Provision of Software held to be royalties
Software companies doing business in India have been put on notice by the Indian Income Tax Department following an unexpected outcome in the Income Tax Appellate Tribunal (Microsoft Corporation v. Assistant Director of Income-tax, International Tax Division).
The key issue considered by the Tribunal was whether the sale of "off the shelf software product" (i.e. shrink wrapped) by non-resident companies (i.e. Microsoft and its subsidiaries) to independent Indian distributors is taxable in the hands of such non-resident companies as royalties within the meaning of the domestic Indian tax laws and under the double tax agreement between India and the United States of America.
It was found by the Tribunal that the sale of the shrink wrapped product to the distributors by Microsoft and its subsidiaries was fully taxable in India as a royalty (under the domestic law and tax treaty). This decision is contrary to a series of other decisions handed down within the Indian judiciary.
This recent decision is in contrast to the current view of the OECD.
Companies forming part a multinational group which provide the use of software to offshore related parties should seek confirmation that the supply of the right does not represent royalties, which may trigger a royalty withholding tax liability in the overseas jurisdiction.
Indonesia introduces transfer pricing implementation regulations
Indonesia recently issued transfer pricing implementation regulations (DGT Regulation No 43/2010 "Application of Common Business Practices and Arm's Length Principle in Transactions between Taxpayers and Parties who have a Special Relationship" or "DGT 43"), which is a significant tax development for multinational groups doing business in Indonesia . The guidelines apply the internationally accepted "arm's length principle" and are generally consistent with the OECD guidelines.
In relation to available transfer pricing methods, the guidelines apply a hierarchical approach with preference placed on the traditional methods. The transactional net margin method (TNMM) is permitted as a method of last resort which means that taxpayers should only apply the TNMM if none of the other methods are reliable or practical.
Taxpayers are required to prepare Transfer pricing documentation for each related party transaction in excess of Rp10 million, which is approximately AUD$1,150.00. Interestingly, similar to the rules in Malaysia, the Indonesian transfer pricing provisions apply equally to domestic transactions.
If you have any queries in relation to this publication or which to discuss you transfer pricing issues, please contact Daren Yeoh on dyeoh@moorestephens.com.au.
For more transfer pricing insights, visit our site at:
http://moorestephensresources.com.au/categories/Transfer-Pricing-Insights/
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