· Any applicable treaty or domestic law,
whichever is more beneficial applies.
· The treaty definition of "permanent
establishment" and taxation of only such business profits as
are attributable thereto limit exposure otherwise possible under
domestic law.
· Lower withholding rates are available for
certain dividends, interest, royalties, land fees for technical
services.
· Generally, Indian treaties do not contain a
separate article to prevent treaty shopping.
The government of India continues its policy
to expand the network of international tax treaties and
renegotiate existing treaties. Appendix V lists the treaties in
force. The air of the treaties is to relieve double taxation, curb
tax evasion, and attract know-how and technology. As a developing
country, India seeks inclusion of tax-sparing provisions in its
treaties with developed counties, and this has often been a
stumbling block in concluding treaties (e.g., with the United
States). India also seeks to retian the right to tax royalties
land fees for technical services from Indian sources, although in
many cases at withholding rates lower than the general rate. Most
treaties are comprehensive, but some treaties are limited to
aircraft and / or shipping.
The later treaties tend to follow the U.N.
Model Convention. Any applicable tax treaty or domestic law,
whichever is more beneficial, applies.
Under domestic law, the rate of withholding
tax is 20 percent from dividends and taxable interest on foreign
currency loans payable to nonresidents. A lower rate of 10
percent applies in certain cases (see Appendix IV). The general
rate of withholding tax on royalties and fees for technical
services payable to foreign companies under agreements approved
by the government or in accordance with declared industrial
policy is 30 percent.
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Many treaties provide a reduced rate of
withholding from dividends, interest, royalties, and fees for technical
services, provided they are not effectively connected with a permanent
establishment. Generally, there is no treaty reduction for royalties,
fees for technical services and interest in excess of an arm's-length
charge, and the lower with holding rates usually apply only in the case
of beneficial ownership. Appendix IV lists the withholding tax rates on
dividends, interest, royalties, and fees for technical services. Fiscal
authorities are bound by the treaty withholding rates.
The concept of permanent establishment tends in
most cases to follow, with modifications, the U.N. Model Treaty. Fees
for technical services are generally dealt with separately under a
specific article in which India retains the right to withhold tax. In
many cases, "permanent establishment" includes a building
site or construction, installation or assembly project, or supervisory
activities in connection therewith where the site, project or
supervisory activity continues for more than a prescribed period
(usually six months) or, in certain cases, if the charge payable for
the project or supervisory activities exceeds a specified percentage
of the sale price of equipment. The treaties provide specific
guidelines as to the type of agency relationships that constitute a
permanent establishment. Normally, the use of storage or display
facilities, the maintenance of goods for processing by another
enterprise or the maintenance of a fixed place of business solely for
purchasing goods or collecting information does not constitute a
permanent establishment.
Under domestic law, a nonresident is taxed on all
income that is received in India or that arises or is deemed to arise
in India. This exposure is limited by the definition of permanent
establishment in the treaties and by the fact that only the business
profits attributable to the permanent establishment in the treaties
and by the fact that only the business profits attributable to the
permanent establishment are subject to Indian tax. The treaties do not
include a force-of-attraction clause, although income from interest,
dividends, royalties, and fees for technical services may be taxed as
business profits if they are effectively connected with a permanent
establishment. Some recent treaties also subject to tax the sale of
goods or other business activities in India of the same or a similar
kind as those sold or effected through the permanent establishment.
The attributable profits of a permanent
establishment are generally determined as if it were an independent
enterprise engaged in the same or similar activities under the same or
similar conditions. Some treaties protect domestic law, which limits
the allowance of head office expenses.
The treaties generally distinguish between
independent and dependent personal services. Independent personal
services are taxable in the country of performance only if the person
rendering the services has a fixed base in the country or stays in
that country for more than a prescribed number of days (usually 183
days, less in some cases). Dependent personal services are generally
exempt from tax in the country of performance if the employee is
present in that country for 183 days or less, the remuneration is
paid by or on behalf of an employer who is not resident in that
country, and the remuneration is not borne by a permanent
establishment or fixed base that the employer may have in that
country. A few agreements provide that the employer must a resident
of the other contracting state. Generally, there is no upper limit on
the amount that may be exempt. The treaty rules substantially reduce
the exposure a nonresident individual may otherwise have under
domestic law.
Most Indian treaties provide for reciprocal tax
exemption of international aircraft profits. Most treaties provide
tax exemption up to 50 percent of the domestic tax on international
shipping profits derived in the contracting state by an enterprise
of the other state. Some treaties provide for a reduction in the
percentage five years after the treaty comes into force. Several
recent treaties define "aircraft and shipping income" to
include income from specified incidental operations.
Indian treaties generally provide for the
elimination of double taxation on Indian residents under the credit
method, under which a credit is allowed from the Indian tax
liability equal to the lower of the foreign tax withheld or paid
and the Indian tax on the doubly taxed income. For nonresidents
liable to tax in India, the treaties provide for relief in their
country of residence in accordance with their laws, either by
exemption (with or without progression) or through credit against
the tax liability in that country. Some treaties entitle foreign
companies holding a prescribed percentage of shares in an Indian
company to claim a tax credit in their country of residence for
underlying taxes paid by the Indian company on their profits in
India in addition to the withholding tax on dividends. Certain
Indian treaties provide for allowance of a tax-sparing credit by
the other treaty partner.
A common antiabuse provision is the
precondition of beneficial ownership for taking advantage of lower
with holing rates on dividends, interest, royalties, and technical
service fees. Generally, the treaties prohibit the application of
lower withholding rates on interest, royalties and fees for
technical services in excess of the arm's-length charge if higher
amounts are agreed on due to special relationships. Associated
enterprises are subject to tax adjustment if the transactions
differ from those that would have been made between independent
enterprises.
The treaties do not generally contain any
special antiabuse articles to deal with treaty shopping. However,
a specific article in the treaty with the United States seeks to
prevent third-country residents from establishing a presence
solely to take advantage of the treaty.
Most treaties provide that the competent
authorities are to exchange such information as is necessary for
carrying out the provision of the treaty and for preventing fraud
or evasion of taxes. The treaties usually contain restrictions
regarding the treatment and type of information that may be
exchanged.
The treaties generally provide that a
resident of a contracting state may approach the competent
authority in the country of residence if it appears that the
actions of Tax authorities result or will result in taxation at
variance with the treaty, notwithstanding any other remedies
that may be available under the law. The competent authority
will attempt to reach an agreement with its counterpart in the
other country to resolve the issue.
General Section
