Double taxation avoidance

India and Korea on December 9 agreed to suspend collection of taxes during the pendency of Mutual Agreement Procedure (MAP). This MoU will relieve the burden of double taxation for the taxpayer in both the countries.

Two days later, India and Japan signed a protocol for amending the existing convention, signed way back in 1989, for the avoidance of double taxation and for the prevention of fiscal evasion with respect to taxes on income.

The double taxation avoidance agreement (DTAA) provides for internationally accepted standards for effective exchange of information on tax matters including bank information and information without domestic tax interest.

It further provides that the information received from Japan and South Korea in respect of a resident of India can be shared with other law enforcement agencies with authorisation of the competent authorities of Japan and S Korea, and vice versa. As of now, India has DTAA with 84 nations, including Armenia, Bangladesh, Finland, Ireland, Kazakhstan, Greece, Italy and several others.

India has actively participated in the Base Erosion and Profit Shifting (BEPS) project undertaken by OECD and G-20 countries, which is aimed at aligning taxation of income with the place where economic activity is performed and value is created. This also includes ensuring DTAAs are not used for tax avoidance.

The taxation problem arises when if a taxpayer is resident in one country but has a source of income situated in another country, there is a situation at hand where his income is taxed in both countries, or double taxation occurs.

These DTAA treaties benefit both institutions and individuals who earn in countries other than their country of residence, provided such an arrangement exists between their country of residence and the country/countries where their income sources are.

The benefits of DTAA are lower withholding tax (tax deducted at source or TDS), exemption from tax, and credits for taxes paid on the doubly-taxed income that can be enchased at a later date. Double taxation can be avoided in two ways. One, the resident country exempts income earned in the foreign country. Or, it grants credits for the tax paid in the other country.

The rules vary from treaty to treaty. For example, the tax treaty with Mauritius has zero tax for capital gains on equities, but that with the US taxes capital gains.