Taxand comments on the OECD report on tax treaty issues related to common telecommunication transactions
The location of a satellite in a geostationary orbit and the receipt of its signals in a particular area cannot determine the location of a Permanent Establishment (‘PE’) for the satellite operator. Payments made for “transponder leasing” for the purpose of transmitting between satellite operators and their customers (including broadcasting and telecommunication enterprises) do not constitute royalties. Payments made by foreign telecom operators under “roaming agreements” do not constitute royalty either since these are not made in consideration for the “use of, or right to use” property, or for information, referred to in the definition.
In a typical transaction model, the foreign telecom equipment supplier undertakes supply of equipment to its customers in source country and the commissioning and installation of such equipments are separately undertaken by an affiliate / enterprise in the source country. Under some of these arrangements, the foreign equipment supplier also executes an umbrella agreement providing an overall guarantee for successful completion of supply, installation and commissioning of equipments in source country. The taxation of income accrued / arisen on supply of equipment by foreign enterprise has been a matter of concern in many jurisdictions.
We recommend that the OECD clarify that even where a satellite operator has an affiliate / enterprise in the source country to undertake some local activities. The satellite operator qualifies to have a PE in the source country due to such presence, and the entire revenue of the satellite operator would not be chargeable to tax.
The use of a transponder does not involve any “process”. The word "process", judged by the context and setting in which it is used in the Article, is seen to be surrounded by words denoting intellectual property rights (‘IPRs’). IPRs are either protected or capable of being protected in law and therefore the word "process" should fit in with them.
In our view, the foreign equipment suppliers do not generally have a place of business in the source country in the form of either an office or branch or any other fixed place of business in relation to the offshore supply of equipment since the related activities are entirely conducted from outside the source country.
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