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    India-DTAA-Recent Developments

    Indian Tax environment has been rapidly changing to absorb the global changes and the need to curb the tax avoidance and restrict the black money, which have been the primary objectives of the government. The recent developments provide us with a glimpse of India’s treaty policy to prevent double non-taxation, curb revenue loss and check the menace of black money through automatic exchange of information. The following is a summary of the recent India- DTAA developments:

     

    India – Singapore:

     

    ØResident based to Source based: The India-Singapore DTAA at present provides for residence based taxation of capital gains of shares in a company. The Third Protocol amends the DTAA with effect from 1st April, 2017 to provide for source based taxation of capital gains arising on transfer of shares in a company. This will curb revenue loss, prevent double non-taxation and streamline the flow of investments.

     

    ØGrandfathering clause: Investments in shares made before 1st April, 2017 have been grandfathered subject to fulfillment of conditions in Limitation of Benefits clause as per 2005 Protocol.

     

    ØTransition Period: Two year transition period from 1st April, 2017 to 31st March, 2019 has been provided during which capital gains on shares will be taxed in source country at half of normal tax rate, subject to fulfillment of conditions in Limitation of Benefits clause.

     

    ØLOB:Under the present Treaty, and as retained in the Protocol, an entity is not entitled to the capital gains tax exemption in the source state if its affairs were arranged with the primary purpose to take advantage of such benefits. Similarly, shell or conduit companies, viz., resident legal entities with negligible or nil business operations, or with no real and continuous business activities, are disentitled from availing the capital gains exemption in the source state.

     

    The aforementioned conditions of the primary purpose test under the "Limitation of Benefits" (LOB) article have also been made applicable to entities seeking to claim benefit of the 50% lower tax rate under the Protocol during the transition period from 1 April 2017 to 31 March 2019 (Transition Period).

     

    The expenditure thresholds and corresponding temporal limits to avail of the capital gains exemption on investments made prior to 1 April 2017 continue to remain the same in the Protocol, i.e., an annual expenditure of at least S$ 200,000 in Singapore or INR 5,000,000 in India on operations in each of the two blocks of 12 months in the immediately preceding period of 24 months from the date on which the gains arise

    ØMAP:The Third Protocol also inserts provisions to facilitate relieving of economic double taxation in transfer pricing cases. This is a taxpayer friendly measure and is in line with India’s commitments under Base Erosion and Profit Shifting (BEPS) Action Plan to meet the minimum standard of providing Mutual Agreement Procedure (MAP) access in transfer pricing cases. The article on "Associated Enterprises" under the Treaty has been amended to provide that a corresponding adjustment to the income/profits of an enterprise of one contracting state would be made when an addition is made in the income of its associated enterprise in the other contracting state. In determining such adjustment, due regard shall be had to the other provisions of the Treaty, and the competent authorities of the contracting states shall consult each other, if necessary

     

    ØGAAR: The Third Protocol also enables application of domestic law and measures concerning prevention of tax avoidance or tax evasion. (To give effect to GAAR)

     

    ØThings missed out, but can be subject to GAAR: While the transfer of capital assets other than shares, such as debentures, partnership interests etc., and an indirect transfer of Indian assets would continue to be tax exempt under the Protocol even after 1 April 2017, and would not be subject to the LOB test, such transactions will nevertheless be required to pass the muster of GAAR (i.e. the domestic anti-abuse tax law of India).

     

    India – Mauritius:

     

    ØTheProtocol for amendment of the India-Mauritius Convention signed on 10th May, 2016, provides for source-based taxation of capital gains arising from alienation of shares acquired from 1st April, 2017 in a company resident in India.

     

    ØGrandfathering and Transition: Investments made before 1st April, 2017 have been grandfathered and will not be subject to capital gains taxation in India. Where such capital gains arise during the transition period from 1st April, 2017 to 31st March, 2019, the tax rate will be limited to 50% of the domestic tax rate of India.

     

    ØLOB:The benefit of 50% reduction in tax rate during the transition period shall be subject to the Limitation of Benefits Article.

     

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

    India – Cyprus:

     

    ØTherevised DTAA between India and Cyprus signed on 18th November, 2016, provides for source based taxation of capital gains arising from alienation of shares, instead of residence based taxation provided under the DTAA signed in 1994.

     

    ØGrandfathering clause has been provided for investments made prior to 1st April, 2017, in respect of which capital gains would continue to be taxed in the country of which taxpayer is a resident.

     

    ØAssistance between the two countries for collection of taxes and updates the provisions related to Exchange of Information to accepted international standards.

     

    ØNomore NJA: Notification of Cyprus under section 94A of the Income Tax Act, 1961, as a notified jurisdictional area for lack of effective exchange of information, has been rescinded with effect from 1.11.2013 [Notification No. 114/2016 dated 14.12.2016].

     

    India – Switzerland:

     

    Fighting the menace of Black Money stashed in offshore accounts has been a key priority area for the Government. To further this goal, the ‘Joint Declaration’ for the implementation of Automatic Exchange of Information (AEOI) between India and Switzerland was signed in November, 2016.

     

    It will now be possible for India to receive from September, 2019 onwards, the financial information of accounts held by Indian residents in Switzerland for 2018 and subsequent years, on an automatic basis.

     

    Concluding Remarks:

     

    The above protocols in the International tax environment from India Perspective are significant changes and could have great impact on the structuring/ tax planning of the MNC’s and can also create transparency in the thought process of both the taxpayers and government. These changes/protocols indicate the importance of the exchange of information and source based taxation. With GAAR coming into picture very soon these changes would also help/attribute to the intentions of the government and would provide support in achieving the objectives.

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