Reduced tax rates and key provisions

Under the terms of the India-Spain Double Taxation Avoidance Agreement (DTAA), India has announced that the tax rates on royalties and fees for technical services (FTS) as outlined in the India-Germany DTAA will be capped at 10 percent. calling Most Favored Nation rule. According to the March 2024 notification, royalty and FTS will be liable to taxation in the treaty state in accordance with its domestic regulations.


Relief to taxpayers under India-Spain DTAA and MFN provisions

According to Notification no. 33/2024, issued by the Income Tax Department of India, „If the recipient qualifies as the beneficial owner of royalties or fees for technical services, the tax levied shall not exceed 10 percent of the total amount of royalties or fees for technical services.” In contrast, the domestic law allows tax rates up to 20 percent as of AY 2024-25.

The DTAA between India and Spain covers individuals and entities residing in either or both of the states. It includes various taxes in each country, including income tax, corporation tax and capital tax in Spain, and income tax along with property tax in India.

The MFN rule does not automatically apply

The automatic applicability of the most-favoured-nation (MFN) rule in double taxation avoidance agreements is a matter of controversy. The Central Board of Direct Taxes has clarified that certain conditions have to be fulfilled to apply the MFN clause, including sequence of DTAA signatures and OECD membership of the countries concerned.

Further, the recent Supreme Court judgment in the Nestlé case emphasized the need for a notification under Section 90 of the Income Tax Act to implement changes in the provisions of the DTAA. The March 2024 notification is consistent with this ruling, extending the benefit of lower tax rate from the India-Germany DTAA to taxpayers under the India-Spain DTAA.

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While other DTAAs with OECD member countries may provide for both lower tariffs and restricted scope, in this case, only the rate is accepted. In light of the Supreme Court ruling, there is anticipation as to whether other OECD member countries will make similar changes.

The salient features of DTAA are as follows:

  • Communication: Competent authorities of the two countries exchange confidential information to implement the provisions of the DTAA.
  • Effective Dates: The provisions of the Amending Protocol are applicable to different taxes depending on their effective dates.
  • Assistance in revenue collection: Both countries are committed to assist each other in revenue collection as per international standards and OECD norms.
  • Rates of Withholding Tax: DTAA outlines specific rates of withholding tax on dividends, interest and royalty.
  • Taxation of Business Profits: Business profits are taxable in the state of operation unless there is a permanent establishment in the other state.
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The insertion of the Limitation of Benefits clause in the Protocol is a significant step forward in order to prevent tax abuse. The agreement is distinct from the Multilateral Convention on the Implementation of Measures Related to the Tax Treaty to Prevent Base Erosion and Profit Shifting (MLI), which the two countries have signed, albeit including domestic General Anti-Avoidance Rule (GAAR) provisions. On April 1, 2020, MLI came into force in India.

What is Double Taxation Avoidance Agreement?

India has signed DTAAs with 88 countries, of which 86 are now operational. These tax treaties refer to preferential tax rates and jurisdictions based on specific types of income.

Country

Royalty

Fees for technical services

Albania

10%

10%

Austria

10%

10%

Armenia

10%

10%

Australia

10%/15%

10%/15%

Belarus

15%

15%

Bangladesh

10%

No separate arrangement

Botswana

10%

10%

Belgium

10%

10%

Bulgaria

15% of royalties relating to literary, artistic or scientific works other than films or tapes used for television or radio broadcasting.

20% in other cases

20%

Canada

10%/15%

10%/15%

Brazil

15%

No separate section

China

25% for use of trademarks

15% for others

No separate section

Denmark

20%

20%

The Hashemite Kingdom of Jordan

20%

20%

Republic of Che

10%

10%

Germany

10%

10%

Ethiopia

10%

10%

Estonia

10%

10%

Italy

20%

20%

France

10%

10%

Georgia

10%

10%

Finland

10%

10%

PG

10%

10%

Greece

According to the agreement

Indonesia

10%

10%

Hungary

10%

10%

Israel

10%

10%

Kyrgyz Republic

15%

15%

Ireland

10%

10%

Iceland

10%

10%

Kuwait

10%

10%

Kazakhstan

10%

10%

Kenya

10%

10%

Japan

10%

10%

Libya

According to the agreement

Mauritius

15%

10%

Morocco

10%

10%

Namibia

10%

10%

Lithuania

10%

10%

Montenegro

10%

10%

Netherlands

10%

10%

Mozambique

10%

No separate section

Myanmar

10%

No separate section

New Zealand

10%

10%

Luxembourg

10%

10%

Malta

10%

10%

Malaysia

10%

10%

Oman

15%

15%

Mongolia

15%

15%

Norway

10%

10%

Trinidad and Tobago

10%

10%

Uzbekistan

10%

10%

Zambia

10%

10%

Vietnam

10%

10%

Nepal

15%

No separate section

Tajikistan

10%

No separate section

Turkmenistan

10%

10%

United Mexican States

10%

10%

Uganda

10%

10%

Ukraine

10%

10%

UK

10% on bank interest

15%, in other cases

America

10%/15%

10%/15%

Tanzania

12.50%

No separate section

United Arab Emirates

10%

No separate section

Thailand

25%

No separate section

Syrian Arab Republic

7.50%

No separate section

Turkey

15%

15%

Sweden

10%

10%

Swiss Confederation

10%

10%

Sudan

10%

10%

South Africa

10%

10%

Sri Lanka

10%/20%

20%

Slovenia

10%

10%

Saudi Arabia

10%

No separate section

Russia

10%

10%

Qatar

10%

10%

Portuguese Republic

10%

10%

Serbia

10%

10%

Philippines

15%

No separate section

Singapore

10%

10%

Poland

15%

15%

Romania

10%

10%

Spain**

10%

10%

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Countries often practice double taxation in situations of cross-border income flows to avoid discouraging foreign economic activity.

Also, non-resident Indians (NRIs) working abroad can avoid paying tax on their income twice, thanks to DTAAs.

Understanding the MFN Rule

A most-favored-nation (MFN) clause requires a state to commit to giving its treaty partner a preferential tariff if the first state in its tax treaty with another third state gives a preference over that specified in its own tax treaty. treatment. To apply, both the second and third countries must be OECD members under the MFN rule. This provision is included in tax treaties with the same country to guarantee equal treatment of all OECD members.

Basically, this provision ensures that no country granted MFN status can be subjected to less favorable treatment compared to other countries in the World Trade Organization (WTO). The WTO recommends that all countries should be treated equally in relation to trade agreements.

If the individual's country of residence has not entered into a DTAA with India, he can claim relief from double taxation under Section 91 of the Income Tax Act. India therefore exempts both categories of taxpayers from double taxation. Approaches to avoiding double taxation vary from one country to another.

DTAAs address various aspects, including:

1. Methods of preventing double taxation of income in India or abroad.
2. Withholding of tax rates, procedures for tax exemption and provision of tax credits.
3. Procedures for collection of income tax under Indian Income Tax Act and laws in foreign countries.
4. Mechanisms for exchange of information between countries to prevent evasion or avoidance of income tax.
5. Procedures for investigating tax evasion or avoidance cases.

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Amendments have been announced in the 2023 fiscal budget

In India's Fiscal Budget 2023, Finance Minister Nirmala Sitharaman announced some amendments to the Finance Act 2023 on March 31, 2023.

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A significant amendment is the increase in the rate of tax on royalties or fees for FTS earned by non-resident taxpayers or foreign companies. Earlier, such income was taxed at 10 percent under Section 115A of the Income Tax Act. The amendment proposed to increase this special tax rate to 20 percent (plus surcharge and health and education cess) from April 1, 2023, if the income is not connected with a permanent establishment or fixed place in India.

According to the amendment, non-residents can explore tax benefits provided by tax treaties between India and other countries. These treaties often provide lower tax rates such as 10 percent or 15 percent on royalty income and FTS earned by non-residents of India.

To receive benefits under a tax treaty, non-residents must satisfy various anti-abuse provisions such as the primary purpose test (PPT), limitation of benefits (LOB) and the beneficial ownership test. To access the benefits of DTAAs, NRIs must fulfill the residency requirements of the foreign country and obtain a Tax Residency Certificate (TRC) from foreign tax authorities. In cases where the TRC does not contain specific details, a separate Form 10F should be submitted along with a copy of the TRC.

Provisions within the DTAAs relating to „dependent personal services” exempt employment income earned in India from Indian taxation subject to certain conditions. These conditions include physical presence in India, residence abroad, salary expenses paid by an Indian company or taxable presence in India by a foreign company.

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