AI may force govt to renegotiate bilateral tax treaties

As AI businesses increasingly generate significant economic activity in a jurisdiction without a corresponding physical workforce, india is projected to renegotiate its bilateral tax treaties once global bodies such as the Organisation for Economic Co-operation and Development (OECD) and the United Nations.

Key points

• For instance, a foreign firm could deploy AI-based developers, software agents or autonomous systems to perform functions for an Indian subsidiary without sending employees to India.
• The question, therefore, is whether such virtual or technology-enabled presence could, under certain circumstances, create a taxable nexus in India.
• What is being done on the UN model is basically related to the taxability of services.
• With a new tax framework for AI-related services, existing international tax rules may require an overhaul, authorities stated.
• Tax experts remarked the apply of AI by both taxpayers and tax authorities could additionally result in more sophisticated tax disputes.

Authorities informed TNIE that India is at present in a wait-and-watch mode. Once an international framework is finalised, there could gradually be changes in the way cross-border tax liabilities arising from AI-enabled services are assessed. Nevertheless, the problem remains at a nascent stage, with countries awaiting detailed guidelines from the OECD and UN.

India's international tax rules and tax treaties have traditionally relied on concepts such as permanent establishment, physical presence and human intervention to determine whether income generated by a foreign enterprise can be taxed in India. AI-powered systems, nevertheless, could challenge these assumptions, office-holders noted.

For instance, a foreign firm could deploy AI-based developers, software agents or autonomous systems to perform functions for an Indian subsidiary without sending employees to India. Similarly, AI-powered robots could be deployed in India by foreign firms for installation, supervision, maintenance or other functions.

Notably, the question, therefore, is whether such virtual or technology-enabled presence could, under certain circumstances, create a taxable nexus in India. The matter could become more complicated as AI-powered systems commence performing increasingly sophisticated functions, authorities remarked.

"What is being done on the UN model is basically related to the taxability of services. It are presently not covered under the existing clauses. The scope has to include AI-enabled services. It presently fall outside the jurisdictional ambit and may not end up being taxed in India. In that perspective, work will have to be done at the multilateral or bilateral level to renegotiate treaties and come up with solutions for AI-enabled taxation, " an official remarked.

With a new tax framework for AI-related services, existing international tax rules may require an overhaul, authorities stated. Guidelines may be needed on problems such as tax residency, permanent establishment, fees for technical services, deductibility of expenses and the treatment of tax positions generated with the assist of AI.

Meanwhile, tax experts remarked the apply of AI by both taxpayers and tax authorities could additionally result in more sophisticated tax disputes.

With access to sizeable volumes of tax and transaction data, AI systems could identify patterns, inconsistencies and transactions that may not be visible through conventional assessments. While additionally raising new questions over how AI-generated findings should be interpreted and challenged by taxpayers, this could support tax authorities improve compliance and target investigations.

Taken together, the developments around AI may force govt to renegotiate bilateral tax treaties point to a situation that is still moving, and the coming days should bring more clarity.