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UK Double Taxation Avoidance Agreement (DTAA)-Enhanced Cooperation Between India and UK

December 22, 2024No Comments

Agreement to Avoid Double Taxation and Prevent Fiscal Evasion with the United Kingdom

The agreement between the Government of India and the Government of the United Kingdom aims to prevent double taxation and fiscal evasion related to taxes on income and capital gains. It came into effect on October 26, 1993, following the completion of legal formalities by both countries as specified in Article 30 of the agreement.

Under Section 90 of the Income-tax Act, 1961, the Indian government has implemented this agreement within the country.

Key Provisions of the Agreement

Article 1: Scope of the Agreement

  1. The agreement applies to individuals and entities who are residents of one or both countries.
  2. It covers the territories of India and the UK, including their territorial seas and exclusive economic zones, for exploration and use of natural resources.

Article 2: Taxes Covered

  1. The agreement applies to:
    • In the UK: Income tax, corporation tax, capital gains tax, and petroleum revenue tax.
    • In India: Income tax and related surcharges.
  2. It also includes similar taxes introduced after the agreement was signed. Both countries will inform each other about significant changes in their tax laws.

Article 3: Definitions

  1. Important terms:
    • “United Kingdom” refers to Great Britain and Northern Ireland.
    • “India” refers to the Republic of India.
    • “Tax” includes UK or Indian taxes but excludes penalties for defaults.
    • “Resident of a Contracting State” is defined by the tax laws of each country.
    • “Permanent establishment” refers to a fixed place of business, such as an office or factory, where business activities are conducted.

Article 4: Tax Residency

  1. A person is considered a resident of a country based on criteria like domicile, residence, or place of management, provided their global income is taxable there.
  2. If a person qualifies as a resident of both countries:
    • Their residency will be determined by the location of their permanent home or closer personal and economic ties.
    • Other criteria, such as habitual residence or nationality, may also be considered.

Article 5: Permanent Establishment

  1. A “permanent establishment” refers to a fixed place of business used for carrying out business activities.
  2. Examples include offices, branches, factories, and warehouses.
  3. Activities like storing goods or conducting preparatory work are not considered as establishing a “permanent establishment.”
  4. Agents acting solely for a business in one country may establish a permanent establishment in that country unless they are independent.

Article 6: Income from Immovable Property

  1. Income from immovable property can be taxed in the country where the property is located.
  2. The definition of immovable property includes:
    • Land and buildings.
    • Equipment used in agriculture and forestry.
    • Rights related to natural resources.
  3. This article applies to all forms of income from immovable property, whether derived from direct use, renting, or other purposes.

Article 7: Business Profits

  1. Taxation of Business Profits: A business’s profits are taxed only in the country where it is based, unless the business operates in the other country through a permanent establishment (e.g., an office, branch, or factory). If it does, the profits related to that establishment may also be taxed in the other country.
  2. Attributing Profits: Profits from the permanent establishment are determined as if the establishment operates independently, under the same conditions, dealing with the rest of the business as a separate entity.
  3. Contracts and Contributions: If a permanent establishment contributes to contracts negotiated or fulfilled by the business, a share of the profits from those contracts will be attributed to the establishment based on its contribution.
  4. Apportioning Total Profits: If a country’s laws allow the division of total profits across different parts of the business, it can apply such a method, provided it aligns with the principles of this agreement.
  5. Allowable Expenses: Expenses incurred for the permanent establishment, including administrative and executive costs, can be deducted when calculating profits, provided they comply with the tax laws of the country where the establishment is located.
  6. Special Expense Rules: If the local laws limit the deduction of certain expenses (like administrative costs), and those rules change under agreements with other developed nations, both countries will consider updating this agreement to reflect similar terms.
  7. Non-Deductible Payments: Payments made between a permanent establishment and the main office, such as royalties, commissions, or interest (except for banks), are not deductible when calculating profits. Similarly, the establishment cannot charge such payments to the main office.
  8. Exclusions: Profits cannot be attributed to a permanent establishment solely because it purchases goods or merchandise for the business.
  9. Overlap with Other Articles: If certain types of income (e.g., royalties, dividends) are covered under other articles of the agreement, those rules will apply, not the rules in this article.

Article 8: Air Transport

  1. Taxation of Air Transport Profits: Income from operating aircraft in international traffic by a business of one country will not be taxed in the other country.
  2. Participation in Pools: The above rule also applies to income from participating in air transport pools, joint ventures, or similar arrangements.
  3. Definition of Air Transport: Air transport includes carrying passengers, goods, or mail and related activities like leasing aircraft or selling tickets for other airlines.
  4. Gains from Aircraft Sales: If a business sells aircraft that it owns and operates, any profits from the sale will only be taxed in the country where the business is based.

Article 9: Shipping

  1. Taxation of Shipping Profits: Income from operating ships in international traffic is taxed only in the country where the business is based.
  2. Local Journeys Excluded: This rule does not apply to income from journeys between locations within the same country.
  3. Definition of Shipping Income: Shipping income includes revenue from leasing ships (e.g., bareboat charters) if it is related to the main shipping business.
  4. Containers: Income from using, maintaining, or renting containers for goods transport is also taxed only in the business’s home country, following the same rules.
  5. Participation in Joint Operations: Income from shipping pools, joint ventures, or similar arrangements is treated the same way.
  6. Gains from Ship Sales: Profits from selling ships or containers are taxed only in the business’s home country if the income from operating them was taxed there or if the ships/containers were outside the other country at the time of the sale.

Article 10: Associated Enterprises

  1. Relationship Between Enterprises:
    • If a business in one country (Contracting State) is directly or indirectly involved in the management, control, or capital of a business in the other country, or if the same people are involved in both businesses, and
    • Special terms are set between these businesses that differ from terms that independent businesses would use,
    • Any profits that would have been earned under normal conditions can be added to the profits of one of the businesses and taxed accordingly.
  2. Adjustments to Avoid Double Taxation:
    • If one country adjusts the profits of a business and taxes it, and these profits were already taxed in the other country, the second country will adjust its taxes to prevent double taxation.
    • Both countries will consult each other to ensure fair adjustments in line with the agreement.

Article 11: Dividends

  1. Taxation of Dividends:
    • Dividends paid by a company in one country to a resident of the other country can be taxed in the recipient’s country.
    • However, the country where the company paying the dividends is located can also tax the dividends. If the recipient is the beneficial owner, the tax rate cannot exceed:
      • 15% if the dividends are from income related to immovable property through an investment vehicle.
      • 10% in all other cases.
  2. Definition of Dividends:
    • Dividends include income from shares or similar rights that are not debt claims but involve profit participation. It also covers any income treated as dividends under the laws of the country where the company paying them resides.
  3. Exceptions for Permanent Establishments:
    • If the dividend recipient has a permanent establishment or fixed base in the country where the paying company is located, and the shares are connected to this establishment, the taxation rules for business profits or independent personal services will apply instead.
  4. Restrictions on Additional Taxes:
    • The country where the company paying dividends is located cannot impose extra taxes on:
      • Dividends paid to a resident of the other country unless they are connected to a permanent establishment in that country.
      • The company’s undistributed profits, even if those profits include income from the other country.
  5. Anti-Abuse Clause:
    • No tax relief under this article will be available if the main purpose of creating or transferring the shares was to take unfair advantage of these provisions.

Article 12: Interest

  1. Taxation of Interest:
    • Interest earned in one country and paid to a resident of the other country can be taxed in the recipient’s country.
    • The country where the interest arises can also tax it, but if the recipient is the beneficial owner, the tax rate cannot exceed 15% of the gross amount.
  2. Special Cases:
    • If the recipient is a bank actively involved in banking, the tax rate is reduced to 10%.
    • Interest paid to the government, local authorities, or specific financial institutions like the Reserve Bank of India is exempt from tax in the country where it arises.
  3. Exemptions for Certain Loans:
    • Interest on loans guaranteed or insured by official export credit agencies (e.g., UK Export Credits Guarantee Department or Export-Import Bank of India) is exempt from tax in the source country.
  4. Definition of Interest:
    • Interest refers to income from loans or debt, including income from bonds, debentures, or government securities. However, it does not include payments treated as dividends.
  5. Connection with Permanent Establishments:
    • If the interest is connected to a business or fixed base in the source country, it will be taxed under the rules for business profits or independent personal services instead.
  6. Determination of Source:
    • Interest is considered to arise in the country where the payer resides or where a permanent establishment incurring the interest is located.
  7. Special Relationships:
    • If a special relationship between the payer and the recipient causes interest payments to exceed what would be reasonable in normal circumstances, the excess is taxable under local laws.
  8. Anti-Avoidance:
    • Relief from tax will not apply if the recipient intentionally structured the debt to exploit the benefits of this article.

Article 13: Royalties and Fees for Technical Services

  1. Taxation of Royalties and Fees:
    • Royalties and technical service fees earned in one country and paid to a resident of the other country can be taxed in the recipient’s country.
    • The source country may also tax these payments, but if the recipient is the beneficial owner, the tax rates are capped as follows:
      • Royalties and certain fees: 15% or 20% (depending on conditions) for the first five years, then 15%.
      • Other royalties and fees: 10%.
  2. Definition of Royalties:
    • Payments for the use of copyrights, patents, trademarks, designs, processes, or industrial, commercial, or scientific equipment.
  3. Definition of Fees for Technical Services:
    • Payments for technical or consultancy services, including personnel services, that:
      • Are linked to the use of rights or equipment, or
      • Provide technical knowledge, skill, or processes.
  4. Exclusions from Technical Fees:
    • Payments for services related to property sales, equipment rental in international traffic, teaching, personal use, or employment are not considered technical service fees.
  5. Connection with Permanent Establishments:
    • If the royalties or fees are connected to a business or fixed base in the source country, they will be taxed under the rules for business profits or independent personal services.
  6. Determination of Source:
    • Royalties and fees are considered to arise in the country where the payer resides or where a permanent establishment incurring the payment is located.
  7. Special Relationships:
    • If a special relationship inflates the payment amount, only the reasonable amount is eligible for treaty benefits; the excess is taxable under local laws.
  8. Anti-Avoidance:
    • The benefits of this article will not apply if the arrangement was created primarily to exploit the treaty’s provisions.

Article 14: Capital Gains

  1. General Rule:
    • Each country can tax capital gains according to its own laws, except for gains covered under Article 8 (Air Transport) or Article 9 (Shipping).

Article 15: Independent Personal Services

  1. Taxation of Income:
    • An individual earning income from independent professional activities (e.g., as a doctor, lawyer, or architect) is taxed in their home country.
    • However, they can also be taxed in the other country if:
      • They are present in that country for 90 days or more during the fiscal year, or
      • They have a fixed base available in that country for their activities.
      • In both cases, only the income related to services performed in the other country is taxable there.
  2. Partnerships:
    • If an individual is part of a partnership, their presence is counted based on the days any other partner performs services in the other country.
  3. Definition of Professional Services:
    • Includes independent work in scientific, literary, artistic, educational, or teaching fields, as well as work by doctors, lawyers, engineers, accountants, and similar professionals.

Article 16: Dependent Personal Services

  1. Taxation of Employment Income:
    • Employment income (e.g., salaries or wages) is usually taxed in the employee’s home country unless the work is performed in the other country. If so, the income may also be taxed in that country.
  2. Exemptions for Short Stays:
    • Income from work performed in the other country is not taxed there if:
      • The individual stays in the other country for 183 days or less during the fiscal year,
      • The employer is not a resident of that country, and
      • The income is not deductible by an enterprise in that country.
  3. Special Rule for International Traffic:
    • Income from employment on ships or aircraft in international traffic is taxed only in the country where the employer is a resident.

Article 17: Directors’ Fees

  1. Taxation of Directors’ Income:
    • Income earned as a director of a company is taxed in the country where the company is based, regardless of the director’s residence.

Article 18: Artistes and Athletes

  1. Taxation of Performers’ Income:
    • Income earned by entertainers (e.g., actors, musicians, or athletes) from personal activities is taxed in the country where those activities are performed.
  2. Income Paid to Another Entity:
    • If an entertainer or athlete’s income goes to another person or organization (e.g., a company), it is still taxed in the country where the activity is performed.
  3. Exemptions for Publicly Funded Visits:
    • If an entertainer or athlete’s visit is supported by public funds from their home country (e.g., government sponsorship), their income is not taxed in the host country.

Article 19: Government Remuneration and Pensions

  1. Tax Exemption for Government Remuneration:
    • If a government of one country pays a salary (excluding pensions) to an individual who is a national of that country for services performed in the other country, it is exempt from tax in the other country.
  2. Taxation of Government Pensions:
    • Pensions paid by a government for services rendered to that government are taxable only in the country of the government paying the pension.
  3. Exclusion for Business Services:
    • This article does not apply to salaries or pensions related to services performed in connection with trade or business.

Article 20: Pensions and Annuities

  1. Taxation of Private Pensions and Annuities:
    • Pensions (other than government pensions) and annuities paid to a resident of one country are taxable only in that country.
  2. Definition of Pension:
    • A pension is a regular payment made for past employment or as compensation for work-related injuries. It also includes payments under social security laws.
  3. Definition of Annuity:
    • An annuity is a fixed periodic payment made for life or a specified period, provided it is paid in return for monetary value.

Article 21: Students and Trainees

  1. Tax Exemptions for Students and Trainees:
    • A student or trainee temporarily in one country, primarily for studying, training, or research, is not taxed in that country on:
      • Gifts from abroad for their maintenance, education, or training.
      • Grants, allowances, or awards received for their studies or research.
      • Income from personal services rendered in the host country, up to 750 pounds sterling (or its equivalent in Indian currency) per fiscal year.
  2. Time Limit:
    • The exemption is valid for the duration of the visit as reasonably required for the purpose, but not exceeding five years.
  3. Technical or Professional Training:
    • Individuals working in one country for a resident of the other country for up to 12 months, primarily for gaining experience or studying, are exempt from tax on income up to 1,500 pounds sterling (or its Indian currency equivalent).
  4. Government-Sponsored Programs:
    • Participants in government-sponsored training or research programs in the host country are not taxed on payments from their home country’s government.

Article 22: Teachers

  1. Tax Exemption for Teachers and Researchers:
    • Teachers or researchers visiting one country for up to two years to work at a recognized institution are exempt from tax in that country on income from such work if they were residents of the other country before the visit.
  2. Research Public Interest Condition:
    • The exemption applies only if the research is conducted in the public interest and not for the primary benefit of private individuals or organizations.

Article 23: Other Income

  1. Taxation of Miscellaneous Income:
    • Income earned by a resident of one country, which is not covered under other articles of the treaty (except income from trusts or estates of deceased persons), is taxable only in their home country.
  2. Exceptions for Business Activities:
    • If the income is connected to a business or professional activities carried out through a permanent establishment or fixed base in the other country, it can be taxed in that country as per the rules of Article 7 (Business Profits) or Article 15 (Independent Personal Services).
  3. Source-Based Taxation:
    • Income not covered under other articles but arising in one country can still be taxed in that country.

Article 24: Elimination of Double Taxation

  1. United Kingdom’s Tax Relief:
    • The UK allows credit for Indian taxes paid on income, profits, or gains from Indian sources against UK taxes on the same income.
    • For dividends paid by an Indian company to a UK company that owns at least 10% of voting power, the credit also includes Indian taxes paid by the Indian company on the profits used to pay those dividends.
  2. India’s Tax Relief:
    • India allows credit for UK taxes paid on income earned in the UK, subject to Indian tax laws, ensuring the credit does not exceed the proportion of Indian tax applicable to that income.
    • For companies, the credit is applied first to income tax and then to surtax.
  3. Definition of “Indian Tax Payable”:
    • Includes amounts that would have been payable in India but were exempted or reduced due to provisions in Indian tax laws. This applies to exemptions under sections like 10(4), 10(6), 33AB, and others listed in this article.
  4. Exclusions for Older Exemptions:
    • Relief does not apply if the income relates to a period more than 10 years after the tax exemption or reduction was first granted.
  5. Income Considered for Tax Rate Calculations:
    • Income exempt from tax under the treaty can still be considered to determine the tax rate on other taxable income.
  6. Source of Income:
    • Income taxable in one country under the treaty is considered as arising from sources in that country for calculating tax relief.

Article 25: Partnerships (Omitted)

This article, which earlier addressed taxation of partnerships, has been removed. Previously, it stated:

  • The UK could tax its residents on their share of a partnership’s income or capital gains, even if the partnership itself was exempt under the treaty.
  • Partnerships in India were not entitled to tax credits for UK dividends, but individual members could claim them.

Article 26: Non-Discrimination

  1. Equal Treatment of Nationals:
    • Citizens of one country cannot be taxed in the other country in a way that is more burdensome than how the host country taxes its own citizens in similar circumstances.
  2. Fair Taxation for Permanent Establishments:
    • A business operating through a permanent establishment in the other country will not face higher taxes than local businesses carrying out the same activities under similar conditions.
    • However, a country can impose higher tax rates on profits of foreign businesses than on its local businesses.
  3. Exclusion of Personal Tax Benefits:
    • A country is not required to provide tax allowances, reliefs, or reductions to non-residents that are only available to its residents.
  4. Protection for Foreign-Controlled Enterprises:
    • Businesses in one country, even if partly or wholly owned by residents of the other country, will not face harsher taxes or requirements than local businesses in similar circumstances.
  5. Definition of Taxation:
    • This article applies to all taxes covered by the treaty.

Article 27: Mutual Agreement Procedure

  1. Resolving Tax Disputes:
    • If a resident feels that they are being taxed unfairly under the treaty, they can present their case to their home country’s tax authority, even if domestic remedies are available.
  2. Mutual Resolution:
    • If the tax authority finds the objection valid but cannot resolve the issue, it will work with the tax authority of the other country to reach an agreement that avoids unfair taxation.
  3. Clarifying Treaty Provisions:
    • Tax authorities of both countries will work together to resolve doubts or difficulties in interpreting or applying the treaty.
  4. Direct Communication:
    • Authorities can communicate directly to expedite resolutions.

Article 28: Exchange of Information

  1. Sharing Relevant Tax Information:
    • Tax authorities will share information needed to enforce the treaty or domestic tax laws, covering all types of taxes, regardless of whether the person being taxed is a resident of either country.
  2. Confidentiality:
    • Shared information will be kept confidential and used only for tax-related purposes, such as assessments, collections, prosecutions, or appeals. It may be disclosed in public court proceedings or judicial decisions.
  3. Limitations on Information Sharing:
    • A country is not required to:
      • Take actions against its own laws or practices.
      • Provide information that cannot be obtained under its normal tax administration procedures.
      • Share trade secrets or information against public policy.
  4. Obtaining Information:
    • A country must use its resources to gather information requested by the other, even if it doesn’t need the information for its own tax purposes, subject to the limitations above.
  5. No Protection for Certain Entities:
    • A country cannot refuse to share information just because it is held by banks, financial institutions, agents, or relates to ownership in a company.

Article 28A: Tax Examinations Abroad

  1. Request for Examination:
    • At the request of one country (requesting State), the other country (requested State) may allow representatives of the requesting State to visit its territory to interview individuals and examine records, provided the individuals involved give written consent.
  2. Participation in Tax Examination:
    • Representatives of the requesting State may attend tax examinations in the requested State, but only with permission. The requested State will provide details of the examination, including its timing, location, and officials involved.
  3. Authority Over Examination:
    • The requested State retains full control over how the tax examination is conducted.

Article 28B: Assistance in the Collection of Taxes

  1. Mutual Assistance:
    • Both countries agree to help each other collect taxes owed under the treaty.
  2. Definition of Revenue Claim:
    • Includes unpaid taxes, interest, penalties, and collection costs related to taxes covered by the treaty.
  3. Collection of Revenue Claims:
    • A country can request the other to collect taxes as if they were owed to the requested country, provided the claim is enforceable under the laws of the requesting country.
  4. Conservancy Measures:
    • If a country is allowed to take measures to secure payment of a tax debt, it can request the other country to take similar actions, even if the tax is not yet enforceable.
  5. Asset Freezing:
    • If permitted under its laws, one country can ask the other to freeze the assets of a taxpayer before a formal tax claim is raised.
  6. Limitations:
    • Revenue claims do not gain higher priority or extended time limits in the requested country.
    • The requested country is not obligated to question the validity of the claim.
  7. Changes in Tax Debt:
    • If a tax claim becomes unenforceable after a request for assistance, the requesting country must inform the other country, and the assistance may be suspended or withdrawn.
  8. Exceptions to Assistance:
    • Assistance is not required if it:
      • Contradicts the laws or practices of either country.
      • Violates public policy.
      • Places an excessive administrative burden on the requested country compared to the benefits.

Article 28C: Limitation of Benefits

  1. Prevention of Treaty Abuse:
    • Treaty benefits will not apply if the primary purpose of a transaction or the existence of an entity is to exploit the treaty’s advantages.
  2. Notification Requirement:
    • If a country denies treaty benefits, it must inform the other country’s tax authority.

Article 29: Diplomatic and Consular Officials

  1. Preservation of Privileges:
    • The treaty does not override international rules or special agreements granting tax privileges to diplomatic or consular officials.
  2. Residency for Treaty Purposes:
    • Diplomatic or consular officials from one country stationed in the other are not considered residents of the host country for treaty purposes if they are taxed only on income sourced in that host country.

Article 30: Entry into Force

  1. Notification Process:
    • Each country must inform the other when it completes the legal procedures required to enforce the treaty. The treaty takes effect on the date of the later notification.
  2. Effective Dates for Taxation:
    • In the United Kingdom:
      • Income Tax and Capital Gains Tax: Applies for tax years starting on or after April 6 of the year following the later notification.
      • Corporation Tax: Applies for financial years starting on or after April 1 of the year following the later notification.
      • Petroleum Revenue Tax: Applies for chargeable periods starting on or after January 1 of the year following the later notification.
    • In India:
      • Applies to income arising in fiscal years starting on or after April 1 of the year following the later notification.
  3. Termination of the 1981 Treaty:
    • The earlier treaty signed in 1981 will end when this treaty comes into effect for the relevant taxes.
    • However, if the 1981 treaty provides greater tax relief, those provisions will continue to apply for:
      • In the UK: Tax years or financial years starting before this treaty takes effect.
      • In India: Fiscal years starting before this treaty takes effect.

Article 31: Termination

  1. Duration:
    • The treaty will remain in force indefinitely unless one of the countries decides to terminate it.
  2. Termination Procedure:
    • Either country can terminate the treaty by providing written notice through diplomatic channels at least six months before the end of a calendar year, but only after the treaty has been in effect for at least ten years.
  3. Effective Dates After Termination:
    • In the United Kingdom:
      • Income Tax and Capital Gains Tax: Ends for tax years starting on or after April 6 of the year following the notice.
      • Corporation Tax: Ends for financial years starting on or after April 1 of the year following the notice.
      • Petroleum Revenue Tax: Ends for chargeable periods starting on or after January 1 of the year following the notice.
    • In India:
      • Ends for income arising in fiscal years starting on or after April 1 of the year following the notice.
  4. Signatures and Languages:
    • The treaty was signed on January 25, 1993, in New Delhi, in both Hindi and English. Both versions are equally valid, but the English text will be used in case of disputes.

Protocol Highlights

  1. Building Sites and Projects:
    • For Article 5(2)(j) regarding permanent establishments:
      • Time spent on unrelated sites or projects is excluded from the six-month duration test.
      • The six-month test is applied separately to unrelated sites or projects or connected groups of sites/projects.
      • A building site is treated as a single site even if multiple contracts are involved, as long as the work forms a coherent commercial and geographical unit.
  2. Permanent Establishments and Contracts:
    • For Article 7(3):
      • All circumstances are considered to determine if a permanent establishment actively participated in contract negotiations or execution.
      • Contracts negotiated with the enterprise’s head office can still count as involving the permanent establishment.
  3. Aircraft Operations and Interest:
    • For Article 8(1):
      • Profits from aircraft operations include interest from investments or deposits linked directly to such operations but exclude interest from reinvested amounts.

Key Amendments to the Treaty

  1. Definition of “Person” (Article 3):
    • Expanded to include individuals, companies, groups of persons, and any taxable entity under the respective tax laws.
  2. Definition of “Resident” (Article 4):
    • A resident is defined as someone taxable in a country based on domicile, residence, management, or incorporation.
    • Exceptions:
      • Those taxable only on income from local sources are excluded.
      • For partnerships, estates, or trusts, the term applies only if the income is taxed as resident income.
  3. Dividends (Article 11):
    • Dividends may be taxed in both the source and recipient countries:
      • 15% limit: When dividends are paid from income linked to immovable property through certain investment vehicles.
      • 10% limit: For all other dividends.
    • Exclusions:
      • Benefits do not apply if the beneficial owner has a permanent establishment in the source country linked to the dividends.
      • Dividends paid to residents of the other country are exempt from further taxation on the company’s undistributed profits.
  4. Anti-Abuse Provision:
    • Relief for dividends is denied if shares or rights are created or assigned primarily to exploit treaty benefits.

Administrative Updates

  1. Amendment Notification:
    • The amendments were introduced via Notification No. 10/2014, dated February 10, 2014, and became effective from December 27, 2013.
  2. Clarifications on Changes:
    • Updates primarily focus on aligning treaty provisions with modern practices and ensuring clarity in definitions, processes, and tax applications.

Article V: Deletion of Article 25 (Partnerships)

  • What changes?
    • Article 25 (Partnerships) is removed from the convention.
    • No renumbering of subsequent articles will occur.

Article VI: Replacement of Article 28 (Exchange of Information)

  • Purpose: To enhance transparency and improve the exchange of information between the two countries for tax purposes.
  1. Information Sharing:
    • Tax authorities in both countries will exchange information relevant for enforcing the treaty or domestic tax laws concerning all types of taxes.
    • The exchange is not limited by Articles 1 and 2 of the treaty.
  2. Confidentiality:
    • Shared information must be treated as confidential, like other sensitive information under domestic laws.
    • It can only be disclosed to individuals or authorities involved in tax assessments, enforcement, appeals, or prosecutions.
    • Information may be used for other purposes if permitted by both countries’ laws and explicitly authorized by the supplying country.
  3. Limitations:
    • A country is not obligated to:
      • Perform actions that conflict with its or the other country’s laws.
      • Provide information unavailable under its domestic tax administration.
      • Disclose trade secrets or information that violates public policy.
  4. Obligation to Gather Information:
    • The requested country must use its resources to gather information even if it doesn’t need the information for its own tax purposes.
    • However, limitations in paragraph 3 apply, and a country cannot refuse to share information just because it has no domestic interest in it.
  5. Banking and Financial Information:
    • A country cannot deny information requests solely because the data is held by a bank, financial institution, or fiduciary agent, or pertains to ownership interests.

Article VII: Insertion of Article 28A (Tax Examinations Abroad)

  • Purpose: To facilitate cross-border tax examinations.
  1. Request for Examination:
    • The requesting country’s tax officials can enter the requested country to interview individuals and review records, but only with prior written consent from the individuals concerned.
    • The requesting authority must inform the requested authority about the time and location of meetings.
  2. Participation in Tax Examinations:
    • The requested country may allow representatives from the requesting country to attend tax examinations in its territory.
  3. Notification of Examination:
    • If permission is granted, the requested country will notify the requesting country of:
      • The examination’s time and location.
      • The designated authority or official conducting the examination.
      • Procedures and conditions for the examination.
    • All decisions on how the examination is conducted rest with the requested country.

Summary of Changes

  • Article 25: Removed from the treaty.
  • Article 28: Updated to expand the scope and obligations for exchanging tax information.
  • Article 28A: Introduced to enable and regulate cross-border tax examinations.

These updates aim to enhance cooperation, ensure transparency, and improve the enforcement of tax laws between the two countries. 

Article VIII: Assistance in the Collection of Taxes (New Article 28B)

  1. Mutual Assistance:
    • Both countries will help each other collect unpaid taxes, including interest, penalties, and costs related to such taxes.
  2. Definition of Revenue Claim:
    • A “revenue claim” includes amounts owed under the treaty that comply with the laws of both countries.
  3. Collection of Taxes:
    • If a tax claim is enforceable in one country and the taxpayer cannot prevent collection, the other country will collect it as if it were its own tax claim.
  4. Measures to Secure Collection:
    • One country may request the other to take conservancy measures (e.g., freezing assets) to secure tax payments, even if the claim is not yet enforceable.
  5. Freezing Assets:
    • A country can request the other to freeze a taxpayer’s assets under its laws before a tax claim is formally raised.
  6. Limitations on Priority and Time:
    • Tax claims from the requesting country will not gain higher priority or extended time limits in the requested country.
  7. Challenges to Tax Claims:
    • Courts or administrative bodies in one country cannot challenge the validity or amount of a tax claim from the other country.
  8. Ceasing Assistance:
    • If the tax claim becomes unenforceable after a request is made, the requesting country must notify the other, and the request may be suspended or withdrawn.
  9. Exceptions:
    • Assistance is not required if it:
      • Conflicts with domestic laws or practices.
      • Violates public policy.
      • Imposes an unreasonable administrative burden relative to the benefit.

Article IX: Limitation of Benefits (New Article 28C)

  1. Anti-Abuse Rule:
    • Treaty benefits will not be granted if the main purpose of creating a transaction or entity is to exploit the treaty.
  2. Notification Requirement:
    • If benefits are denied, the country must notify the other country’s tax authority.

Article X: Entry into Force

  1. Notification Process:
    • Each country must notify the other once it completes the required procedures to enforce this protocol. The protocol takes effect on the later notification date.
  2. Effective Dates:
    • For taxes withheld at source: Applies to amounts paid on or after the protocol’s effective date.
    • In India:
      • Applies to taxes levied for fiscal years starting on or after the protocol’s effective date.
    • In the UK:
      • Income Tax and Capital Gains Tax: Applies for tax years starting on or after April 6 of the year following the protocol’s effective date.
      • Corporation Tax: Applies for financial years starting on or after April 1 of the year following the protocol’s effective date.
      • Petroleum Revenue Tax: Applies for chargeable periods starting on or after January 1 of the year following the protocol’s effective date.
  3. Retrospective Application:
    • Articles VI (Exchange of Information), VII (Tax Examinations Abroad), and VIII (Assistance in Collection of Taxes) apply even to matters that pre-date the protocol’s enforcement.

Key Takeaways

  • Article 28B introduces structured mutual assistance for collecting taxes between the two countries.
  • Article 28C ensures treaty benefits cannot be abused for tax avoidance.
  • The protocol’s provisions on information exchange, tax examinations, and assistance in tax collection apply retrospectively.

This agreement ensures better enforcement of tax laws, reduces tax avoidance, and fosters cooperation between India and the UK. 

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Last updated on December 22, 2024

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