Amending tax treaties, government plugs treaty shopping by investors

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Chennai, Dec 31 (IANS) Amending the tax treaties with foreign governments shows the Bharatiya Janata Party (BJP)-led governments attitude to plug treaty shopping by many multinational companies (MNC) and foreign institutional investors (FII), said an expert.

“The recent amendment in tax treaties underscores government’s no-nonsense approach with respect to innovative treaty shopping or treaty abuse presently being followed by many MNC/FII investing in India,” Amit Agarwal, Partner, Nangia and Co, an international tax advisory and accounting firm, told IANS.

“Notably, India is one of the active participants to the BEPS (Base Erosion Profit Shifting) project, one of the action plans of which is to discourage practices of treaty abuse or treaty shopping,” Agarwal added.

The government on Friday announced amending of the Double Taxation Avoidance Agreement (DTAA) with Singapore for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income, by signing a Third Protocol.

This is in line with India’s treaty policy to prevent double non-taxation, curb revenue loss and check the menace of black money through automatic exchange of information, as reflected in the nation’s recently revised treaties with Mauritius and Cyprus and the joint declaration signed with Switzerland.

“Singapore route was widely used for treaty shopping as investors were used to create shell companies claiming it to be a resident of Singapore. Thus, this loophole is plugged to cover for revenue loss and control black money routed via this route,” Rakesh Bhargava, Director, Taxmann, said.

In the recent past the government has taken many crucial decisions to tackle black money whether it be a demonetisation drive or revising of treaty with Mauritius and Cyprus, Bhargava added.

“Under this Protocol, India will get the right to tax capital gains arising on transfer of shares acquired on or after April 1, 2017,” Agarwal said.

A two-year transition period from April 1, 2017, to March 31, 2019, has been provided during which capital gains taxation in the source country will be limited to half the normal rate.

But that is subject to fulfilment of conditions specified under the existing Limitation of Benefits (LoB) Article in the India-Singapore Tax Treaty, Agarwal said.

“For shares acquired prior to 31 March 2017, grandfathering will be applicable and capital gains derived thereon will be taxable in the state of alienator i.e. where seller is a resident of Singapore, the same shall be taxed in Singapore,” he added.

Taxation in India at full domestic tax rate will take place from financial year 2019-20 onwards.

“However, it will be interesting to read in the fine print as to what the withholding on interest under the revised treaty would be which is not mentioned in the press release (government statement). The Mauritius treaty provides for 7.5 per cent vis-à-vis 15 per cent in the India Singapore treaty,” Girish Vanvari, National Head of Tax, KPMG in India said.

“This is clearly a watch point for investors from Singapore investing through debt instrument,” Vanvari said.

According to Vanvari the amending the tax treaty will be a big boost to foreign exchange flows into the country.

“All eyes now on what is the final take on the withholding rate of interest under the revised India- Singapore treaty in the fine print,” Vanvari reiterated.

According to Agarwal, the Third Protocol also inserts provisions to facilitate relieving of economic double taxation in transfer pricing cases to meet the BEPS minimum standard of providing Mutual Agreement Procedure (MAP) access in such cases.

It also enables the application of domestic law and measures concerning the prevention of tax avoidance/evasion.

“Overall this is an important step in resolution of transfer pricing and international taxation disputes through competent authorities and paves way for elimination of economic double taxation,” Agarwal said.

–IANS

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