Double Tax Avoidance Agreement (DTAA)

Double Tax Avoidance Agreement (DTAA)

 

Basics and Background:

  • A DTAA is a tax treaty signed between two or more countries. Its key objective is that tax-payers in these countries can avoid being taxed twice for the same income. A DTAA applies in cases where a tax-payer resides in one country and earns income in another.
  • DTAAs can either be comprehensive to cover all sources of income or be limited to certain areas such as taxing of income from shipping, air transport, inheritance, etc.
  • India recently amended its Double Taxation Avoidance Agreement (DTAA) with Mauritius to plug certain loopholes.
  • Now, a Mauritian entity will have to pay capital gains tax here while selling shares in a company in India from April 2017.
  • Earlier, the company could avoid tax as it was not a ‘resident’ in India. It could get away from the taxman in Mauritius too, due to non-taxation of capital gains for its residents.
  • As a result, many shell entities sprang up in Mauritius to profit from investments in India and get away without paying taxes anywhere.

 

Importance of DTAA:

  • DTAAs are intended to make a country an attractive investment destination by providing relief on dual taxation.
  • Such relief is provided by exempting income earned abroad from tax in the resident country or providing credit to the extent taxes have already been paid abroad. DTAAs also provide for concessional rates of tax in some cases.

 

India has DTAAs with which nations?

  • India has DTAAs with more than eighty countries, of which comprehensive agreements include those with Australia, Canada, Germany, Mauritius, Singapore, UAE, UK and USA.

 

What are the benefits of DTAA?

  • DTAAs are intended to make a country an attractive investment destination by providing relief on dual taxation.
  • Such relief is provided by exempting income earned abroad from tax in the resident country or providing credit to the extent taxes have already been paid abroad. For example, if a person is sent on deputation abroad and receive emoluments during stint away from home, income may sometimes be subject to tax in both the countries.
  • The person can claim relief when filing tax return for that financial year, if there is an applicable DTAA.
  • Similarly, if the person is an NRI having investments in India, DTAA provisions may also be applicable to income from these investments or from their sale. DTAAs also provide for concessional rates of tax in some cases.
  • For instance, interest on NRI bank deposits attract 30 per cent TDS (tax deduction at source) here. But under the DTAAs that India has signed with several countries, tax is deducted at only 10 to 15 per cent. Many of India’s DTAAs also have lower tax rates for royalty, fee for technical services, etc.

 

Categories

  • The following categories are covered under the Double Taxation Avoidance Agreements (DTAA):
    1. services
    2. salary
    3. property
    4. capital gains
    5. savings/fixed deposit accounts

 

Base Erosion and Profit Shifting (BEPS)

  • BEPS is a term used to describe tax planning strategies that exploit mismatches and gaps that exist between the tax rules of different jurisdictions.
  • It is done to minimize the corporation tax that is payable overall, by either making tax profits ‘disappear’ or shift profits to low tax jurisdictions where there is little or no genuine activity.
  • In general BEPS strategies are not illegal; rather they take advantage of different tax rules operating in different jurisdictions.
  • BEPS is of major significance for developing countries due to their heavy reliance on corporate income tax, particularly from multinational enterprises (MNEs).
  • The BEPS initiative is an OECD initiative, approved by the G20, to identify ways of providing more standardised tax rules globally.

 

India Sri Lanka DTAA Amended

  • Recently, the Union Cabinet approved the signing and ratification of the protocol amending the agreement between India and Sri Lanka for the avoidance of double taxation and the prevention of fiscal evasion.
  • The existing DTAA between India and Sri Lanka was signed on January 22, 2013, and entered into force on October 22, 2013.
  • India and Sri Lanka are members of the Inclusive Framework and as such are required to implement the minimum standards in respect of their DTAAs with Inclusive Framework countries.
  • India is a signatory to the MLI, however, Sri Lanka is not a signatory to the MLI as of now.
  • Therefore, amendment of the India-Sri Lanka DTAA bilaterally is required to update the Preamble and also to insert Principal Purpose Test (PPT) provisions to meet the minimum standards.