Inclusion of consultancy services under Construction PEs, foreign firms engaged in construction activities in the country, is likely to impact the real estate sector, says a PwC report.
PE (Permanent Establishment) is a fixed place of business which generally gives rise to income or value-added tax liability in a particular jurisdiction.
As per the report, tax-related issues pertaining to Construction PEs are on the rise in relation to attribution of profits from offshore supply and splitting of consolidated contracts.
The report mentions that though offshore supply is not taxable in India, revenue authorities may raise a question about whether offshore and onshore (PE-related) contract values have been split correctly.
India's tax treaties provide for the constitution of a Construction PE if a foreign company undertakes activities in relation to a building or construction site, installation, assembly and connected supervisory activities, in India for a specified duration, it said.
In November 2015, the Organisation of Economic Cooperation and Development (OECD) issued its Action Plans (APs) on Base Erosion and Profit Shifting (BEPS).
In cognisance with one of the APs, the 'Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting' (MLI) was signed in Paris, France, on June7, 2017. India was one of the signatories.
The report said that according to the provisional list of India's reservations, submitted on the MLI, it has agreed to implement the suggestions of the MLI in relation to Construction PEs.
"Inclusion of consultancy services under Construction PE and the PPT (Principal Purpose Test) is likely to affect the real estate, construction and EPC sectors in India adversely.
"Foreign companies may need to revisit their arrangements in order to ascertain the impact of these changes," said the report.
Hitesh Sawhney, Partner Corporate and International Tax, PwC said PPT provides the conditions of when a contract can be considered to be artificially split to avoid constitution of PE and also includes 'consulting services' under the ambit of Construction PE.
"Since India has expressed its willingness to implement the suggestions of MLI, foreign Real Estate, construction and EPC companies need to be mindful of these while undertaking activities in India," said Sawhney.
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