The ATO has released guidance on payments made to Indian residents for remote technical services, under new tax legislation. Indian residents will not be taxed in Australia on certain payments or credits, provided they meet specific criteria and the new law applies only to income years starting from 29 December 2022.
Eligible Payments and Credits for Indian Residents under Australian Tax Law
Certain payments and credits made by Australian customers to Indian residents have been amended for taxation purposes, effective for income years starting from 29 December 2022. Indian residents will not be taxed for eligible payments or credits received for technical services provided remotely and not through a permanent establishment in Australia. Eligible payments or credits must satisfy specific criteria, including being covered by Article 12(3)(g) of the Double Tax Agreement between Australia and India, not classified as royalties under the ITAA 1936, and previously subject to tax in Australia under Article 12(3)(g) and Article 23 of the Indian Agreement. If you provide both onshore and offshore technical services, refer to Composite contracts.
Taxation of Composite Contracts under Australian Law
A composite contract, or onshore-offshore arrangement, refers to a situation where a taxpayer provides both offshore services through a head office in India and onshore services through a permanent establishment (PE) located in Australia. The recent law amendment will not affect the taxation of payments or credits made by Australian customers for onshore technical services provided through an Australian PE of the Indian resident.
Background on Recent Law Amendment in Australian Taxation Law
On 23 November 2022, the Treasury Laws Amendment (Australia-India Economic Cooperation and Trade Agreement Implementation) Bill 2022 was granted royal assent. The new law amends the International Tax Agreements Act 1953 to remove Australian taxation on certain payments or credits made to Indian residents for tax purposes. Previously, payments or credits made by Australian customers to Indian residents for remote technical services were taxable in Australia due to the interaction between the Income Tax Assessment Act 1997 and the Indian Agreement.
Previously, payments or credits made to Indian residents by Australian customers for remote technical services were taxable in Australia due to:
- their coverage under Article 12(3)(g) of the Indian Agreement,
- their sourcing in Australia under Articles 12 and 23 of the Indian Agreement, and
- their inclusion as assessable income under the ITAA 1997.
This taxation was upheld in several court cases, including Tech Mahindra Limited v FCT [2015] FCA 1082, Tech Mahindra Limited v FCT [2016] FCAFC 130, and Satyam Computer Services Limited v FCT [2018] FCAFC 172.
The Australian Government agreed on 2 April 2022 to cease taxation of certain payments or credits made by Australian customers to Indian residents for remote technical services covered by Article 12(3)(g) of the Indian Agreement and not considered royalties under the ITAA 1936. This legislative change was planned to coincide with the implementation of the Australia-India Economic Cooperation and Trade Agreement (AI-ECTA), which became effective on 29 December 2022. The amendment to the ITAA 1953 resulting from the Bill will apply to income years starting from 29 December 2022.
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