The Union Cabinet of India has given the green light for the ratification of the Protocol aimed at amending an ongoing Convention between the two nations for the Double Taxation Avoidance Convention (DTAC). These modifications aim to employ the recommendations from the Base Erosion and Profit Shifting Project (BEPS) initiated by G20 OECD.
Amendments and Expectations
The proposed changes intend to align the existing DTAC with international standards, promising increased tax certainty for businesses and investors from both countries. It is believed that the amendment will encourage investment flow by reducing tax rates and technical service fees.
Double Tax Avoidance Agreements
DTAAs are tax treaties signed between two or more nations. Primarily, these agreements help taxpayers avoid the inconvenience of being taxed twice on the same income. This circumstance typically occurs when a taxpayer resides in country A while earning an income in country B. Tax relief is provided either by exempting the foreign-earned income from tax in the resident country or by offering credit for the taxes already paid abroad.
Base Erosion and Profit Shifting
Base Erosion and Profit Shifting (BEPS) is a term coined to describe tax planning strategies that utilize gaps and mismatches existing between varying jurisdictions’ tax rules. These tactics help to minimize the corporation tax payable overall, either by rendering tax profits ‘invisible’ or by transferring profits to a jurisdiction with low tax rates and negligible real activity. BEPS primarily impact developing countries heavily dependent on corporate income tax, especially revenues from multinational enterprises (MNEs).
| Term | Definition |
|---|---|
| Agreement | A negotiated and usually legally enforceable understanding between two or more legally competent parties. It can result in a binding contract. |
| Convention | A formal agreement open for participation of various states, synonymous with the term ‘treaty’. |
| Protocol | An agreement formulated and signed by negotiators as the basis for a final convention or treaty. |
OECD/G20 Base Erosion and Profit Shifting Project
The Organization for Economic Co-operation and Development (OECD) and G20 countries adopted a 15-point Action Plan to address BEPS in 2013. Their joint project seeks to establish a single, consensus-driven set of international tax rules that successfully addresses BEPS and protects tax bases. In 2016, they established an Inclusive Framework on BEPS and has since been joined by over 100 countries and jurisdictions.
