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July 31, 2007
Taxation of
outsourcing activity - Morgan Stanley ruling analyzed
Further to our hotline “Supreme
Court rules on permanent establishment in the outsourcing
industry” dated July 9, 2007,
please click here to read our analysis (published in the
Worldwide Tax Daily: 2007 WTD 142-5) of the judgment in the case
of DIT (International Taxation), Mumbai v. Morgan Stanley and
Co. Inc. In its ruling the Supreme Court held that that the
outsourcing of services such as back-office operations to a
captive service provider will not per se create a permanent
establishment ("PE") of the parent in India. This was a key
consideration, as in case outsourcing were to cause a PE of the non-resident company in India, the
global profits of the non-resident company attributable to the
PE may have been taxable in India at the rate of approximately
42.23%(approximately). Further, the availability of tax credit for such tax paid
in the home jurisdiction may be uncertain, thus potentially
leading to double taxation and wiping out the economic advantage
of outsourcing to India. The Supreme Court has held that the
presence of employees for stewardship functions will not
constitute a service PE, whereas deputation of employees may
create a service PE. Therefore foreign companies need to be
careful in structuring inter-country assignments henceforth. It has also accepted the single-entity
approach for the attribution of profits to a PE by ruling that
the payment of an arm’s-length price by the nonresident to the
PE extinguishes any further attribution of profits to tax.
Hope you find the analysis
informative.
Best regards,
Taxteam
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