On 2 April 2022, India and Australia entered into an Economic Cooperation and Trade Agreement (ECTA) to facilitate increased cooperation and expand opportunities for work, travel and study between the two countries. In connection with this, the governments also exchanged letters of understanding stating that Australia will amend its domestic tax laws to prevent taxation of offshore income arising to Indian entities from provision of technical services from India (offshore services) to customers in Australia.
It may be implied that the above development is in the context of a decision of Australia’s Full Federal Court in 2018, which had held that the payment received by an Indian resident for providing offshore services to Australian customers was taxable in Australia under the provisions of the India-Australia Double Taxation Avoidance Agreement (DTAA), even though the Australian domestic tax laws do not contain any provision to tax such offshore income. The decision was seen as impacting Indian companies providing offshore technical services to Australian customers, including Indian entities providing services to their Australian affiliates. The decision may have caused Indian entities to be taxable in Australia on consideration received for services that satisfied the definition of royalty in Article 12(3)(g) of the DTAA, such as the development and customization of software, software maintenance and enhancement activities. The letters of understanding seek to prevent this taxation, with Australia indicating that it would amend its domestic tax laws.
This Tax Alert highlights the above development.
