What are other matters related to DTAA

1. Mutual Agreement Procedure
If there are any disputes in the interpretation / applications of the terms of DTA Agreements, normal remedies of appeal etc. provided in the Income-tax Act are available to the aggrieved party. The DTA Agreements also contain mutual agreement procedure under which the aggrieved party may approach the Competent Authority of the contracting State wherein he is a resident. The Competent Authority will approach the competent Authority of the other contracting State to arrive at a solution after mutual discussion. The provision helps the foreign investor and other persons involved in international transaction in avoiding litigation in foreign courts and enable them to settle matters through the agency of respective competent authorities. The disputes for settlement may be:-

a.    Specific case provision
Where one considers that the action of one or both the states will result in taxation not in accordance with the treaty.

b.    Interpretative matters
Matters relating to interpretation of any particular article or term used in the DTAA may be referred. For instance the provision was invoked by certain countries to interprete the non-discrimination clause in the context of higher rate of tax on foreign companies in India.

c.    Legislative provision

Where no provision exist in the treaty to avoid double taxation in respect of certain income, the authorities may be approached to do so.

2.   Exchange of Information
Tax treaties make provisions for exchange of information to give effect to the provisions of the treaty. By virtue of such an arrangement the treaty partners are supposed to provide information in respect of income earned by resident of other country in their country. Such information may be supplied by a State without request on its own or when required by the other country. No country is expected to provide information which cannot be obtained under normal laws of that country and exchange of information is subject to the condition of confidentiality as laid down in the treaty.

3.   Non-discrimination
The treaties contain provision prohibiting discrimination in the matter of taxation between the nationals of the two countries. This means that nationals of other treaty partner country cannot be subjected to taxation or other connected requirement which is less favourable or more burdensome than the requirement to which nationals of that country are subjected. The same rule applies to the P.E. of the enterprise of the other State which is entitled to same treatment as the enterprise of that State under similar circumstances. It is, however permissible to grant to own residents any personal allowance, relief or reduction not granted to non-residents on account of Civil States or family responsibilities.
In India foreign companies are taxed at the rate higher than domestic companies. A dispute generally arises as to whether this amounts to discrimination prohibited under the treaty. This has been subject of determination under the mutual assistance procedure invoked by certain countries and it was agreed that the foreign companies should be subjected to tax at the same rate as domestic companies. By the Finance Act 2001, however, an Explanation was inserted in sub-section (2) of Section 90 clarifying that charge of tax at higher rate in respect of income of foreign companies will not be regarded as less favourable charge or levy of tax where the foreign company has not made prescribed arrangement for declaration and payment of dividend within India. The amendment made nullifies the agreements arrived at under Mutual Agreement Clause of the treaties with certain countries unilaterally with retrospective effect and provides interpretation to the already negotiated treaties, the validity of which may be questioned.

4.   Most - favored nation (MFN) clause
In certain treaties, where it is intended not to discriminate between countries within a group, a stipulation is incorporated generally through protocol or Exchange of Notes that in case, after the coming into force of the treaty, favorable terms in respect of specified matter are agreed to with any other state, the same terms will be applicable in respect of that treaty also. For instance in Indo-France treaty, the MFN clause provided that if India demits its taxation at source in respect of income from dividend, interest, Royalty etc. in any treaty with a member of OECD after 1st September, 1989, the same terms will apply to Indo-France treaty w.e.f. from the date the other treaty enters into force. As a consequence when a rate of 10% in respect of interest, royalty and rent of equipment was agreed to in Indo-German treaty w.e.f 1-4-1997 the original rates of 15% (for interest) and 20% (for royalty and equipment rental) in Indo-France treaty were substituted by 10% w.e.f 1-4-97. After Indo – German treaty, treaty with Sweden effective 1-4-1998 provided for nil taxation at source in respect of rental of equipment which being more favourable because applicable to Indo-France treaty also and such income became taxable only on existence of a P. E in the state of source.

5.    Treaty Shopping
Only the residents of two contracting states can avail of the benefits of the relevant treaty. As the terms in all the treaties entered into by a State are not uniform and as there is no treaty with some States, efforts are made by residents by third State to have access to the treaty benefits by routing the investment / services through that State only with the object of having access to the treaty. Such practices are known as "treaty shopping". The practice of treaty shopping most commonly in use in Indian context is in respect of Indo-Mauritius treaty which provide, for a much lower rate of tax on dividend in the source country. Further, the right of taxation of income from capital gain has been given only to the state of residence under this treaty. The result is that a resident of Mauritius investing in India is not liable to tax in India on capital gains accruing here. There being no tax on capital gains under the domestic law of Mauritius, the residents of that State become exempt from tax in both the countries. In order to benefit from such a position arising from the treaty provisions, residents of State other than Mauritius are making investment in India not directly but through entities floated in Mauritius for deriving tax benefits. This has resulted in majority of foreign investment in India coming from Mauritius.
The only provision to check such practice in most of the treaties is that the benefit of lower rate of source country taxation of dividend, interest, etc. is available only if the recipient of such income is the beneficial owner of the income. If, therefore, it can be shown that the person in whose name shares, etc. are held is not the beneficial owner, the treaty provision will not be applicable to him.
Indo-US treaty, however, contains specific provision to check such practice. According to it the treaty will apply to a person (other than individual) only if at least 50% beneficial interest in that entity is held directly or indirectly by the residents any of the contracting State. This does not apply in respect of income derived from active conduct of business.