By Jai Patel and Peter Madden
Australia and India signed an Economic Co-operation and Trade Agreement (Agreement) on 2 April 2022, in which Australia has agreed to stop the taxation of offshore income of Indian firms providing technical services to Australia.
This development is significant because Indian information technology service companies have received unfavourable decisions from litigation in Australia regarding the taxation of services provided to Australian clients by their employees based in India.
The Indian companies argued that such services should not be taxable in Australia as those services were not sourced in Australia and were not royalties under the domestic tax law of Australia.
In Satyam Computer Services Limited v Commissioner of Taxation [2018] FCAFC 172 (now Tech Mahindra Limited) the Full Federal Court of Australia held that payments received by an Indian company from its Australian resident clients were deemed to have had an Australian source by application of Article 23 (source) because they were considered royalty in accordance with Article 12(3)(g) (royalty) of the Australia – India Tax Treaty.
The Economic Co-operation and Trade Agreement details
In connection with the signing of this Agreement, the following understanding between the Federal Government and the Government of India was documented by way of a side letter:
- The Government of Australia has agreed to amend Australian domestic taxation law to stop the taxation of offshore income of Indian firms providing technical services to Australia; and
- Australia will implement the amendments to its domestic taxation legislation in a similar time period as the Agreement.
The proposed amendments will come into effect on the date the Agreement enters into force and shall constitute an integral part of the Agreement.
Observations
The recent decisions of the Australian courts in Satyam and Tech Mahindra have adversely impacted several Indian engineering, software and other Indian companies providing technical services from India to their Australian clients.
The Agreement should provide welcome relief from Australian tax for those Indian companies providing services to Australian clients from India.
The Agreement seems to propose a prospective change in the domestic law of Australia and which would help Indian companies providing services to Australian clients going forward.
There will be no change of the taxation in India for Australian companies providing similar services from Australia to clients in India.
Contributing Authors: Peter Madden, Director, KPMG Australia and Jai Patel, Head of India Business Practice, KPMG Australia
Disclaimer: This article was first published by KPMG Tax Now. The opinions expressed within this article are the personal opinions of the author. The Australia Today is not responsible for the accuracy, completeness, suitability, or validity of any information in this article. All information is provided on an as-is basis. The information, facts, or opinions appearing in the article do not reflect the views of The Australia Today and The Australia Today News does not assume any responsibility or liability for the same.