Tax Avoidance treaties

About

India has entered into several tax treaties with other countries to avoid double taxation and curb tax evasion. These agreements aim to promote cross-border trade and investment by ensuring that individuals and businesses are not taxed twice on the same income in two jurisdictions. Here's an overview:

1. Double Taxation Avoidance Agreements (DTAAs):
  • Definition: Agreements between two countries to avoid taxing the same income twice.
  • Purpose:
    • Prevent double taxation of income earned in one country and repatriated to the taxpayer's home country.
    • Reduce tax burdens for businesses and individuals.
    • Facilitate information exchange between countries to prevent tax evasion.
  • Coverage:
    • Income from services, salaries, interests, royalties, dividends, capital gains, and other sources.
  • Methods Used:
    • Exemption Method: Income is taxed in one country only.
    • Tax Credit Method: Taxes paid in one country are credited against taxes owed in the other.
2. Key Provisions in Indian DTAAs:
  • Most Favored Nation Clause (MFN): Some treaties include an MFN clause that ensures non-discriminatory tax treatment.
  • Lower Tax Rates: India's DTAAs often set lower withholding tax rates on dividends, interest, royalties, and fees for technical services.
  • Limitation of Benefits (LOB): Prevents treaty abuse by ensuring benefits are only available to genuine residents of a contracting state.
3. Major DTAAs Signed by India:

India has signed over 90 DTAAs with various countries, including:

  • USA: Limits tax rates on dividends, royalties, and interest.
  • United Kingdom: Covers income from various sources like employment, pensions, and capital gains.
  • Mauritius and Singapore: Historically, these treaties have been used for investments, though amendments were made to prevent abuse.
  • UAE: Encourages trade and investments with reduced tax rates.
  • Germany, France, and Japan: Cover a wide range of income types.
4. Multilateral Instrument (MLI):
  • India is a signatory to the OECD's Base Erosion and Profit Shifting (BEPS) Multilateral Instrument, which modifies existing tax treaties to combat tax avoidance.
  • Introduced concepts like Principal Purpose Test (PPT) to prevent treaty abuse and aggressive tax planning.
5. Prevention of Tax Evasion Agreements:

India has agreements with several countries for the exchange of information to curb tax evasion:

  • Tax Information Exchange Agreements (TIEAs): Signed with countries like the Bahamas, Bermuda, and Cayman Islands.
  • Common Reporting Standard (CRS): Global framework for automatic exchange of financial account information.
6. Recent Updates and Amendments:
  • Amendments to treaties with Mauritius, Cyprus, and Singapore now tax capital gains arising from the transfer of Indian shares in India.
  • Implementation of General Anti-Avoidance Rules (GAAR) in India to address treaty abuse and aggressive tax planning.

Challenges in Tax Treaties:

  1. Misuse of treaties (e.g., treaty shopping through Mauritius and Cyprus).
  2. Ambiguities in certain provisions leading to litigation.
  3. Balancing interests between developed and developing countries.

 
 
 

-- Daily News Section Compiled

    By Vishwas Nimbalkar 
Posted by on 23rd Jan 2025
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