Friday, September 2, 2011

Double Taxation Avoidance Agreement- Economics topic

Double Taxation Avoidance Agreement
-The Central Government is empowered under Section 90 of the Income Tax Act to enter into Double Tax Avoidance Agreements with other countries.

-The main purpose of such agreements is to evolve a just system of taxation of different types of income in both the state of source and state of residence.

-It may be understood that a non-resident carrying out business in a foreign country becomes liable to pay tax in the country by virtue of it being the source state and also in his own country by virtue of it being the country of residence.

-Tax incidence, therefore, becomes an important factor influencing the non-residents in deciding about the location of their investment, services, technology etc.

-Tax treaties such as Double Taxation Avoidance Agreement serve the purpose of providing protection to tax payers against double taxation and thus preventing the discouragement which taxation may provide in the free flow of international trade, international investment and international transfer of technology.

Double Taxation Avoidance Agreement with Tanzania

-India during the visit of Prime Minister Manmohan Singh to Tanzania in May 2011, signed a Double Taxation Avoidance Agreement (DTAA) with the country.

-The Agreement was signed by Shri K V Bhagirath, High Commissioner of India on behalf of the Government of India and by Mr Pereira Ame Silima, Deputy Minister of Finance on behalf of the United Republic of Tanzania in the presence of the Prime Minister, Dr Manmohan Singh and the President of Tanzania Mr Kikwete on 27 May 2011.
The Double Taxation Avoidance Agreement provides the following features:
  1. Business profits will be taxable in the source state if the activities of an enterprise constitute a permanent establishment in the source state. Examples of permanent establishment include a branch, factory, etc. 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 270 days.
  2. 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.
  3. 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.
  4. Capital gains from the sale of shares will be taxable in the country of source.
Double Taxation Avoidance Agreement with Ethiopia

-India had earlier signed a similar agreement with Ethiopia on 25th May, 2011 at Addis Ababa.

-The Agreement was signed by Shri S.M. Krishna, External Affairs Minister on behalf of the Government of India and by Mr. Sufian Ahmed, Minister of Ethiopia in the presence of the Prime Minister, Dr. Manmohan Singh and the Ethiopian Prime Minister. Mr. Meles Zenawi.

-The DTAA provides for similar features as stated above except that for 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.

-Secondly, the maximum rate of tax to be charged in the country of source in respect of dividents, interest and royalties income will not exceed 7.5% in the case of dividends and 10% in the case of interest, royalties and fees for technical services.

-Both the Agreements further incorporates provisions for effective exchange of information and assistance in collection of taxes between tax authorities of the two countries in line with internationally accepted standards including exchange of banking information and incorporates anti-abuse provisions to ensure that the benefits of the Agreement are availed only by the genuine residents of the two countries.

Double Taxation Avoidance Agreement with Mozambique

-The latest on Double Taxation Avoidance Agreement is the signing of similar consensus with Mozambique on 31 May 2011.

-However, in this 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 12 months.

-Secondly, 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.

-It is further stated that the Agreement will provide tax stability to the residents of India and Mozambique and facilitate mutual economic cooperation as well as stimulate the flow of investment, technology and services between India and Mozambique.

Double Taxation Avoidance Agreement with Columbia

-India had earlier on May 13 signed a Double Taxation Avoidance Agreement with the Republic of Columbia.

-As per the treaty, profits of a construction, assembly or installation project is to be taxed in the source state if the project continues in that state for more than six months.

-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 per cent in the case of dividends and 10 per cent in the case of interest and royalties.

-Capital gains from the sale of shares will be taxable in the country of source.

-More importantly, the DTAA incorporates provisions for effective exchange of information and assistance in collection of taxes between tax authorities of the two countries in line with internationally accepted standards.

-This includes exchange of banking information and also incorporates anti-abuse provisions to ensure that the benefits of the agreement are availed of by genuine residents of the two countries.

Double Taxation Avoidance Agreement with Lithuania

-The Government of India on Jul 26, 2011 signed an Agreement and Protocol for Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital (DTAA) with Government of Lithuania.

-The Agreement and the Protocol were signed by Shri Prakash Chandra, Chairman, Central Board of Direct Taxes, on behalf of the Government of India and Mr. Petras Simeliunas, Ambassador, Republic of Lithuania to India, on behalf of the Government of Lithuania.

-Lithuania is the first Baltic country with which DTAA has been signed by India. (Baltic states are Estonia, Latvia and Lithuania. Other countries located in the Baltic Sea region are Sweden, Denmark, Finland, Germany, Poland, and the western Russia).

-The DTAA provides that business profits will be taxable in the source state if the activities of an enterprise constitute a permanent establishment (PE) in the source state.

-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 between tax authorities of the two countries in line with latest international standard, 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.

-The Agreement will provide tax stability to the residents of India and Lithuania and will facilitate mutual economic cooperation between the two countries. It will also stimulate the flow of investment, technology and services between India and Lithuania.

Double Tax Avoidance Agreement with Georgia

-The Government of India on 24 Aug 2011 signed an Agreement for Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital (DTAA) with Government of Georgia.

-The Agreement was signed by Mr. M.C.Joshi, Chairman, Central Board of Direct Taxes(CBDT) on behalf of the Government of India and Mr. Zurab Katchkatchishvili, Ambassador of Georgia to India on behalf of the Government of Georgia.

-The DTAA provides that business profits will be taxable in the source state if the activities of an enterprise constitute a Permanent Establishment (PE) in the source state.

-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 & fess 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 between tax authorities of the two countries in line with best international standards, including exchange of banking information and supplying of information without recourse to domestic interest.

-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 benefits of the Agreement are availed of by the genuine residents of the two countries.

-The Agreement will provide tax stability to the residents of India and Georgia and will facilitate mutual economic cooperation between the two countries. It will also stimulate the flow of investment, technology and services between India and Georgia.

Revision Questions
1. With which of the following countries has India recently (in May 2011) signed Double Taxation Avoidance Agreement?
  1. Tanzania
  2. Ethiopia
  3. Mozambique
  4. All the above countries
2. As per Double Taxation Avoidance Agreement signed by India with other countries which of the following is correct?
  1. A businessman who earns profits in the other country must pay taxes in India.
  2. A businessman who operates a ship to the other country must pay taxes on his profits in the other country.
  3. Dividends are taxable both in the country of source and country of residence.
  4. Capital gains from sale of shares is taxable in the country of residence.
3. Which of the following is true in respect of Double Taxation Avoidance Agreements signed by India with different countries from time to time?
  1. The Government is authorised to do so under the Income Tax Act, 1961
  2. Double Taxation Avoidance Agreement is entered to minimise black money
  3. International Trade gets hampered due to such agreements
  4. None of the above

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