In this blog post, Bhawana Tiwari, a BA LLB (Hons.) student from ILNU and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes the tax treatment given for the payment of brokerage fees to an offshore reinsurer.
Indian insurance sector is much neglected sector and to an extent wherein there are no clear provisions of law to tax the players in this sector. The problem in taxing this sector lies in the fact that the sector itself is a very complex web. The clearest aspect of taxation in this sector is that the policyholder gets exemption under section 80c of the Income Tax Act, 1961 and the insurer has to pay service tax accordingly.
In this article we will try to understand the position of tax treatment of brokerage fee paid to an offshore reinsurer. For this purpose there is a need to understand what reinsurance is. “Reinsurance is a transaction by which risk is transferred from an insurance company to a reinsurance company.” Generally the big risks like terror attacks, aircrafts, satellites etc are reinsured as the nature of the risk is huge and it might be impossible for an insurance company to provide the compensation when the need arises. A reinsurer is a big player in the market and virtually provides stability to the insurance market.
The reinsurance is the arrangement specifically between the insurer and the reinsurer and there is no role of the policyholder per se. Such an arrangement can be made between the insurer and reinsurer directly or through a broker company. For this transfer of risk the reinsurers are paid a premium by the insurer.
The problem with respect to reinsurance in India is that there are no separate rules for tax treatment of reinsurance. Hence, the premiums ceded or claims received mostly follow the accounting treatment in the books of the insurer.
Also there is only one Indian company i.e. General Insurance Corporation of India (GIC Re) which works as reinsurer. The foreign reinsurers could not set up their office in India as reinsurers but only as service providers as insurance remained a largely closed sector, however now that the Insurance Laws (Amendment) Bill, 2015 has been passed foreign reinsurers are keen to mark their presence in Indian market. Now due to large absence of foreign players in the market there is no certainty in the taxation of the transactions done by the foreign reinsurers in India. The situation becomes complex as there are no set provisions for carrying on the reinsurance business in India by any foreign entity with respect to their regulation and taxation.
As of now, due to lack of any settled principles, the income tax authorities take the view that the reinsurance premium paid to the foreign reinsurer or the Non Resident Reinsurer (NRRI) is accrued or arise in India and therefore is chargeable to tax under section 5(2)(b) of the Act which reads as follows:
“(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which—
(b) accrues or arises or is deemed to accrue or arise to him in India during such year.”
However, the reinsurance industry claims that is this is not the correct interpretation. The Income Tax authorities are widening the aspect of the provision to bring foreign reinsurers under the taxation regime somehow.
Their contention is that there is no business operation that is being carried out in India by virtue of a reinsurance contract. The foreign reinsurer merely takes the risk and not the profit as such, also the reinsurer doesn’t have any direct contract or dealing with the policy holders. Hence, neither the income is accrued or arise in India nor can it be deemed to be accrued or arise in India.
Now where there is a Double Taxation Avoidance Agreement that India has entered into with the country of the foreign reinsurer in question. The DTAAs that India has entered into with other countries have common Articles 7 which put the foreign companies out of the ambit of taxation in India if they do not have any permanent establishment in India. Hence, to tax a non resident company in India it is important to prove that there is a Permanent Establishment of the entity in India. However, it is to be noted that only a few of the DTAAs actually enlist reinsurance in Article 5 as a permanent establishment.
Unfortunately the definite answer to the taxation of the foreign reinsurer cannot be found at any level. As a result there have been various cases filed.
In the case of DIT v/s Guy Carpenter & Co. Ltd. the assessee was an international reinsurance broker based in the United Kingdom. A contract was entered into by the Indian insurance company seeking the international broker’s services and the assessee. Brokerage fee was paid by the Indian insurance company to the taxpayer for its service. The Assessing Officer & Commissioner of Income Tax (Appeals) held that the payment received by the taxpayer was part of “fees for technical services” under section 9(1) (vii) of Income Tax Act, 1961 and Article 13(4) (c) of the Double Taxation Avoidance Agreement as the service rendered was consultancy in nature.
The issue that arose was whether the services rendered by taxpayer were part of “fees for technical services” and liable to be taxed according to the provisions of the Income Tax Act and the Tax treaty. The tribunal held that the taxpayer was paid as an intermediary and not as a consultancy for any financial service per se. The taxpayer was only an intermediary in the process of reinsurance.
The tribunal also made it clear that mere rendering of technical services is not enough to attract tax liability under the said provisions. Instead “the technical knowledge must remain with the payer, and he must be equipped to independently perform the technical function himself without the help of the service provider.”
Conclusion
India is developing at a fast pace and to achieve this we have shifted from closed to an open economy. The government is striving to attract global business to help the economy further. In this effort there is relaxations given in Foreign Direct Investment. With this relaxation being given in various sectors India is now opening up its Insurance sector as well. The insurance sector in India has remained underdeveloped, both in the financial and legal aspects. However, now that the Insurance Laws (Amendment) Bill, 2015 has been passed there is now more reasons to understand the legal implications for the reinsurers of foreign origin.
Reinsurance law demands more focus and specialisation. There is a need to come up with proper legislation to deal with various aspects of reinsurance, mainly taxation. The problem in the ambiguity of the taxation provisions with regard to reinsurance is that it leads to unnecessary litigation and also loss of revenue. There is a need to address cross border reinsurance in the new GST regime to address the issues of indirect taxes involved in the reinsurance sector and along with that the Income Tax Act,1961 should be amended accordingly to address the direct taxation in issues involved.
