India, Kazakhstan signed protocol to amend Double Taxation Avoidance Convention

India and Kazakhstan on 6 January 2017 signed a Protocol to amend the existing Double Taxation Avoidance Convention (DTAC). The protocol was signed in New Delhi.

The existing protocol was signed on 9 December 1996 for the avoidance of double taxation. The protocol also seeks to prevent fiscal evasion with respect to taxes on income.

Highlights of the amended protocol

• The protocol incorporates internationally accepted norms for effective exchange of information on tax matters.

• The information received from Kazakhstan for tax purposes can be communicated to other law enforcement agencies with the authorisation of the agencies of Kazakhstan and vice versa.

• The Protocol inserts a Limitation of Benefits Article. This article seeks to provide a main purpose test to prevent misuse of the DTAC.

• The article also allows application of the domestic law against tax avoidance or evasion practises.

• The protocol inserts specific provisions to facilitate relieving of economic double taxation in transfer pricing cases.

• This provision is in tune with India’s commitment under Base Erosion and Profit Shifting (BEPS) Action Plan to meet the minimum standard of providing Mutual Agreement Procedure (MAP) access in transfer pricing cases.

• The BEPS is an initiative of the Organisation for Economic Cooperation and Development (OECD).

• The Protocol inserts service PE provisions with a threshold and also provides that the profits to be attributed to PE will be determined on the basis of apportionment of total profits of the enterprise.

• The Protocol replaces existing Article on Assistance in Collection of Taxes with a new Article to align it with international standards.

Why the amendment to DTAC signed?

• The protocol with Kazakhstan is a part of the series of revision agreements initiated by the government.

• The government’s primary concern behind these protocols is to stop the misuse of existing DTAC by multinational companies through instruments like transfer pricing.

• Transfer pricing is the setting of the price for goods and services sold between related legal entities within an enterprise.

• As per the established norms, a transfer price must match either what the seller would charge an independent customer or what the buyer would pay an independent supplier.

• However, in reality, the transfer pricing mechanism has been used by the companies to transfer profits to tax heavens in order avoid taxes from profits in home countries.