures to prevent BEPS.
However, there is still time for synchronising tax treaties with the multilateral instrument.
India has submitted only provisional lists of reservations.
Under most of the current bilateral treaties, “storage of goods and merchandise”, typically done through warehouses, is not considered MNCs’ permanent establishment, says a note by PwC on permanent establishments (PEs) in India.
This is irrespective of whether storage is the main activity or the core business of a company or its auxiliary activities.
If MNCs have PEs in India, global income attributed to that establishment is taxed in India.
But, under the multilateral instrument, PE exemptions would be given only if storage is not part of the core business of a company, whether on a standalone basis or a group basis.
However, storing goods and merchandise is a core business activity of an e-commerce business. As such, it would come under PE.
Hitesh Sawhney of PwC says one has to see whether storage of goods and merchandise is the main activity or core business of a company. In the case of an e-commerce company, storage is a core business, he says.
“Foreign e-commerce businesses with warehouses in India… may not be eligible to claim PE exclusion (once the MLI comes into force) since these activities may constitute the core business activity of such companies,” the note says.
However, the storage business is not the main activity for a brick and mortar company, says a retail store. For it, the main business is selling goods. So, warehouses of these kinds of MNCs may not come under PE and hence not taxable in India.
Similarly, the MLI will lead to a segmentation of thresholds for claiming PE exemption. There are thresholds in terms of the number of days. Currently, companies segregate their businesses contracts into, say, installation activities and supervisory work to claim PE exemption. Now, the company will have to combine a contract into one to see if the threshold is applicable or not once the MLI comes into force.
Here it should be noted that these provisions under the MLI would be enforceable only if other countries also agree to it. Other than India, Australia, Italy, and Russia have agreed to the storage activity part of the MLI, while the UK, and Italy have agreed to the fragmentation part. Japan, the Netherlands, Spain have agreed to both.
i) Earlier this year, over 70 ministers and high-level representatives participated in the signing ceremony of the multilateral convention to implement tax treaty-related measures (MLI) to prevent base erosion and profit shifting
ii) India along with other countries has submitted a list of provisional reservations
iii) MLI offers concrete solutions for governments to close gaps in existing international tax rules