1. Changing Australian environment
Contraction of tax base =
Attempted expansion of tax from international corporates –
MAAL
DPT PE
Royalty
Service fee/royalty
“embedded royalty”
Tech Mahindra

2. Tech Mahindra Tech Mahindra Limited v Commissioner of Taxation [2016] FCAFC 130 Tech Mahindra Limited v Commissioner of Taxation [2015] FCA 1082
What does the decision tell us?
If an Indian entity performs services in India (payments for which fall within the extended definition of royalty in the treaty) for an Australian buyer-
Then, because the payments are within the royalty definition, they are deemed by the treaty to be Australian sourced income.
But they are not royalties under Australian domestic law, simply Australian sourced services income
And the Indian company will pay tax on the profit (calculated using the Australian “assessable income” rules) from the contracts in Australia.
Even though it pays no withholding tax, and has no PE

3. Tech Mahindra Why? Because of Article 23: Article 23 Source of income
(1) Income, profits or gains derived by a resident of one of the Contracting States which, under any one or more of Articles 6 to 8, Articles 10 to 20 and Article 22 may be taxed in the other Contracting State, shall for the purposes of the law of that other State relating to its tax be deemed to be income from sources in that other State.
(2) Income, profits or gains derived by a resident of one of the Contracting States which, under any one or more of Articles 6 to 8, Articles 10 to 20 and Article 22 may be taxed in the other Contracting State, shall for the purposes of Article 24 and of the law of the firstmentioned State relating to its tax be deemed to be income from sources in that other State.

4. Unresolved issues
Identification of affected Application of article 23 Calculation of profit attributed Treatment of flow through/subcontract models

5. Tech Mahindra Structure
Indian Head Co
Statements of work
India
Services
Invoices
Australia
Australian Permanent Establishment
Australian Customers
Services
Payment for services (Australian bank account controlled by Indian Head Co)
April 2018

6. Australian subsidiary structure
Indian Head Co
Intercompany service fee
Services
India
Statements of work (which allow the Aus sub to procure services from other Group Co’s)
Australia
Australian Subsidiary
Australian Customer
Services
Key differences from TM:
Contracting parties
Invoices
Payment
Invoices
Payment for services
April 2018

7. Australian PE Structure
Indian Head Co
Invoices
Cost + 7% markup
India
Statements of work (to provide services to end users)
Payment
Australia
Australian Permanent Establishment
Australian Customers
Services
Key differences from TM:
Recipient of services (end customers)
Payment
Services
End User Customers
April 2018