DTAA Current Affairs - 2020

Cabinet Approves amendment of Double Taxation Avoidance Agreement with Sri Lanka

On February 12, 2020 the Union Cabinet approved the protocol to amend the DTAA (Double Taxation Avoidance Agreement) that was signed between India and Sri Lanka. The DTAA with respect to prevention of fiscal evasion is to be amended.

Highlights

Under the amendment, an anti-abuse provision is to be included. Also, the amendment will include Principle Purpose Test. This will help in curbing strategies that exploit gaps in tax rules.

Significance

Both Indian and Sri Lanka are members of major multilateral organizations such as OECD, G20, BEPS. Therefore, it is essential for both the countries to implement standards based on Multilateral Convention to Implement Tax Treaty related measures.

Why Principle Purpose Test?

India is a signatory of MLI, whereas Sri Lanka is not. Therefore, it is essential for the countries to insert Principle Purpose Test to meet the minimum standards

What is MLI?

In 2016, around 100 countries signed Multilateral Convention to Implement Tax Treaty. The treaty includes features that help to prevent Base Erosion and Profit Shifting. This is called Multilateral Instrument or MLI.

If a country has signed MLI along with India, it is not important to include Principle Purpose Test in the DTAA. As Sri Lanka is not a signatory, DTAA has been included.

Cabinet approves Double Taxation Avoidance Agreement between India-Chile

Union Cabinet has approved the signing of Double Taxation Avoidance Agreement (DTAA) and Protocol between Republic of India and Republic of Chile. This will help in elimination of double taxation as well as prevention of fiscal evasion and avoidance with respect to taxes on income.

Major impact of DTAA Agreement and Protocol

It will facilitate elimination of double taxation between two nations. Moreover, a clear allocation of taxing rights between Contracting States by Agreement will provide tax certainty to investors and businesses of both countries. This will also augment the flow of investment through fixing of fees for technical services, royalties and the tax rates in source State on interest.

The Agreement and Protocol implements minimum standards and other recommendations of G-20 OECD Base Erosion Profit Shifting (BEPS) Project (or BEPS Project). The Agreement includes provisions such as a Principal Purpose Test, Preamble Text, a General Anti-Abuse provision along with a Simplified Limitation of Benefits Clause (SLBC) as per BEPS Project. This will result in curbing of tax planning strategies which exploit gaps and mismatches in tax rules.

Way Forward

The Implementation Strategy and Targets includes completing necessary formalities for bringing the Agreement and Protocol into force after the Cabinet approval. Implementation would be watched and reported by Union Ministry of Finance.