Double Taxation Avoidance Convention (DTAC)
Kartavya Desk Staff
Source: PIB
Subject: Economy
Context: India and France have signed an Amending Protocol to update their 1992 Double Taxation Avoidance Convention (DTAC) to align with international tax standards.
About Double Taxation Avoidance Convention (DTAC):
What it is?
• A Double Taxation Avoidance Convention (also known as a DTAA or Tax Treaty) is a bilateral agreement between two countries.
• It is designed to ensure that the same income is not taxed in both the country where it is earned (the Source Country) and the country where the taxpayer resides (the Resident Country).
How it Works?
The convention allocates taxing rights between the two contracting nations based on the type of income. It typically utilizes two main methods to provide relief:
• Exemption Method: The income is taxed in only one country and is entirely exempt in the other.
• Tax Credit Method: The income is taxed in both countries, but the resident country allows the taxpayer to claim a credit for the taxes already paid in the source country.
Key Features of the Amended India-France DTAC:
• Capital Gains Taxation: Provides full taxing rights to the country where a company is resident (Source State) for gains arising from the sale of its shares.
• Revised Dividend Rates: Replaces the flat 10% rate with a split rate: 5% for those holding at least 10% of the company’s capital and 15% for all other cases.
• MFN Clause Deletion: Formally removes the Most-Favoured-Nation (MFN) clause, ending interpretational disputes and ensuring treaty benefits are limited to the specific agreed terms.
• BEPS Integration: Incorporates provisions from the Base Erosion and Profit Shifting (BEPS) Multilateral Instrument (MLI) to prevent tax avoidance by multinational corporations.
• Enhanced Cooperation: Updates provisions for the Exchange of Information and introduces a new article on Assistance in Collection of Taxes to combat fiscal evasion.
• Service Permanent Establishment (PE): Expands the scope of Permanent Establishment by adding Service PE and aligns the definition of Fees for Technical Services with international models.
Significance:
• By providing a clear and predictable tax regime, it makes India and France more attractive destinations for foreign direct investment (FDI).
• The removal of the MFN clause and clarification of taxing rights on shares provides much-needed legal certainty for large portfolio investors and global corporations.
• The updated standards for information exchange help both governments track and prevent illegal financial activities and profit shifting.