The Authority for Advance Rulings (AAR) concluded that MasterCard Asia Pacific, a Singapore-based entity in the financial group, effectively has a taxable presence in the country thanks to its use of devices in India. As a result, MasterCard’s Asian subsidiary would be taxable in India.
“Some companies trying to restructure their operations to avoid a PE in India may have to rethink their strategy,” said one head of tax at a retail company with operations in India. “Though the courts have yet to issue a final decision on this matter.”
The Indian tax authority made the case that the Singaporean subsidiary had a taxable presence due to its use of equipment and networks in India. This specifically concerns MasterCard’s reliance on interface processors to operate from afar. This is despite the fact that its systems all go through servers outside the country.
One tax director at a multinational tech company based in India argued that the ruling was not “very convincing” when the functions, assets and risk (FAR) analysis is applied.
“You could easily conclude that the transaction in question couldn’t be construed as one of rendering preparatory or auxiliary services,” the tax director told TP Week.
Gaurav Shah, chartered accountant at Shah V G & Co, said the Supreme Court decision “sent a strong message to other international companies” about the state of play in India.
The AAR may have decided that processing fees paid to MasterCard’s regional headquarters by Indian banks count as royalty payments, but MasterCard has appealed the decision and the High Court has yet to rule on whether or not to uphold the June 2018 ruling. The case is up for appeal in August.
“The Supreme Court ruling was a big victory for the tax office,” said Amit Maheshwari, managing partner at Ashok Maheshwari & Associates in New Delhi. “India is becoming an aggressive tax jurisdiction.”
The ruling sets a worrying precedent for multinational companies operating in the country. Though the decision is only binding on MasterCard, the Indian tax authority may be eager to make similarly aggressive claims in the future.
Facts of the case
MasterCard used to route Indian operations through a liaison office, which worked with various banks handling card payments. At the time, the American multinational counted this presence as a PE with all the tax implications that came with it.
Except in 2014, MasterCard restructured its Indian operations and transferred all the assets and employees of the liaison office to the subsidiary. This was just as the company began providing services relating to authorisation, clearing and settlement to Indian customers.
So MasterCard decided to go to the AAR and seek a ruling on whether it would still have a PE in India. The key issue would decide whether the payments received from Indian customers can be treated as royalties under the India-Singapore tax treaty.
Each transaction went through a MasterCard interface processor (MIP) located in the Indian bank branch itself. The company argued that these MIPs fell within the exceptions for preparatory or auxiliary functions in the treaty. But the AAR did not accept this argument.
The Indian authorities went further, finding that the MIPs counted as a taxable presence and the processing fees paid to the Singaporean subsidiary constituted royalty income.
Defending a structure
Much like other US companies, MasterCard relies on a network of subsidiaries to operate globally. The company’s Asia Pacific subsidiary acts as the regional headquarters for Asia Pacific, the Middle East and Africa.
The US company is based in Delaware with its European arrangements organised through Ireland, the UK and Belgium. These structures are how MasterCard maintains an effective tax rate of 15.5% as of March 31 2019. The Indian court ruling may send a shock through the company’s Asian operations, if the appeal fails.
One CFO at an engineering company in Mumbai suggested the US company exposed itself to this challenge inadvertently.
“The biggest issue I see is that MasterCard USA had voluntarily declared it had a PE in India and it was only post-restructuring that they have taken a different position,” the CFO said.
“The tax authority has construed the restructuring was a means to get around being classified as a PE in India and to avoid paying taxes in India,” the officer said.
This kind of challenge is not out of the ordinary in an uncertain world for taxpayers. However, some jurisdictions are getting a reputation for being more bellicose than others are. India is just one example.
Dispute resolution and risk management are becoming the keys to everyday transfer pricing strategy. Uncertainty has become the norm for doing business. Yet taxpayers are still looking for an international organisation to take the lead and resolve these conflicts over taxing rights.
“Google and Facebook are facing similar issues in the EU,” the head of tax said. “A lot depends on what comes out from the OECD on regulations to tax such transactions.”
Many companies hold out hope that the world will reach a consensus on such matters, but there is little sign of any such agreement on the horizon. The international tax system is in a state of flux, so it may take many years before debates over profit attribution and permanent establishment are settled.
“I don’t know if we’ll see similar rulings, but there are bound to be more rulings on PEs,” Maheshwari said. “I’m expecting a lot more rulings on PEs and more challenges in the future. I definitely see an increase in litigation because the authorities are getting more and more aggressive.”
“You need to be very, very careful,” he stressed, adding, “If you have a similar fact pattern, you need to think about how you can protect yourself.”
Unfortunately, the MasterCard case is unlikely to answer these questions but whether the court rejects or upholds the initial ruling will be a sign of things to come in India. Businesses should prepare a plan B in the meantime.