International Agreements

INTRODUCTION

International Agreements based on Taxation are formulated either between two countries or between various countries depending upon the nature of the agreement signed between the respective parties. They aim to facilitate and foster peace and cooperation between the nations. Their objective is to eliminate tax evils such as double taxation, fiscal evasion, tax erosion and many more. Hence, India has become a part of various treaties to achieve the above objective.

Below are the summary of few International Agreements entered into by India internationally:

TAX INFORMATION EXCHANGE AGREEMENTS (TIEAS)

Tax Information Exchange Agreements are constructed to facilitate and promote international cooperation in tax matters for the provision of exchange of information on request relating to a specific criminal or civil tax matters under investigation. It was developed by the OECD Global Forum Working Group on Effective Exchange of Information. A large number of bilateral agreements have been based on this Agreement. Since the threat of black money has always been on the rise. In order to eradicate this issue at the root, India has resorted to legal recourse. Ergo, India has entered into 17 Tax Information Exchange Agreements for effective exchange of information. The list of countries is:

1. Argentina
2. Bahamas
3. Bahrain
4. Bermuda
5. Belize
6. British Virgin Islands
7. Gibraltar
8. Guernsey
9. Jersey
10. Liberia
11. Monaco
12. San Marino
13. Sint Maarten
14. Cayman Islands
15. Liechtenstein
16. Cayman Islands
17. Isle of Man

DOUBLE TAX AVOIDANCE AGREEMENT (DTAA)

It is a tax treaty signed between India and another country (two or more) so that the taxpayers can avail the benefit of not paying double taxes on their income earned from the source country as well as the residence country. It is empowered by the Central Government under Section 90 of the Income Tax Act, 1961.

The main objective behind the formulation of DTAA is to alleviate the occurrence of tax evasion for tax payers in either or both of the countries between which the bilateral/multilateral DTAA have been signed.

India has signed DTAAs with 93 countries. The list of the countries is given below:

LIMITED AGREEMENTS BETWEEN INDIA AND OTHER COUNTRIES

To facilitate the objective of double taxation relief with respect to income of airlines/merchant shipping companies, India has entered into limited agreements with the following countries:

1. Afghanistan
2. Lebanon
3. Yemen Peoples Democratic Republic of
4. Ethiopia
5. Maldives
6. Yemen Arab Republic
7. Iran
8. Pakistan
9. SAARC countries

SOCIAL SECURITY AGREEMENTS (SSA)

It so happens that, cross border relocation of employees gives rise to social security implications in two countries. In order to eradicate them, India has entered into SSAs. Social security is an important consideration while structuring international assignments for employees. Indian employees, who are posted to other countries by their Indian employers, without terminating the contract of employment, continue to make social security contribution in India as per Indian law. India has SSA’s with 18 countries. They are Belgium, Germany, Switzerland, Denmark, Luxembourg, France, South Korea, Netherlands, Hungary, Finland, Sweden, Czech Republic, Norway, Canada, Japan, Austria, Portugal and Australia.

ADVANCE PRICING AGREEMENT (APA)

An APA can be defined as an agreement between a taxpayer and tax authority with the objective to determine the transfer pricing methodology for pricing the tax payer’s international transactions for future years. As a result of this agreement, the tax authority accepts not to look for a Transfer Pricing adjustment for enclosed transactions as long as the taxpayer toes the line as agreed by the APA.

Types:

One sided: Agreement entered between a taxpayer and the tax administration of the country where it is subject to taxation.

Two sided: Agreement entered between the taxpayers, the tax administration of the host country and the foreign tax administration.

Multilateral: Agreement entered between the taxpayers, the tax administration of the host country and more than one foreign tax administrations.

Considering the current business atmosphere, tax risks are always on the rise. In order to tackle such issues and to eliminate any possibility of exposure to such kind of risks, Advance Pricing Agreements come to the rescue for the taxpayers. They basically function as a mechanism to settle transfer pricing disputes in advance prior to the birth of cross border related party transaction. The Indian APA rules provide for an APA term up to five years in addition it can also cover upto four preceding years in case of a roll-back.

The year 2016-2017 has been a landmark year as 88 Advance Pricing Agreements were entered with the Taxpayers. According to the Central Board of Direct Taxes (CBDT) annual report, almost 50 per cent (70 out of 141) of the total unilateral agreements are with the information technology and banking/finance industries. It has been reported that India has entered into 152 APAs in five years (2012-13 to 2016-17).

China has entered into 113 APAs in the 10 years between 2005 and 2014.

CBDT has received maximum number of APAs applications from the US in the last five years. It has sofar received 42 applications for India-US bilateral APAs. The number of bilateral APA applications India received so far from the UK and Japan stand at 39 and 17.

MUTUAL AGREEMENT PROCEDURE (MAP)

MAP functions as a tax dispute resolution mechanism which provides a solution to the taxpayers for settling the disputes arising out of double taxation whether juridical or economic in nature. It endeavours to eradicate double taxation arising from transfer pricing adjustment. Under this mechanism, the Revenue authorities of two separate nations resolve a dispute which is outside the ambit of the domestic tax regulation.

Article 25 of the Organisation for Economic Co-operation and Development ( OECD ) Model Convention for the Avoidance of Double Taxation provides for assistance of competent authorities under MAP. Tax disputes pertaining to certain jurisdictions (US, UK and Denmark) wherein the nature of the agreement entered by the Indian authorities is such that the taxpayer has the option to provide a bank guarantee for the outstanding tax demand, the tax demand would not be pursued by the tax authorities until the MAP application has been disposed off.

The system of MAP also keeps the outstretched litigations at bay.

The issues entertained by MAP pertain to Adjustment arising from Transfer Pricing Assessment, Existence of Permanent establishment, Characterisation of income, Attribution of profits to Permanent Establishment. Generally, the time limitation for filing an application for MAP is two to three years from the date of notice giving rise to double taxation but it is primarily governed by the respective Treaty for Avoidance of Double Taxation entered into between the countries. There is to time limit for disposal of application for assistance of Competent Authorities as such under the Indian Tax Conventions.

The taxpayer is not bound by the resolution passed under the MAP process, if left unsatisfied.

In India, the rules of MAP are governed by Rules 44G and 44H of Income Tax Rules, 1962.

MULTILATERAL INSTRUMENT (MLI)- BEPS TAX TREATY

MLI is a convention which was signed on 7^th June, 2017 by several countries and will have a major impact of changing the bilateral tax treaties signed by these countries. India recently joined hands with 68 countries at a ceremony held in Paris on 7^th June.

This very instrument consists of VII Parts and 39 articles which aim to modify bilateral treaties of the countries signatory to the MLI. The respective articles will provide options to each country to select for adopting in its tax treaties.

Base Erosion and Profit Shifting (BEPS) basically means the artificial shifting of profits by Multi-national enterprises to low or no tax locations. Such shifting of profits is attained via loopholes in the tax rules of different countries along with the governing tax treaties. Such actions result in erosion of the tax base of the country where the value was created and is hence termed as an abuse of the tax framework.

To bring an end to such abuse of the tax framework, BEPS project was constructed by the OECD Committee on Fiscal Affairs (CFA) and endorsed by the G20 leaders in September 2013. It recognises 15 Action Plans to deal with BEPS.

This will bring monumental changes to all 93 comprehensive tax treaties entered into by India and will result in effective implementation of recommendations under the BEPS project.

Since countries such as USA, UAE, Malaysia and Thailand did not participate in the signing ceremony and Germany has not notified its tax treaty with India as a Covered tax Agreement under the MLI, ergo, India’s existing bilateral treaties with these countries would not be affected. The effect of the MLI on the India-Mauritius treaty will be known shortly as Mauritius will sign the MLI by 30^th June, 2017. The Principle Purpose Test (PPT) has been introduced as a minimum standard which has been expressly stated in the Preamble of tax treaties which elucidates that that the purpose of the treaty is not to create opportunities for tax evasion, tax avoidance or double non-taxation.  The benefit of the tax treaty shall not be granted if obtaining such benefit was one of the principal purposes of any transaction. India has also accepted the Simplified Limitation of Benefits Clause (SLOB).The SLOB aims to create supplementary conditions to be satisfied to avail the benefit of a tax treaty. India has not agreed to the MLI provisions to arbitration proceedings for dispute resolution and methods for elimination of double taxation. The double taxation relief will continue to apply as per the existing bilateral tax treaties. India has accepted the provisions for prevention of artificial avoidance of Permanent Establishment (PE) under commissionaire structures, specific activity exemptions and artificial splitting of contracts. Some of India’s treaty partners have accepted these provisions but some have not. Hence, the expanded PE exposure for Indian marketing operations of a multinational enterprise could vary from country to country.

INTER GOVERNMENTAL AGREEMENT (IGA)

India and the US signed the IGA on 9^th July, 2015 to implement the Foreign Account Tax Compliance Act (FATCA) to facilitate transparency on tax Matters. Its objective is to promote international co-operation to eliminate tax evasion everywhere. 

FACTA was enacted in 2010 to obtain information on accounts held by the US taxpayers in other countries.

MULTILATERAL COMPETENT AUTHORITY AGREEMENT (MCAA) BY OECD

It can be defined as a multilateral framework agreement that provides a standardised and efficient mechanism to facilitate the automatic exchange of information in accordance with the Standard for Automatic Exchange of Financial Information in Tax Matters (“the Standard”). It avoids the need for several bilateral agreements to be concluded. 

India joined MCAA of Financial Account Information on 3^rd June, 2015, in Paris France, along with Australia, Canada, Costa Rica, Indonesia and New Zealand. As a result of this, the total number of countries/jurisdictions agreeing to exchange information automatically in accordance with MCAA equalled to sixty.

COMMON REPORTING STANDARD (CRS)

The framework of CRS was issued in 2014 by the OECD. It is a global Standard for Automatic Exchange of Information (AEoI) that is based on the FACTA model 1 IGA

As with the IGA-backed FATCA, the CRS is operated by virtue of Competent Authority Agreement (CAA) which is supposed to be signed by the respective countries’ tax authorities. Exchange of information revolves around any data or numbers in any format with written remarks that can be used to clarify taxpayers’ income or assets. AEoI empowers the tax authorities to automatically exchange the information in an agreed format during certain periods, through arranged channels, with a one-time-only agreement. Ergo, it will result in expansion of the scope of the exchanged information, with relatively hassle-free bureaucratic procedures involved.

The CRS works by two kinds of CAA: bilateral and multilateral. A bilateral CAA is an exclusive agreement between two jurisdictions’ tax authorities only, whereas a multilateral CAA (MCAA) has multiple jurisdictions as the signatories and each jurisdiction exchanges information with all of the MCAA signatories.

India has also signed and committed to exchange information on an automatic basis. This would enable India to receive information from almost every country in the world, including offshore financial centres. This could be monumental in keeping international tax evasion and avoidance at bay, and getting information about assets of Indians held abroad, including through entities in which Indians are beneficial owners. This will also enable alleviate tax evasion and eradicate the issue of black money.

THE CONVENTION ON MUTUAL ADMINISTRATIVE ASSISTANCE IN TAX MATTERS

The Convention on Mutual Administrative Assistance in Tax Matters (“the Convention”) was developed jointly by the OECD and the Council of Europe in 1988 and amended by Protocol in 2010. The Convention is the most comprehensive multilateral instrument available for all forms of tax co-operation to tackle tax evasion and avoidance, a top priority for all countries.

It aims to promote better cooperation of national tax laws, while keeping in mind about the fundamental rights of the taxpayers. It provides for automatic exchange of information, recovery of foreign tax claims and many more. India signed the Convention in 2012.

As of now, 111 jurisdictions participate in the Convention, including 15 jurisdictions covered by territorial extension. It includes a varied combination of countries such as all G20 countries, all BRIICS, all OECD countries, major financial centres and an increasing number of developing countries.

International Agreements act as a formal understandings or commitments between two or more countries. India entering into various type of International Agreements enables in strengthening the relationship of India with other countries.

Get in touch with us at info@taxpertpro.com to understand the benefits available to you and your organisation in the International Agreements entered into different countries with India.