THE Union Cabinet today gave its nod for
a fresh DTAA and Protocol between India and Cyprus to curb 'round tripping'
and 'base erosion & profit shifting'.
This step follows the recent amendment of the Double Taxation Avoidance Agreement
with Mauritius. As in the case of Mauritius, the treaty with Cyprus had provided
for residence-based taxation of capital gains. With the revision of the treaty
now approved by the Cabinet, capital gains will be taxed in India for entities
resident in Cyprus, subject to double tax relief. In other words, India will
have the right to tax capital gains arising in India. The provisions in the
earlier treaty for residence-based taxation were leading to distortion of financial
and real investment flows by artificial diversion of various investments from
their true countries of origin, for the sake of avoiding tax. As in the case
of Mauritius, this amendment will deter such activities. Negotiations with
Singapore are also underway for similar changes.
A
revised Agreement is proposed to be signed between the Republic of India
and the Republic of Cyprus for the Avoidance of Double Taxation and the Prevention
of Fiscal Evasion with respect to Taxes on Income (“DTAA”) and Protocol to
this Agreement, which will replace the existing DTAA signed by both countries
on 13th June, 1994.
Detailed provisions of the proposed DTAA are summarized as below:
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The proposed DTAA will align the applicable provisions with the consistent
policy followed by India and the revised international standards. It will
also prevent the abuse of beneficial provisions of the DTAA that can distort
financial and real investment flows and create challenges in respect of tax
collection.
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The proposed DTAA provides for source based taxation of capital gains on
transfer of shares, instead of residence based taxation as provided in the
existing DTAA. However, the Protocol to the Agreement has a grandfathering
provision provide that the provisions of the proposed DTAA in respect of
capital gains will not be applicable on shares acquired at any time prior
to 1st April, 2017. The proposed DTAA also enables source based taxation
of capital gains from transfer of shares of any company the property of which
consists directly or indirectly principally of immovable property situated
in a Contracting State.
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The proposed DTAA also includes a provision for Assistance in Collection
of Taxes. It also provides for a revised provision for Exchange of Information
that would enable the use of information exchanged for other purposes, with
the permission of the Competent Authority of the country providing the information.
The proposed DTAA also expands the scope of the Permanent Establishments (PE)
that enables source based taxation of business income. The provision on income
from Shipping and Aircrafts has been aligned with International standards in
the proposed DTAA.
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Other provisions, including the provisions on Royalty, Fees for Technical
Services, Artists and Sportspersons, Other Income, Mutual Agreement Procedure,
Exchange of Information and definitions of relevant terms like Resident,
Business Profits, Associated Enterprises, Dividend, Interest, have also been
aligned with India’s consistent policy and International Standards accepted
by India.
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The Protocol to the Agreement provides clarification about taxation of dividends
in India that are subjected to dividend distribution tax, and clarifies that
provisions on Assistance in Collection of Taxes shall not be construed to impose
any obligation that is at variance with the laws, practices or public policy
of a Contracting State. It also clarifies that Article 24 on Non Discrimination
will not be construed as preventing a Contracting State from charging the profits
of a permanent establishment at a rate which is higher than that imposed on
a domestic company.
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All the consulted Ministries / Departments have conveyed their concurrence
with this proposal. The DTAA will enter into force on the date of the notification
by the two countries (date of later notification), and shall have effect in
India from the first day of the next fiscal year. The existing DTAA shall be
terminated on the day the proposed DTAA comes into effect.
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