united-states tax-law india corporate-tax-laws
How does international income taxes work when the buying intermediary platform is in the United States and recipient corporation&#39;s country is India?
<p>This question is a bit broad.</p>
<p>Assume a person A buys something in Europe. This is a digital product which is sold through a platform provided by an American company. After sales are made the final recipient of payment is an Indian corporation. The corporation is liable to pay income tax to whom? India? EU? The EU member state? US state? US federal government? Local authorities? Some other authority?</p>
<p>I have heard of the term &quot;withholding tax&quot;. Now both India and USA implement withholding tax the tax withheld will be for India or USA or some where else?</p>

<p>Ther corporation that receives the payment is an Indian company, so it certainly owes taxes to India. It apparently does business in the EU, or some affiliated company does, so some tax may be owed to the EU. The American company which owns the sales platform presumably got a commission of some sort on the sale. It would owe taxes to the US based on its worldwide activities.</p>
<p>If the Indian company must under contract pay part of the revenue to an affiliate elsewhere, that may reduce the tax to India, and be taxable elsewhere.</p>
<p>Tax treaties could modify any of this. In general such treaties aim to avoid or reduce double taxation, allowing a person or company to claim credit in one nation for taxes lawfully paid to another. The details of just how much credit, and what transactions are covered vary significantly.</p>
<p>In the <a href="/questions/tagged/united-states" class="post-tag" title="show questions tagged &#39;united-states&#39;" rel="tag">united-states</a> at least, &quot;withholding tax&quot; is money taken out of wage (and some other) payments and credited against future taxes, so that a person need not pay the entire tax bill at one time. It is not strictly speaking a tax itself, but payments toward income tax. When taxes are finally computed, the person may owe additional payments, or be entitled to a refund of some of that was withheld. The term is not usually used for money paid regularly by businesses to the government, but a business must make regular payments based on income to date. Such payments are comparable to a wage-earner's withholding payments. In some cases a person msut also make estimated tax payments, which serve a similar function.</p>

<blockquote>
<p>How does international income taxes work when the buying intermediary
platform is in the United States and recipient corporation's country
is India?</p>
</blockquote>
<p>Let's start with a key point. There is no such thing as an international income tax.</p>
<p>The U.S. has federal and state and local tax laws. India has federal and state and local tax laws. European countries have tax laws. In the absence of a tax treaty, one has to analyze the entire transaction under the laws of each country that has anything to do with the transaction separately. (So far as I know, the E.U. does not impose taxes of its own on this kind of transaction, although it does impose minimum standards that member E.U. nations are supposed to implement in connection with their own domestic tax laws.)</p>
<p>Also, overwhelmingly, tax treaties are bilateral, and not terribly uniform or principled. There is probably a tax treaty between the U.S. and the particular European country in question. There is probably a tax treaty between the U.S. and India. There may or may not be a tax treaty between the European country in question and India. These tax treaties, in turn, are enforce in the domestic tax courts of the U.S., India and the European country, independently of each other and not necessarily consistently.</p>
<p>Also, another key point, that I'll explore more below, is that the fine details of how the transaction is structured matter a lot. If the American company is based in Nevada, which doesn't have a state income tax, then state income tax won't be owed even if California would collect state income taxes in a situation. A sale pursuant to a license and a consignment/broker type sale look almost indistinguishable to a European purchaser, but are taxed very differently.</p>
<p>Typically, most of this kind of tax work is done by big multinational accounting firms and huge multinational law firms at a very high legal fee charge. These overhead professional services expenses are one of the important reasons that small businesses has historically often found that it is not cost effective for them to try to engage in international business transactions, because they don't have a large enough volume of sales to make the compliance costs that are largely the same regardless of the volume of sales worth incurring. I would probably charge $15,000-$50,000 to fully work up a particular case for a client, and would probably have to incur another $10,000-$25,000 of outsourced work from local professionals in the affected countries. So, a definitive answer to these questions in a particular fact pattern might costs $25,000-$75,000 of professional services.</p>
<p>But with the Internet making global operations much cheaper, fools rush in where angels fear to tread, compliance issues be damned, and often only pay taxes when some jurisdiction credibly demands that they do so after the fact, rather than trying to determine their legal and tax obligation in advance.</p>
<p>The flip side of high compliance costs is that it can be very expensive for a tax official in Europe or California or even the IRS in the U.S. to pursue a claim for taxes owed from a tiny firm run out of someone's basement in Mumbai that may not have many assets that are readily identified and seized by a non-Indian taxing authority.</p>
<blockquote>
<p>Assume a person A buys something in Europe. This is a digital product
which is sold through a platform provided by an American company.
After sales are made the final recipient of payment is an Indian
corporation. The corporation is liable to pay income tax to whom?
India? EU? The EU member state? US state? US federal government? Local
authorities? Some other authority?</p>
</blockquote>
<p>The details of the transaction are incredibly important. It is possible to structure international digital service transactions (digital products are usually  considered &quot;services&quot; rather than &quot;goods&quot; for jurisdictional and tax law purposes) in ways that retain the same economic substance but a treated very different legally under the tax laws of a particular jurisdiction.</p>
<p><em>Example One</em></p>
<p>For example, when you say &quot;person A buys something in Europe. This is a digital product which is sold through a platform provided by an American company,&quot; this is ambiguous.</p>
<p>Did 'person A&quot;, lets call her Alice, buy a digital product embedded in a physical medium, like a DVD at a shopfront in Berlin, or did Alice sit at her laptop in her living room in Berlin and order a DVD to be delivered to her home in Berlin, or did Alice download a streamed video? The analysis is different in each case.</p>
<p>Let's support that Alice had the video streamed to her from a California based tech company, let's call it &quot;Congo Peach&quot; to her laptop in Berlin.</p>
<p>So, the first question would be whether Congo Peach has to either collect German value added tax (VAT) on the sale of a digital service to Alice in Berlin, and/or pay German income taxes on its income attributed to its sales to German customers, under German tax laws and under a U.S.-German tax treaty. I don't know that answer and can't read German, but I'd know where someone needs to look to find the answer (and getting someone who does not to tell you what it is probably isn't cheap, international taxation is a pricey legal and accounting specialty.) One important factor is likely to be what kind of physical presence Congo Peach has in Germany. If it has store fronts there, even if only to sell its digital video reading tablets, the odds that it will have to collect VAT and pay German income taxes is greater.</p>
<p>If the sale was made in Estonia instead, and Congo Peach doesn't even bother to pay for advisements in Estonian or in Estonia since it is a small market, the likelihood that it has to pay these amounts is smaller. But any European country can create a strong incentive for Congo Peach to collect VAT and/or to pay income taxes on its sales to residents of that country, because if Congo Peach doesn't, the European country could decide that it won't allow Congo Peach to enforce copyright violation cases in that European country which could make Congo Peach's products worthless all across Europe by making bootleg pirated copies of its digital downloads available in ways that other Europeans can easily access.</p>
<p>The second question would be what tax liabilities Congo Peach, as an American corporation owes to the U.S. and California tax officials. In the simplest scenario, in which the sale to Alice was made directly by the parent company, the sale would increase Congo Peach's revenues which it would report on IRS Form 1065, along with any costs of goods sold, merchant processing fees for Alice's credit card payments, the cost of operating its servers and paying its employees, and so on. In particular, Congo Peach could probably take a deduction for amounts that it pays to the company in India, let's call it Bollywood Enterprises, from which it licenses the video that it distributes to people all over the world including Alice via digital streaming. Congo Peach may also have to pay California income taxes on this steaming sale to Alice and possibly even California sales taxes depending on California's sale tax regulations.</p>
<p>If Congo Peach paid any German VAT and/or German income taxes on its sale to Alice, Congo Peach gets a foreign tax credit for the taxes it paid which can be applied to any of the U.S. income taxes it pays that are attributable to its German sales, under complicated tax regulations under federal U.S. tax law and under the German-U.S. tax treaty.</p>
<p>Then, Bollywood Enterprise would royalty checks from Congo Peach, in part, from the sale made to Alice. The royalty check is not going to be subject to German VAT or German income taxes or California sales taxes (U.S. sales taxes only tax retail sales unlike European Value Added Taxes), since a royalty check isn't a sale to a German customer or a retail sale.</p>
<p>So, the next question is whether Bollywood Enterprises owes U.S. or California income taxes on the royalty checks that it receives from Congo Peach. Usually, royalty checks are taxable where they are received, rather than where they are paid, which is the foundation of a lot of U.S. tech company tax shelters, in which intellectual property is owned by an affiliated company in a low tax country that isn't formally treated as a tax haven for tax purposes (Ireland is a common choice) where the royalty income is taxed in the first instance, and the royalty expense to the affiliated company is a deduction that reduces the taxable income of the U.S. based operating company to a very low level. If the affiliated company distributes the royalty funds it accumulates to the U.S. operating company, this distribution is treated as taxable U.S. income to the U.S. operating company at this time (and sometimes sooner under anti-tax evasion laws designed to discourage this kind of arrangement), but until then the U.S. company doesn't pay U.S. (or California) income taxes on the portion of its revenues paid out as royalties to its affiliated European intellectual property owning company.</p>
<p>In the example of this question, where Bollywood Enterprises is a company completely unrelated to Congo Peach, except for a licensing agreement, Bollywood Enterprises will probably not owe any U.S. federal or California income taxes on the royalty checks it receives, although these will be subject to income taxation as part of Bollywood Enterprise's corporate income taxes, in India. This assumes that the India-U.S. tax treaty doesn't provide otherwise and I've never looked at whether it does or not.</p>
<p><em>Example Two</em></p>
<p>Now, all of this assumes one way of structuring the transaction. But that isn't the only way to structure the transaction. Rather than licensing the digital video that Bollywood Enterprises created from Bollywood Enterprises, Congo Peach could instead enter into an Internet Service Provider agreement with Bollywood Enterprises that Congo Peach manages, and payments could be made by Alice directly to Bollywood Enterprises through an online payment system like PayPal that would transfer the funds directly to Bollywood Enterprises less a merchant fee collected by PayPal. And, Bollywood Enterprises would pay an ISP fee (possibly based in part upon audited PayPal collection statements) each month or quarter to Congo Peach.</p>
<p>In that situation, the question that we asked about whether Congo Peach had to collect any German VAT or pay any German income taxes would be evaluated instead with respect to Bollywood Enterprises and the Germany-India tax treaty, if any, by German tax officials. The income received by Bollywood Enterprises would be taxable income under all national, state and local income taxes applicable to Bollywood Enterprises unless those domestic Indian tax laws have exclusions for this kind of income. And, I have no idea whether a foreign tax credit would be available under the tax laws of India for taxes paid to Germany. I suspect that it is more likely that India would not count the revenue received from Alice via PayPal as taxable income under the income tax laws of India, and that Germany would insist on collecting German VAT and income taxes in this situation, because that would be the most common rule in national income tax laws, but I haven't investigated the tax laws of Germany, the tax laws of India, or the Germany-India tax treaty (if there is one) to find out.</p>
<p>Congo Peach wouldn't owe German VAT or German income taxes, but the ISP fees collected by Congo Peach from Bollywood Enterprises would be revenue to Congo Peach on its U.S. federal corporate income tax return and its California income tax return, and might also be a consider a sale of digital services that are subject to California sales tax laws since ISP services are often considered to be earned in the place where the company selling those services has its headquarters.</p>
<p>These two possibilities are merely common examples. In reality, there are myriad different ways that this same basic economic deal could be structured and those fine details could matter a lot.</p>
<p><em>Example Three</em></p>
<p>As a third example, to illustrate the many creative ways that the deal could be done, the parties might hire a Chinese ISP and pay it a fee, while involving Congo Peach, not as a seller of the digital services or as an ISP, but as a &quot;seal of approval&quot; certifier that the digital video sold by Bollywood Enterprises doesn't contain malware, is compatible with Congo Peach software, and that Bollywood Enterprises had not received too many substantiated complaints about Bollywood Enterprises' customer service and payment processing, in exchange for a fee to Congo Peach and a fee to the Chinese ISP.</p>
<p><em>Example Four</em></p>
<p>A fourth possibility would be to treat Bollywood Enterprises as a content creating subcontractor of Congo Peach and for Congo Peach to own the rights to the digital product. This leads to yet another, very different, analysis.</p>
<p><em>General Observations</em></p>
<p>To really get good at structuring transactions like these from scratch, you need to know the fine print of the tax laws in many, many jurisdictions so that you can structure the deal to maximize the after tax return to Bollywood Enterprises or whomever else the tax advisor and transactional attorney represents in the deal.</p>
<p>Also, even for these big time players, these issues are often not litigated very often and the law is often in continual flux, so even with lots of money spent on top notch professional advice, the answer will often be quite uncertain and might not be followed by less well heeled tax officials, even if the professionals' answers are plausible and legally defensible and should work.</p>
<p>For a really big company, like an Amazon or an Apple, it may be cheaper for them to pay lobbyists to try to change the laws in the countries where they do business to suit them, than to hire someone to predict how existing laws would be interpreted at great costs with great uncertainty about whether the answers are correct.</p>
<blockquote>
<p>I have heard of the term &quot;withholding tax&quot;. Now both India and USA
implement withholding tax the tax withheld will be for India or USA or
some where else</p>
</blockquote>
<p>When a person outside the U.S. receives significant amounts of money from a U.S. person that is subject to U.S. income taxes, the U.S. person is usually required to turn some of the payment that would otherwise be due to the non-U.S. person to the IRS under U.S. federal tax laws.</p>
<p>For example, if Bollywood Enterprises bought a piece of real estate in Los Angeles, California that is well suited for use as a movie studio, and then sold it a few years later at a large profit, its capital gain on the sale of the real estate would be subject to U.S. federal income taxes and California income taxes. So, at the closing of the real estate sale, the title company conducting the sale, on behalf of the buyer of the movie studio in Los Angeles, would withhold some of the sales proceeds from the check otherwise payable to Bollywood Enterprises at closing. This withholding would be based on a very crude formula and if Bollywood Enterprises actually owed less U.S. and California tax than was withheld, Bollywood Enterprises could file a federal tax return for non-resident corporations and a state tax return for non-resident corporations to get some of the money that was withheld back in the form of a tax refund.</p>
<p>On the other hand, if Congo Peach made a royalty payment to Bollywood Enterprises that was not subject to U.S. federal or California income taxation, that check would typically not be subject to U.S. tax withholding.</p>
