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Posted 15 Apr 2024

2 min read

  • Amendment included Principal Purpose Test (PPT) to avail tax benefits under the DTAA to plug the abuse of treaty for tax evasion and avoidance.
    • PPT lays out the condition that the tax benefits under the treaty will not be applicable if obtaining that duty benefit was the principal purpose of any transaction or arrangement.
    • Protocol to amend DTAA is aimed at making it compliant with Base Erosion and Profit Shifting (BEPS) Minimum Standards.

 

Base Erosion and Profit Shifting (BEPS)

  • Refers to tax planning strategies that exploit gaps and mismatches in tax rules for tax avoidance by shifting profits from higher tax to lower tax jurisdictions.
  • Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS aims to update international tax rules and lessen opportunity for tax avoidance by multinational enterprises.
    • India signed the convention in 2017.

 

  • DTAA is an agreement between two countries/territories with an objective to avoid double taxation on same declared asset in two different countries/territories.
    • DTAA between India and Mauritius was first signed in 1982 and amended in 2016.

 

  • Significance of DTAA
    • Promotion of cross-border investment by reducing tax burden on foreign investors.
    • Equitable allocation of right to tax between the ‘source’ and ‘residence’ countries.
    • Provides legal certainty on taxing international income.

 

  • Issues associated with DTAA
    • Treaty Shopping: Takes place when residents of a country, which is not a party to the DTAA, take advantage of the provisions.
    • Double non-taxation: Abuse of DTAA to avoid paying taxes in both countries.
    • Differential interpretations of tax treaties leading to protracted litigations.
  • Tags :
  • DTAA
  • India-Mauritius
  • Principal Purpose Test
  • BEPS
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