India’s DTAAs – Recent Developments

The reader is advised to refer the text of the relevant DTAA or the Protocol while dealing with facts of a particular case.

A) DTAAs/Protocols Signed and Notified

1. Finland

A revised DTAA and Protocol has been signed on 15-01-2010 between India and Finland, effective from 1st April, 2011.

As
per the revised Agreement, withholding tax rates have been reduced on
dividends from 15 % to 10 % and on royalties and fees for technical
services from 15 % or 10 % to a uniform rate of 10 %.

The
revised DTAA excludes the concept of “Make Available” from Article 12
(FTS). The revised Agreement also expands the ambit of the Article
concerning Exchange of Information to provide effective exchange of
information.

The Article, inter-alia, provides that a
Contracting State shall not deny furnishing of the requested information
solely on the ground that it does not have any domestic interest in
that information or such information is held by a bank etc. An Article
for Limitation of Benefits to the residents of the contracting countries
has also been included to prevent misuse of the DTAA.

Other features of the revised Agreement are:-

a) Provisions regarding Service PE has been included in the Article concerning PE.

b)
Paragraph 2 to Article 9 has been included to increase the scope for
relieving double taxation through recourse to Mutual Agreement Procedure
(MAP).

c) A new Article on assistance in collection of taxes
has been added, to ensure assistance in collection of taxes when such
taxes are due under the domestic laws and regulations.

d) The
time test for Independent Personal Service has been extended from 90
days or more in the relevant fiscal year to 183 days or more in any
period of 12 months commencing or ending in the fiscal year concerned.

2. Switzerland

India
has signed a Protocol amending the DTAA with Switzerland, notified on
27-12-2011, effective from 01-04-2012 (and, in respect of Exchange of
Information Article 26, effective from 01-04-2011).

The 14 Articles of the Protocol deal with various matters. Some of the noteworthy changes are as follows:

i) International Traffic to include transport via ship also:

The
earlier definition under the Article 3 (i) of the DTAA referred to
means of transport as ‘aircraft’ alone. Now the ambit has been increased
and the word ‘ship’ has also been added. The business profits will not
exclude the profits from the operation of ships; the change in
definition is evident due to the change in the ambit of international
traffic, which now includes ‘ship’ also as one of the means of
transport. Further changes under Article 8 in addition to air transport
also include shipping, which is consequential. Similar changes are
incorporated under Article 11 & 13.

ii) Non-discrimination clause:

Article
24 of the India-Swiss Protocol has incorporated the changes on the
basis of agreement which is line with the USA. Therefore, the taxation
of a permanent establishment which an enterprise of a Contracting State
has in the other Contracting State, shall not be less favorably levied
in that other State than the taxation levied on enterprises of that
other State carrying on the same activities. This provision shall not be
construed as obliging a Contracting State to grant to residents of the
other Contracting State any personal allowances, reliefs and reductions
for taxation purposes on account of civil status or family
responsibilities, which it grants to its own residents.

Further,
it is clarified that the non-discrimination provision shall not be
construed as preventing a Contracting State from charging the profits of
a permanent establishment which a company of the other Contracting
State has in the first mentioned State, at a rate of tax which is higher
than that imposed on the profits of a similar company of the first
mentioned Contracting State, nor as being in conflict with the
provisions of business profits. However, the difference in tax rate will
not exceed 10 % points in any case.

iii) Exchange of Information:

The
competent authorities of the States will exchange information for the
purposes of carrying out provisions of the DTAA between India and Swiss
and the domestic laws and compliances concerning the taxation. Further,
the exchange of information is not restricted to apply only to the
residents of the Contracting State alone. Proper disclosure methods have
also been provided. On a request for information from India,
Switzerland will need to use its administration to obtain that
information regardless of whether it requires this information under its
own tax laws, as long as it does not violate its legal process. The
information may be held by a bank, financial institution, nominee or
person acting in an agency or a fiduciary capacity. But for the same,
India has to first exhaust its own laws to obtain the information. A
host of procedures are provided in the protocol which are mandatory.

The
amendment clarifies that exchange of information which is foreseeable
and relevant, the procedure has to be set out in order to safeguard the
genuine issues.

iv) Definition of the term “Resident of a Contracting State” in Article 4 (1) expanded:

A
new paragraph is added to the Protocol, which expands the scope of the
term “Resident of a Contracting State”, and includes a recognised
pension fund or pension scheme in that Contracting State. These pension
funds or pension schemes will be recognised and controlled according to
the statutory provisions of that State, which is generally exempt from
income tax in that state and which is operated principally to administer
or provide pension or retirement benefits.

v) Conduit Arrangement:

This
provision is a anti-abuse provision. It states that benefits under
Articles 10 (Dividends), Article 11 (interest), Article 12 (Royalty) and
Article 22 (Other Income) would not be available, where such sums are
received under a “conduit arrangement”.

The term “Conduit Arrangement” means a transaction or series of transactions which is structured in such a way that a resident of a Contracting State entitled to the benefits of the Agreement, receives an item of income arising in the other Contracting State but that resident pays, directly or indirectly, all or substantially all of that income (at any time or in any form) to another person who is not a resident of either Contracting State and who, if it received the item of income directly from the other Contracting State in which the income arises, or otherwise, to benefits with respect to that item of income which are equivalent to, or more favourable than those available under this agreement to a resident of a Contracting State and the main purpose of such structuring is obtaining benefits under this Agreement.

3.    Lithuania

India signed a DTAA with Lithuania on 26-07-2011 and notified on 26 -07-2012, effective from 01 -04-2013. Lithuania is the first Baltic country with which a DTAA has been signed by India.

The Agreement provides for fixed place PE, building site, construction & installation PE, service PE, Off-shore exploration/exploitation PE and agency PE.

Dividends, interest and royalties & fees for technical services income, will be taxed both in the country of residence and in the country of source. The low level of withholding rates of taxation for dividend (5% & 15%), interest (10%) and royalties & fees for technical services (10%) will promote greater investments, flow of technology and technical services between the two countries.

The Agreement further incorporates provisions for effective exchange of information including exchange of banking information and supplying of information without recourse to domestic interest. Further, the Agreement provides for sharing of information to other agencies with the consent of supplying state. The Agreement also has an article on assistance in collection of taxes. This article also includes provision for taking measures of conservancy. The Agreement incorporates anti-abuse (limitation of benefits) provisions to ensure that the benefits of the Agreement are availed of by the genuine residents of the two countries.

4.    Mozambique

India has notified the DTAA with Mozambique on 31st May, 2011, effective from 1st April, 2012.

The DTAA provides that profits of a construction, assembly or installation project will be taxed in the state of source, if the project continues in that state for more than 12 months.

The DTAA provides that profits derived by an enterprise from the operation of ships or aircraft in international traffic, shall be taxable in the country of residence of the enterprise. Dividends, interest and royalties income will be taxed both in the country of residence and in the country of source. However, the maximum rate of tax to be charged in the country of source will not exceed 7.5% in the case of dividends and 10% in the case of interest and royalties. Capital gains from the sale of shares will be taxable in the country of source.

The Agreement further incorporates provisions for effective exchange of information and assistance in collection of taxes including exchange of banking information and incorporates anti-abuse provisions to ensure that the benefits of the Agreement are availed of by the genuine residents of the two countries.

5.    Tanzania – Revised DTAA

India has signed a revised DTAA with Tanzania on 27th May, 2011, effective from 1st April, 2012.

The DTAA provides that business profits will be taxable in the source state, if the activities of an enterprise constitute a permanent establishment in the source state. Profits of a construction, assembly or installation project will be taxed in the state of source, if the project continues in that state for more than 270 days.

The DTAA provides that profits derived by an enterprise from the operation of ships or aircrafts in international traffic shall be taxable in the country of residence of the enterprise. Dividends, interest and royalties income will be taxed both in the country of residence and in the country of source. However, the maximum rate of tax to be charged in the country of source will not exceed a two-tier 5% or 10% in the case of dividends and 10% in the case of interest and royalties. Capital gains from the sale of shares will be taxable in the country of source.

The Agreement further incorporates provisions for effective exchange of information and assistance in collection of taxes including exchange of banking information and incorporates anti-abuse provisions, to ensure that the benefits of the Agreement are availed of by the genuine residents of the two countries.

6.    Georgia

India has signed a DTAA with Georgia on 24-08-2011, effective from 1st April, 2012.

The Agreement provides for fixed place PE, Building Site, Construction & Installation PE, Service PE, Insurance PE and Agency PE. The Agreement incorporates para 2 in Article concerning Associated Enterprises. This would enhance recourse to Mutual Agreement Procedure, to relieve double taxation in cases involving transfer pricing adjustments.

Dividends, interest and royalties & fees for technical services income will be taxed both in the country of residence and in the country of source. The low level of withholding rates of taxation for dividend (10%), interest (10%) and royalties & fees for technical services (10%) will promote greater investments, flow of technology and technical services between the two countries.

The Agreement incorporates provisions for effective exchange of information, including exchange of banking information and supplying of information without recourse to domestic interest. The Agreement also provides for sharing of information to other agencies with the consent of supplying state.

The Agreement has an article on assistance in collection of taxes, including provision for taking measures of conservancy. The Agreement incorporates anti-abuse (limitation of benefits) provisions to ensure that the ben-efits of the Agreement are availed of by the genuine residents of the two countries.

7.    Singapore

India has signed a Second Protocol amending DTAA with Singapore on 24th June, 2011, entered into force from 1st September, 2011, but shall be given effect to for taxable periods falling after 01-01-2008, i.e. Financial Year 2008-09 & subsequent financial years. Both India and Singapore have adopted internationally agreed standard for exchange of information in tax matters. This standard includes the principles incorporated in the new paragraphs 4 and 5 of OECD Model Article on ‘Exchange of Information’ and requires exchange of information on request in all tax matters for the administration and enforcement of domestic tax law without regard to a domestic tax interest requirement or bank secrecy for tax purposes.

8.    Norway

India signs revised DTAA with Norway on 2nd February, 2011, effective from 1st April, 2012.

The revised tax treaty provides for exchange of information between the two nations including banking data. It also provides that each state would be required to collect and provide the information, even though such information is not needed by that state.

It also provides for the Limitation of Benefit (LOB) clause, whereby the treaty benefit would be denied, if the main purpose of the transaction or creation or existence of residence is to avail the treaty benefit.

9.    Japan

India has notified on 24-05-2012, amendments to Article 11 of the India-Japan DTAA, but effective from 1st April, 2012.

As per Article 11(3), interest arising in India and derived by Central Bank or any financial institution wholly owned by Government of Japan, is not taxable in India. Earlier, Inter-national business unit of Japan Finance Corporation was one of the entities entitled to the benefit under Article 11(3). According to the amendment, Japan Bank for International Cooperation would be entitled to the benefit now, instead of the International business unit of Japan Finance Corporation.

10.    Taipei (Taiwan)

The Taipei Economic and Cultural Center in New Delhi has signed a DTAA with the India – Taipei Association in Taipei. Taiwan’s Ministry of Finance (MOF) on August 17, 2012 announced that Taiwan’s income tax agreement and protocol with India entered into force on August 12, 2012 and will apply to income derived from Taiwan on or after January 1, 2012, and to income derived from India on or after April 1, 2012. The agreement has been entered u/s. 90A of the Income-tax Act, 1961 wherein any “specified association” in India may enter into a DTAA with any “specified association” in a “specified territory” outside India. The Taipei Economic and Cultural Center in New Delhi and India – Taipei Association in Taipei have been notified as “specified associations” and “the territory in which the taxation law administered by the Ministry of Finance in Taipei is applied”, has been notified as the “specified territory” for the purpose of Section 90A.

Salient Features of the DTAA

Persons Covered – The DTAA applies to persons who are residents of India, Taipei or both.

Taxes Covered
•    In case of India, the DTAA will cover income tax (including any surcharge thereon).
•    In the case of Taipei, it would cover the following (including the supplements levied thereon):

–  the profit seeking enterprise income tax;

–  the Individual consolidated income-tax; and

–  the income basic tax.

Definition of Person

•    The term “person” to include an individual, a company, a body of persons and any other entity which is treated as a taxable unit under the taxation laws of the respective territories.

Resident

•    In order to qualify as a “resident of a territory” under the DTAA, person has to be “liable to tax” therein by reason of his domicile, residence, place of incorporation, place of management or any other criterion of a similar nature, and also includes that territory and any sub-division or local authority thereof.

•    Further, the term ‘resident’ does not include any person who is liable to tax in that territory only in respect of income from sources in that territory.

•    In case of dual residency, necessary tie breaker rules have been prescribed to determine tax residency. For individuals, the DTAA provides for criteria such as permanent home, centre of vital interests, habitual abode, etc. For persons other than individuals, the tie breaker provides for place of effective management criteria.

Permanent Establishment (‘PE’) – The DTAA contains clauses for constitution of a fixed place PE and inclusions thereon. For construction/supervisory PE, the activities at a building site, or construction, installation, or assembly project or supervisory activities should last for more than 270 days. In respect of constituting a PE by way of furnishing of services, including consultancy services, the services should be rendered for a period or periods aggregating to more than 182 days within any 12 month period for the same or connected project.

Shipping and air transport – Profits from operation of ships or aircraft in international traffic shall be taxable only in the territory of residence.

Dividends, Interest, Royalties and Fees for Technical services (‘FTS’)

•    Dividends, Interest, Royalties and FTS may be taxed in the territory of residence as well as in the source territory.

•    The rate of tax in the source territory shall not exceed the following rates (on a gross basis) in case the beneficial owner of the Dividend, Interest, Royalties and FTS is a resident of the other territory:

– Dividends: 12.5%
– Interest: 10%
– Royalties and FTS: 10%

•    FTS has been defined to mean payments of any kind, including the provision of services of technical or other personnel.

Capital gains

•    Income by way of Capital gains shall be taxed as follows:

– From alienation of Immovable property: In the territory in which the immovable property is situated.

– From alienation of ships or aircraft operated in international traffic: The territory in which the alienator is a resident.

– From alienation of shares deriving more than 50% value from immovable property: In the territory in which such immovable property is situated.

– From alienation of any other shares: The territory in which the company whose shares are alienated, is a resident.

– From alienation of any other property: The territory in which the alienator is a resident.

Methods of Elimination of Double Taxation (Tax Credit)

•    The DTAA allows for the “credit method” to eliminate taxation of income by both India and Taipei. The tax credit for taxes paid on such income in the other territory is available as a credit to a taxpayer in his territory of residence. However, the above tax credit should not exceed the tax on the doubly taxed income in the territory of his residence.

•    It has also been provided that, where any income received in accordance with the provisions of the DTAA by the resident of the other country is exempt from tax in the country of residence, then in calculating the tax on the remaining income of such resident, the resident country may nevertheless take into the exempted income.

•    Further, India would not grant credit to its residents on the Land Value Increment Tax imposed under the Land Tax Act, in Taiwan.

Limitation of Benefits (LOB)

•    This Article restricts the benefits under the DTAA if the primary purpose or one of the primary purposes was to obtain the benefits of the DTAA. Legal entities not having bonafide business activities are also covered by the LOB clause.
(Source: Taiwan’s Ministry of Finance)

11.    Nepal

India signed a revised DTAA with Nepal on 27-11-2011 and notified on 12-06-2012, effective from fiscal year beginning on or after the 1st day of April, 2013.

B)    DTAAs signed but not notified

12.    Australia – Protocol amending the DTAA

The protocol was finalised in February, 2011. The protocol amending the DTAA was signed on 16th December, 2011. However, the same is not yet notified.

In the Protocol, the threshold limit to avail the exemption for service, exploration and equipment permanent establishments and taxation thereof have been enhanced/rationalised to encourage cross border movement of capital and services between the two countries. It also removes the “Force of Attraction Rule” in Article 7.

The Exchange of Information Article is updated to internationally accepted standards for effective exchange of information on tax matters, including bank information, and also for exchange of information without domestic tax interest. It also provides that the information received from Australia in respect of a resident of India can be shared with other law enforcement agencies with authorisation of the competent authority of Australia and vice-versa. This will facilitate higher degree of mutual cooperation between the two countries.

The protocol provides that India and Australia shall lend assistance to each other in the collection of revenue claims.

According to it, the assets or money kept in one country can be recovered by the other country for the purposes of recovery of taxes by following certain conditions and procedure.

In the existing treaty, the concept of non-discrimination was not present. As per the protocol signed, nationals of one country shall not be discriminated against the nationals of the other country in the same circumstances in line with international practices.

13.    UK – Protocol to the DTAA

India has signed a protocol dated 30th October, 2012 with UK and Northern Ireland amending the DTAA. This Protocol amends the DTAA which was signed on 25th January, 1993. However, the same is not yet notified.

The Protocol streamlines the provisions relating to partnership and taxation of dividends in both the countries. Now, the benefits of the DTAA would also be available to partners of the UK partnerships to the extent income of UK partnership are taxed in their hands. Further, the withholding taxes on the dividends would be 10% or 15% and would be equally applicable in UK and in India.

The Protocol also incorporates into the DTAA anti-abuse (limitation of benefits) provisions to ensure that the benefits of the DTAA are not misused.

The Protocol incorporates in the DTAA provisions for effective exchange of information, including exchange of banking information and supplying of information irrespective of domestic interest. It now also provides for sharing of information to other agencies with the consent of the supplying state.

There would now be a new article in the DTAA on assistance in collection of taxes. This article also includes provision for taking measures of conservancy.

14.    Indonesia – Revised DTAA

India has signed a revised DTAA with Indonesia on 27th July, 2012. However, the same is not yet notified.

The revised DTAA gives taxation rights in respect of capital gains on alienation of shares of a company to the source State. The Agreement further provides for rationalisation of the tax rates on dividend income, royalties and Fees for Technical Services in the source State @ 10%.

The revised DTAA further incorporates provisions for effective exchange of information including banking information and sharing of information without domestic tax interest. The revised DTAA also provides for assistance in collection of taxes and incorporates Limitation of Benefits and anti-abuse provisions to ensure that the benefits of the Agreement are availed of by the genuine residents.

15.    Uruguay

India has signed a DTAA with Uruguay on 8th September, 2011. However, the same is not yet notified.

The DTAA provides that profits derived by an enterprise from the operation of ships or aircraft in international traffic shall be taxable in the country of residence of the enterprise. Dividends, interest and royalty income will be taxed both in the country of residence and in the country of source. However, the maximum rate of tax to be charged in the country of source will not exceed 5% in the case of dividends and 10% in the case of interest and royalties. Capital gains from the sale of shares will be taxable in the country of source and tax credit will be given in the country of residence.

The Agreement also incorporates provisions for effective exchange of information including banking information and assistance in collection of taxes including anti-abuse provisions to ensure that the benefits of the Agreement are availed of by the genuine residents of the two countries.

16.    Ethiopia

India has signed a DTAA with Ethiopia on 25th May, 2011. However, the same is not yet notified.

The DTAA provides that profits of a construction, assembly or installation projects will be taxed in the state of source if the project continues in that state for more than 183 days.

The DTAA provides that profits derived by an enterprise from the operation of ships or aircrafts in international traffic shall be taxable in the country of residence of the enterprise. Dividends, interest, royalties and fees for technical services income will be taxed both in the country of residence and in the country of source. However, the maximum rate of tax to be charged in the country of source will not exceed 7.5% in the case of dividends and 10% in the case of interest, royalties and fees for technical services. Capital gains from the sale of shares will be taxable in the country of source.

The Agreement incorporates provisions for effective exchange of information and assistance in collection of taxes including exchange of banking information and incorporates anti-abuse provisions to ensure that the benefits of the Agreement are availed of by the genuine residents of the two countries.

17.    Colombia

India has signed a DTAA with Colombia on 13-05-2011. However, the same is not yet notified.

The DTAA provides that profits of a construction, assembly or installation projects will be taxed in the State of source if the project continues in that State for more than six months.

The DTAA provides that profits derived by an enterprise from the operation of ships or aircraft in international traffic shall be taxable in the country of residence of the enterprise. Dividends, interest and royalty income will be taxed both in the country of residence and in the country of source. However, the maximum rate of tax to be charged in the country of source will not exceed 5% in the case of dividends and 10% in the case of interest and royalties. Capital gains from the sale of shares will be taxable in the country of source.

The Agreement further incorporates provisions for effective exchange of information and assistance in collection of taxes including exchange of banking information and incorporates anti-abuse provisions to ensure that the benefits of the Agreement are availed of by the genuine residents of the two countries.

18.    Netherlands

India and Netherlands have concluded a Protocol on 10th May, 2012 to amend the Article 26 of the DTAA concerning Exchange of Information. However, the same is not yet notified.

The Protocol will replace the Article concerning Exchange of Information in the existing DTAC between India and Netherlands and will allow exchange of banking information as well as information without domestic interest. It will now allow use of information for non-tax purpose if allowed under the domestic laws of both the countries, after the approval of the supplying state.