Double taxation relief for Indian IT companies operating in Australia

In a major relief to Indian information technology (IT) companies operating in Australia, Canberra has agreed to amend its domestic laws to stop taxing offshore income of such Indian companies, as part of the free trade deal inked on Saturday. This may lead to savings up to $200 million each year for over 100 Indian IT companies operating in Australia.

“The Government of Australia has agreed to amend the domestic taxation law to stop the taxation of offshore income of Indian firms providing technical services to Australia. This will resolve the issue that the Indian government has raised about the double taxation avoidance agreement (DTAA) between the two governments for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income,” said a commerce ministry official.

However, both the trade deal and changes to domestic Australian tax laws will come into effect once the Australian Parliament ratifies the deal after the general elections due in May are completed in Australia.

DTAAs are tax treaties signed between two or more countries to help taxpayers avoid paying double taxes on the same income earned from the source country, as well as the residence country.

Misusing the DTAA signed between India and Australia in 1991, Australian authorities were taxing offshore income of Indian companies, claiming it to be royalty income.

For example, if an Indian IT company has an Australian customer and 50 per cent of the work was getting done in Australia and 50 per cent in India, then the Indian component was getting doubly taxed both in Australia, as well as in India.

Indian IT companies had already exhausted the legal challenges in Australia, with Tech Mahindra losing a case in the Federal Court of Australia in 2018.

Welcoming the decision, the National Association of Software and Service Companies (Nasscom) in a statement said it has been advocating for this change for a few years and is delighted to see the road map for resolution under the ambit of the Australia–India Economic Co-operation and Trade Agreement.  

“The IT industry in India plays a key role in enabling competitiveness of Australian enterprises and the public sector through centres in India and Australia. Nasscom will continue to work with both governments and is confident that amendments to the Australia domestic law will be made soon in the upcoming Parliament session to seal this intent,” it added.  

Gagan Sabharwal, senior director at Nasscom, said that double taxation was making Indian IT companies uncompetitive in Australia. “Now the amendment to Australia’s domestic laws will ensure whatever work is done from Australia is taxed by Australia and whatever work is done outside Australia, the company pays in accordance with the local norms in that country. Australia has already made similar changes to domestic law for the US, China, and Poland,” he added.

According to industry estimates, Indian IT companies generate roughly $4-8 billion business income from Australia each year. Over the past decade, the five major Indian IT players — Infosys, Wipro, Tata Consultancy Services, Tech Mahindra, and HCL Technologies — have ramped up business in the country, forming partnerships with many of the top 100 companies on the Australian Securities Exchange, including National Australia Bank and energy company AGL Energy, according to the Australian Trade and Investment Commission, or Austrade.

Significant investments in infrastructure, human resources, new services, and the information and communications technology industry have been made by Indian companies since 2011, when the Australia government started to woo Indian firms.