The Indian tax authorities are seeking to single out Netflix’s US-India operations, according to the Economic Times on Friday, May 12.
In a draft order, a tax officer for the Central Board of Direct Taxes attributed ₹550 million ($6.7 million) of income to a permanent establishment (PE) in India for the financial year 2021-2022.
The report added that Netflix sent staff from its parent company to India to oversee business operations, leading to a potential PE and tax liability.
For a resident company, worldwide business income is taxable in India. Non-resident companies are taxed on income if there is a “business connection”, according to the Income-tax Act, 1961.
The act also says that if there is a tax treaty between India and the country of residence of the non-resident, then the tax treaty will prevail.
As a tax treaty exists between India and the US, its provisions will apply, resulting in a more restricted definition of PE.
If the Indian tax authorities prove that Netflix US has a PE in India, income from the PE will be liable to be taxed at 40%.
One lawyer in India told ITR that taxation around foreign employees sent to India has been a contentious issue, adding that the nature of the activities, the language used in agreements, and the role of the Indian entity should be thoroughly examined.
“With Netflix, we understand that the US entity may have deputed its employees to Netflix in India, which, depending on the specific facts, may result in PE exposure for the US entity,” said Shruti KP, partner at IndusLaw in Mumbai.
“Having said that, given the huge popularity of the streaming service in India, the Indian tax authorities may also be on a fishing expedition,” she added.
“We will have to wait and see how the situation evolves.”
The government order is part of India’s plan to strengthen regulations on the digital economy and guarantee that foreign enterprises pay taxes on revenue earned in the country of business.
It would be the first time India had taxed an overseas digital company providing e-commerce services to consumers, according to the Economic Times.
However, sources speaking to ITR have contested this, saying a 2% equalisation levy has been applicable to non-resident digital companies in some form since 2016, and to e-commerce from 2020.
