In today’s Finshots, we talk about MasterCard, Permanent Establishments and the Equalization levy. Don’t worry, it will all make sense when we are through with this article.
At least we hope it does.
Imagine you’re being asked to design a country’s tax law. You have to be fair, but firm. You’d think the best approach is to simply tax a business based on its country of origin — See where it’s incorporated and let the tax authorities there take care of matters. However what if you find out a company is incorporated elsewhere but seems to do a lot of business in your country. It’s only fair then that they pay their dues here. So you squeeze in an additional clause stating companies will have to pay taxes in your country so long as they have a fixed place of business through which they carry out the business of a foreign enterprise (in part or in full). You call it a Permanent Establishment and start taxing all this income.
What if the foreign country also taxes this income? After all, this company isn’t incorporated in your country. So it’s only safe to presume that they’ll be taxed once again in the country of origin. To get around this problem, most countries sign Double Taxation Avoidance Agreements (DTAAs) with foreign nations in a bid to prevent this mess altogether. Meaning once you tax them in your country, they won’t have to pay their dues elsewhere.
And this brings us to the Mastercard Saga.
The company did most of its business in India through a Singapore Based enterprise — MasterCard Asia Pacific. Mastercard Asia Pacific set up a liaison office in India. This office hired all the staff and harboured assets that could help the company conduct its business in our country. The Indian tax authorities deemed this office as a Permanent Establishment. Mastercard agreed. And they paid taxes on all income accruing out of business conducted in India.
Until in 2014, when they switched things up.
Mastercard restructured its Indian operations and transferred all the assets and staff from the liaison office to the subsidiary in Singapore. After the restructuring, the company stated they no longer had a Permanent Establishment in India. Their contention was simple. Even though they conducted business operations in India, the nature of this business post-restructuring was of a preparatory or an auxiliary character. Meaning the activities were of such insignificance that the authorities couldn’t possibly tax this income in India. Especially since the India-Singapore DTAA explicitly forbids it.
And so, Mastercard approached the Authority for Advance Rulings (AAR) — a quasi-judicial body to offer a binding ruling on the matter. The hope was that AAR would agree with their assessment. Unfortunately, they thought otherwise. Their argument was this — Granted you claim that you have no fixed place of business here anymore. But what about the Mastercard Interface Processors (MIPs) — those servers you’ve installed in every Indian Bank branch to route Mastercard related transactions to the global payment system. You use these systems to conduct taxable business in India. The banks pay your processing fee all thanks to the MIP. This income is royalty income that’s diverted to the Singapore entity. It has to be taxed in India.
Mastercard soon escalated the case to the Delhi High Court, and the matter is yet to be resolved. But wait!!!
That’s not where this story ends.
Mastercard also had to contend with another problem — the equalization levy.
Here’s the backdrop.
A retail store located in the UK can sell clothes directly to Indian customers without a single storefront or an actual salesperson. A gaming company located in Australia can have players all over the world congregate on its platform using remote servers. A streaming giant in the US can push its content digitally anywhere anytime, without a hitch.
So technically some businesses can render services in India without a physical presence and avoid paying taxes altogether. The government believed this was a travesty. So on 1st April 2020, they decreed that foreign entities will have to pay a 2% levy on all digital transactions generated through the sale of goods and services in India. This tax will kick in when the goods or services are supplied to an Indian resident, or when they are ordered through an Indian IP address. So if there are individuals and businesses out there ordering goods through say, an Amazon US or booking a hotel room through a foreign website, the customer is expected to pay a 2% tax on the finale sale price.
While you could contest that the foreign company isn’t actually bearing the burden here, it’s still bad for business since it’s affecting affordability.
Well, since the company offered services to Indian merchants, they fit the bill and there were liable to pay a 2% equalization levy on all revenues generated in India. Fortunately, the Delhi High Court quashed this assessment. After all, the tax authorities fought tooth and nail to determine Mastercard still had a permanent establishment in India. So whilst you're forcing them to pay taxes on all profits generated in India, you can’t possibly ask Mastercard to force their customers to pay an extra 2% (equalization levy) on the processing fee. That’s simply not tenable.
Which finally brings us to big headline last week — “Mastercard Asia Pacific Ltd will not need to pay an equalisation levy (EL) in India, the Delhi High Court has ruled, after the revenue department said that the company had a permanent establishment here and was already paying taxes.”
Make sense now?
Until next time…