presentation - mr. sanjay sanghvi - taxation of epc contracts -21 dec 2013
DESCRIPTION
EPC TAXATIONTRANSCRIPT
Engineering, Procurement & Construction
Contracts
Sanjay Sanghvi | 21 December 2013
Key Tax Considerations : Case Studies
Copyright © Khaitan & Co 2013 | 2
Contents
• An Introduction to EPC contracts
• Glimpse of relevant provisions of tax laws in the context of EPC contracts
• Case studies
• Some practical challenges
Copyright © Khaitan & Co 2013 | 3
Introduction
Typical elements of EPC contract
Complexities arise in relation to taxation of EPC contracts due to various skill sets
required and the different types of services rendered in such contracts.
Copyright © Khaitan & Co 2013 | 4
Glimpse of relevant provisions of tax laws in the
EPC context
Indian Income-tax Act
Section 2(31): Definition of ‘person’ including ‘association of persons’
Section 9: Income deemed to accrue/ arise in India
Transfer Pricing Regulations
General Anti Avoidance Rules (GAAR)
Section 195: Withholding tax obligations at the time of payment to Foreign EPC
Contractors
Double Taxation Avoidance Agreements/ Tax Treaties
Article 5: Permanent Establishment
Article 12: Royalties and Fees for Technical Services
Copyright © Khaitan & Co 2013 | 5
Case Study 1…
Facts
XYZ, a Japanese company, along with its Indian affiliate ABC, bids for and is awarded
an EPC contract in India for setting up a power plant for an Indian company
The contract consists of the following four elements:
Onshore services & supply agreement
Offshore services & supply agreement
The onshore elements of the contract would be executed by ABC, a Indian affiliate of
XYZ.
Certain employees of XYZ would come to India for the purpose of providing supervisory
services in relation to setting up of the plant. Their presence in India would be for 4
months spread across two financial years.
Onshore services & supply
Offshore services & supply
EPC Contract
Copyright © Khaitan & Co 2013 | 6
…Case Study 1 | Issues?
Taxability of XYZ’s income arising from offshore supply? Supply based on CIF / FOB?
Existence of ‘Permanent Establishment’ (“PE”) in India due to presence of employees -
How to compute PE threshold – Multiple counting of days can be considered?
Taxability of offshore services element – whether embedded in the supply of equipment
or to be separately taxed?
Can the values assigned to the onshore elements vis-à-vis the offshore elements be
questioned?
In case any portion of offshore service element is sub-contracted to third party in India,
is the presence of sub-contractor to be included for determining threshold of installation
PE?
Copyright © Khaitan & Co 2013 | 7
Case Study 2…
Facts
XYZ, a Japanese company, bids for and awarded an EPC contract in India.
Contract consists of the following elements:
Onshore services & supply agreement
Offshore services & supply agreement
Onshore elements of the contract assigned to ABC, a new company set up in India as a
subsidiary of XYZ.
Certain employees of XYZ are seconded to ABC to carry out the onshore services
elements.
Copyright © Khaitan & Co 2013 | 8
…Case Study 2 | Issues?
Can questions be raised regarding divisibility of contract awarded to XYZ thereby
having an impact on the taxability of amounts received by it (aggregation of income
from ‘onshore’ and ‘offshore’ elements in the hands of XYZ) ?
Whether assignment of contract from XYZ to ABC attracts Transfer Pricing Regulations
under Income-tax Act?
Whether secondment of employees could give rise to a PE of XYZ in India?
Copyright © Khaitan & Co 2013 | 9
Case Study 3…
Facts
A consortium of foreign companies bids for and awarded an EPC contract in India.
Contract consists of the following elements:
Onshore services & supply agreement
Offshore services & supply agreement
Lead partner of the consortium (i.e. XYZ) enters into an ‘Umbrella Agreement’ for the
performance of contract with the Indian Project owner.
Each consortium member has a defined role and would incur expenses for his part of
the contract.
Copyright © Khaitan & Co 2013 | 10
…Case Study 3 | Issues?
Can questions be raised regarding divisibility of contract awarded to the consortium?
In view of the recent advance rulings – Roxar Maximum Reservoir, Alstom
Transport
Exposure relating to taxability of consortium as an ‘Association of Persons’ (AOP) and
related risks?
What impact does joint and several liability of consortium members have in terms of
AOP exposure ?
What will be the tax impact if a consolidated invoice is given to client by the consortium
as opposed to each consortium member separately invoicing the client ?
What impact does a managing/coordination committee for the consortium made up of
representatives of the consortium members have in terms of AOP exposure?
Copyright © Khaitan & Co 2013 | 11
Some Practical Challenges
Tax cost passed on to the Indian Project owner thereby increasing project costs and
therefore need to achieve tax efficiency in structuring EPC contracts
Ascertaining Withholding Tax (TDS) obligation of the Indian Project Owner where the
foreign EPC contractor creates a PE in India
Obtaining withholding tax certificate from Tax Authorities
Alternatives: Obtain Chartered Accountants certificate or consider obtaining an
advance ruling (if time permits)
Copyright © Khaitan & Co 2013 | 12
Copyright & Disclaimer
• The contents of this Presentation are for informational purposes only and
are based on the laws as on date.
• It is neither intended to be nor is legal advice whether of a general or
specific nature. We encourage you to seek legal advice suited to your
specific requirements.