Iran plans to tax firms involved in exploration

Written by Sanjay Jog | Mumbai, Sep 29 | Updated: Sep 30 2007, 08:45am hrs
Oil is not flowing quietly between India and Iraq. And its not only the IPI pipeline that is adding to the heat. Indian companies engaged in exploration activities in Iran are likely to be in for rude shock if the two countries pen the double taxation avoidance agreement (DTAA).

Iran has proposed to levy tax on Indian companies involved in exploration activities in that country as part of the agreement. This would mean that an Indian company undertaking exploration in the Gulf country would be treated as having a permanent establishment (PE) there and would become liable to tax in Iran even if it does not have a branch, office, factory there.

According to sources, the petroleum ministry has sought comments from ONGC, BPCL, HPCL, IOC, ONGC Videsh Ltd and GAIL India on whether Indian companies were eligible to be a sub-contractor for exploration work in Iran. The companies have been further asked to explain the time period for completion of such sub-contracts and if it was necessary for a sub-contractor to have a fixed place of business in Iran and whether there were any specific rules governing award of such sub-contracts in that country.

Iran plans to include a place of exploration in the definition of permanent establishment in Article 5 of the proposed DTAA. However, the Indian government is of the view that a place of exploration should be treated as a PE only if such exploration continues for more than a threshold period of 182 days in any 12-month period. Indias view is based on the understanding of the present rules in Iran whereby exploration contracts are awarded for a minimum period of four years. However, sources said the Iran government has communicated to India that sub-contract jobs are not eligible for the four-year tax holiday.