What is double non-payment of taxes in relation to DTAA?

Imagine that a foreign investor from Singapore comes to India, buy shares and makes profit (in the form of a capital gains). That income or profit is to be taxed in accordance with the DTAA signed between India and Singapore. As per the India – Singapore DTAA, a Singapore entity can pay taxes for the capital gains income he cratered in India in Singapore.

Now if the tax rate in Singapore for capital gains is zero, the Singapore entity need not pay any taxes. In effect, the investor from Singapore not pays taxes in India as well as in Singapore. This is called double nonpayment of taxes.

Double non-payment of taxes in relation to DTAA implies an entity is not paying taxes in both countries- in the resident county as well as in the source country. For a multinational company or an investor, it will have a resident country which is the country where it has registered. The foreign country where it operates and generated the concerned income is the source country.

The ideal principle in international taxation is to avoid double taxation – a bad situation where an entity pays tax in both countries in the resident country and in the source country. To avoid double taxation, Double taxation agreements are signed by countries.

But many low tax countries and tax havens doesn’t impose taxes. This allows an income and company to escape from tax payment.

The new attempt is thus to avoid double non-payment of taxation. The India Mauritius treaty has been amended to eliminated this trend. A company should pay taxes at least in one place- either in the source country or in the resident country. As per the renewed treaty, Mauritius investor investing in India and creating capital gains should pay taxes in India.

Why double nonpayment has current importance?

At present several attempts are made at different forums to minimize tax avoidance by companies. The OECD has introduced the concept of Base Erosion and Profit Shifting to check extreme tax avoidance by MNCs.

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