Tax Treaty Case Law around the Globe 2014

S. 211Chapter 21 India: Siemens Ltd - To Be Taxed as Fees for Technical Services Some Human Intervention Is a Must

D.P. Sengupta

21.1. Introduction

Taxation of cross-border services poses serious problem for source countries, particularly in the context of the existing rules of distribution of taxing powers. Since service can be rendered without setting up any elaborate structure, the existing permanent establishment (PE) rule of the OECD/UN Models often fails to capture the income. The payment would also normally be deductible in the hands of the resident payer or of the PE or fixed base thereby exacerbating the issue of tax base erosion. In fact, it is in the light of the experience in some source country tax administrations that multinationals have tried to take away substantial source country profits in the name of fees for technical services (FTS) that some countries have taken recourse to introducing a clause in their tax treaties relating to FTS.

India introduced a source rule in its domestic law relating to taxation of FTS way back in 1976 and subsequent thereto has been insisting on having a clause relating to incorporating at least a partial right to tax the income from such servic...