Tax Treaty Case Law around the Globe 2020

S. 49Chapter 5 India: Splitting Up Contracts into Offshore Supply and Services – The Game Continues

D.P. Sengupta

5.1. Introduction

The fault lines in the existing international tax order are becoming increasingly apparent as crises strike the world one after another. In the digital world, the cracks are wide open and visible now, but even outside the digital sphere, the business world is dominated by the same old rules of taxing business income that rely mostly on physical presence and provide for liberal exceptions, even when the test for such presence is satisfied.

A construction contract for various projects is one example. The OECD, recognizing the importance of such activities, included a specific article (article 5(3)) in the OECD Model Tax Convention (OECD Model) that states that a building site or construction or installation project constitutes a permanent establishment (PE) only if it lasts more than 12 months (this period is 6 months under the UN Model Tax Convention). Only the part of the profits that arise from work performed in the source state can be taxed there. Such an arrangement naturally keeps the window of opportunity open to split up the contracts in order to fall out...