AAR Ruling a Tax Twist for Foreign Hotels
A significant judgement by the Authority of Advance Rulings (AAR) may have an impact on taxes to be paid by overseas hotel companies. AAR has held that Accor-owned FRHI Hotels & Resorts property Swissotel Kolkata will constitute a fixed place permanent establishment for FRHI and that its income from operations would be taxable as business profits in India. AAR said this is due to the degree of ‘control’ exercised by the foreign company over the Indian firm. FRHI asked AAR if payments received by it from the Indian hotel owner for provision of global reservation services would be taxable in India as ‘fees for technical services’ or ‘royalty,’
under provisions of the Income Tax Act, 1961 read with Article 12 of the India-Luxembourg double taxation avoidance agreement . FRHI ought a ruling only on the limited question of “taxability of fees for providing global reservation services.” However, AAR evaluated scope of its hotel services agreements — for management, licence, centralised services and advisory — and held that the degree of exclusive control, discretion and authority exercised by the non-resident company over operations of the Indian hotel meant such a hotel constituted a fixed place permanent establishment for the former. Tax experts said global hotel chains are now consulting them and that this issue could have several implications.
“I am advising a few global hotel chains on this. AAR also held that different agreements entered into by the non-resident with the Indian hotel owner for different types of services with the same legal entity have to be read as a single wholesome arrangement and cannot be split,” said a consultant. “In light of the base erosion and profit shifting action plan, which recommends against fragmentation of contracts for avoidance of permanent establishment exposure, and with this recent advance ruling, taxpayers would need to be very careful entering into splitting of contracts.” Accor did not respond to an email seeking comments till the time of going to press. Chains like Marriott and Hilton did not respond to comments. A hospitality consultant said on condition of anonymity that most hotel chains enter into multiple arrangements with the owners, besides the management, royalty and reservations agreements. “There will be implications.,” he added. – www.economictimes.indiatimes.com