BEPS Current Affairs

India, Hong Kong sign double tax agreement

India and Hong Kong have signed agreement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income.

Hong Kong is former British colony and is special administrative region of China which enjoys a high degree of autonomy under which it has an independent taxation system. It is an important financial and trading partner of India and the absence of a treaty was seen hindrance in many ways.

Key Facts

This agreement will stimulate flow of investment, technology and personnel from India to Hong Kong and vice versa, prevent double taxation and provide for exchange of information between two contracting parties. It will also improve transparency in tax matters and will help curb tax evasion and tax avoidance.

It will provide investors advantage of lower withholding tax of 10% on interest or royalties provided they fulfil main purpose test which broadly checks that transaction is not entered specifically to avoid taxes. It will also provide for capital gains taxation of indirect transfers. It provides that gains from sale of shares of company deriving more than 50% of its value from property situated in country will be taxed in that country.

This agreement will give protection against double taxation to over 1,500 Indian companies and businesses that have presence in Hong Kong as well as to Hong Kong-based companies providing services in India.

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Union Cabinet approves Protocol amending DTAA between India, China

The Union Cabinet has approved signing and ratification of protocol amending Double Taxation Avoidance Agreement (DTAA) between India and China. The DTAA aims for avoidance of double taxation  and prevention of fiscal evasion with respect to taxes on income and update the provisions on exchange of information of the DTAA to the latest international standards.

Key Facts

The amending protocol updates existing provisions of DTAA for exchange of information to the latest international standards. It also incorporates changes required to implement treaty related minimum standards under Action reports of Base Erosion & Profit shifting (BEPS) Project, in which India also had participated. It will also bring in changes as per BEPS Action reports as agreed upon by two countries.

Background

In 2016, India had signed multilateral convention to implement measures to prevent shifting of profits by multinational companies (MNCs) to low-tax nations as way to avoid paying taxes. It was outcome of Organisation for Economic Cooperation and Development (OECD)/G20 BEPS project.

The convention aims to BEPS through tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax nations where there is little or no economic activity, resulting in little or no overall corporate tax being paid.

The Final BEPS Project had identified 15 actions to address BEPS in comprehensive manner. Its implementation requires changes to more than 3,000 bilateral tax treaties making it burdensome and time consuming process. In view of this, convention was conceived as multilateral instrument in order to swiftly modify all covered bilateral tax treaties to implement BEPS measures. The convention implements two minimum standards related to prevention of treaty abuse and dispute resolution through mutual agreement procedure.

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