India signs pact to check DTAA abuse

Finance Minister Arun Jaitley. Photo: PTI
India on Wednesday signed a uniform multilateral tax agreement in Paris to check abuse of double tax avoidance agreements (DTAAs) by multinational companies that shift profits from high-tax jurisdictions to those with low or no taxes.  
The deal signed by more than 65 countries will provide a standard framework for bilateral tax treaties creating common tax regulations for all investors across destinations. It will expedite modification of current tax treaties as countries will not be required to amend individual pacts after agreeing to the multilateral instrument. 

Finance minister Arun Jaitley signed the deal on behalf of India. "The Convention will modify India’s treaties in order to curb revenue loss through treaty abuse and base erosion and profit-shifting strategies by ensuring that profits are taxed where substantive economic activities generating the profits are carried out and where value is created," the government said in an official release. 

It is part of the base erosion and profit shifting (BEPS) framework of the Organisation for Economic Co-operation and Development (OECD) to check cross-border tax evasion by global companies by exploiting gaps in tax treaties and tax planning strategies. Under BEPS, the G20-led countries have identified 15 action points that will require countries to make suitable changes in their tax treaties and structures. 

The multilateral convention will pave the way for bilateral pacts with other countries and will modify all covered bilateral tax treaties (covered tax agreements) to implement BEPS measures.

The revenue losses arising on account of base erosion and profit-shifting have been estimated by OECD at $100-240 billion annually or anywhere from 4-10 per cent of global corporate income tax revenues.

The Union Cabinet had last month approved signing of the multilateral convention of the OECD.

The uniform tax treaty for all investors will create a level playing field for both foreign institutional investors investing in capital markets and private equity players investing in Indian companies.  

India has already amended its tax treaty with low or zero-tax jurisdictions including Mauritius, Cyprus and Singapore, from April 1, to plug loopholes that were often exploited to ensure complete tax avoidance. In a lot of cases, unaccounted money kept overseas was routed back to India disguised as foreign capital. New Delhi has now gained taxation rights over capital gains accruing to transfer of shares, which till last year used to rest with these countries.

Bilateral tax treaties are aimed to ensure that taxpayers do not face the burden of double taxation in both countries. But evaders used to manage to avoid taxes in both countries.

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