31 December 2016 EY Tax Alert Third Protocol amending the India-Singapore tax treaty signed Executive summary Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your EY advisor. This Tax Alert summarizes key amendments proposed to the existing Double Tax Avoidance Agreement (DTAA) entered into between India and Singapore in 1994 (1994 DTAA) as amended by a protocol dated 18 July 2005 [1] (2005 Protocol) and the second protocol dated 1 September 2011 [2]. The third protocol to amend the 1994 DTAA was signed on 30 December 2016 (the 2016 Protocol) followed by official announcements made by the Government of India (GOI) and the Government of the Republic of Singapore (GOS) [3]. The text of the 2016 Protocol is now available on the official website of GOS [4]. To recollect, in terms of the 2005 Protocol, it was agreed that the benefit of taxation of capital gains, from sale of shares only in the country of residence of the alienator (i.e. exemption from taxation in source country), will remain in force so long as similar treatment is accorded in the India-Mauritius DTAA. With the amendment of India-Mauritius DTAA on 10 May 2016, the amendment to India- Singapore DTAA was eagerly awaited. The 2016 Protocol, as expected, is on lines similar to the amendments made to India-Mauritius DTAA [5]. Also, it aligns with India s philosophy of providing for source-based taxation of capital gains from sale of shares of a company resident in India as also reflected by the recently amended India- Cyprus DTAA [6]. [1] Notification No. 185/2005 [2] Notification No. SO 2031 (E) [3] Refer EY Flash News tilted Third Protocol amending India-Singapore DTAA signed today on 30 December 2016 [4] www.iras.gov.sg. The website states that the 2016 Protocol is not yet ratified and, therefore, does not have the force of law. [5] Refer EY Tax Alert on Protocol signed on 10 May 2016 to amend the 1982 India-Mauritius tax treaty dated 12 May 2016. [6] Refer EY Tax Alert on New India-Cyprus tax treaty signed dated 15 December 2016.
The 2016 Protocol provides for source-based taxation of capital gains arising from transfer of shares with effect from 1 April 2017. Shares acquired on or before 31 March 2017 are grandfathered and continue to qualify for source tax exemption subject to fulfilment of conditions in the modified Limitation of Benefits (Modified LOB) provisions of the 2016 Protocol. Along the lines of amended India-Mauritius DTAA, transitory provisions for reduced taxation by the source country (taxation at 50% of domestic tax rates) on capital gains from alienation of shares has also been provided for a limited period from 1 April 2017 to 31 March 2019 subject to fulfilment of Modified LOB conditions. Broadly, in relation to transitory relief, modified LOB looks at Expenditure test for a period of 12 months preceding the date on which gains arise as compared to the period of 24 months comprising two blocks of 12 months each, which continue to apply for grandfathered investments. Further, in line with commitment made as part of Article 14 on dispute resolution mechanism of OECD s BEPS project, a provision has been inserted for providing corelative adjustment in transfer pricing cases. The new provision explicitly provides priority to domestic anti-avoidance measures over the 1994 DTAA (read with its Protocols). The 2016 Protocol will be effective once the requisite procedures for its ratification are completed by both the countries. However, irrespective of the completion of procedure, 2016 Protocol shall enter into force from 1 April 2017. Key amendments introduced by the 2016 Protocol Capital gains taxation Capital gains arising from the transfer of shares in an Indian company, until now, were subject to tax only in the resident country (Singapore) under the 1994 DTAA (subject to conditions of LOB provision under the 2005 Protocol). The 2016 Protocol now proposes to restrict this exemption to investments in shares in Indian company acquired up to 31 March 2017. The exemption will apply irrespective of the date of subsequent transfer of such shares and subject to fulfilment of conditions of the Modified LOB which, in this behalf, are at par with LOB conditions provided in 2005 Protocol. Taxation rights are now provided to the State of residence of the company whose shares are alienated (source country - India) on gains from alienation of shares acquired on or after 1 April 2017. Along the lines of India-Mauritius DTAA, the 2016 Protocol provides for a transitory provision for gains arising during a window period of 1 April 2017 to 31 March 2019 in respect of shares acquired on or after 1 April 2017. Such gains arising during the transitory period will be subjected to tax at 50% of the domestic tax rates as applicable in the source country, on fulfilment of the conditions of modified LOB provision. Limitation of Benefits (LOB) The LOB provision is an anti-abuse provision which lays down further conditions to be fulfilled for claiming capital gains exemption in the source Country under the 1994 DTAA (read with the 2005 Protocol). The 2016 Protocol continues to provide that, on principles, exemption from source taxation in respect of grandfathered investments for shares acquired before 1 April 2017 will be subject to following LOB conditions:
The exemption will not be available if the affairs of alienator were arranged with the primary purpose to take such advantage of exemption (Motive Test). The exemption will not be available to a shell or conduit company, being a legal entity with negligible or nil business operations or with no real and continuous business activities. An entity can be regarded as a shell or conduit company in case its annual expenditure in Singapore is less than the threshold provided (i.e. SGD 200,000 in Singapore or INR 5million in India), during each block of 12 months in the immediately preceding period of 24 months from the date on which the capital gain arise (Expenditure test). A company is deemed not to be a shell/conduit company if it is listed on recognized stock exchange of the country or it does not meet the Expenditure test, as aforesaid. For claiming the transitory relief of reduced taxation at 50% during the period 1 April 2017 to 31 March 2019, modified LOB is applicable. For transitory relief, all the above stated elements of the LOB are present except that the Expenditure test (as aforesaid) is required to be fulfilled only in the immediately preceding period of 12 months from the date on which the capital gain arises. This provision is to relieve double taxation in the other contracting state and it is comparable to similar provision in the OECD Model Convention of 2014 (the OECD MC). This amendment is in line with India s commitment made as part of Article 14 on dispute resolution mechanism of OECD s BEPS project and it requires for both the countries to enter into bilateral discussions for elimination of double taxation arising from transfer pricing or pricing of related party transactions. Applicability of domestic antiavoidance provisions The 1994 DTAA will not prevent a country from applying its domestic law and measures concerning the prevention of tax avoidance or tax evasion. From India perspective, the 1994 DTAA may be subject to the provisions of General Anti Avoidance Rule (GAAR) and other domestic anti avoidance rules. Entry into force The 2016 Protocol will be effective in India and Singapore only after completion of the procedures in both the countries for bringing it into force. The 2016 Protocol shall come into effect on the later of date on which India and Singapore notify the same, failing which it shall come into effect from 1 April 2017. Correlative adjustment on account of transfer pricing provision - amendment to Article 9: Associated Enterprises (AEs) The 2016 Protocol inserts a new clause in the definition of AEs to provide that, a correlative adjustment may be made in the profits of AE in the other contracting state where an adjustment has been made by a country to profits of a resident, based on arm s length condition and taxes are levied on such profits adjusted. And such profits are also taxed in the hands of AE in the other contracting state
Comments Singapore has been a preferred holding company jurisdiction for investments into India and has contributed 16% of foreign direct investment (FDI) in India from April 2000 to September 2016 [7]. The 1994 DTAA was a subject matter of discussion for renegotiation between the GOI and the GOS in the recent past, particularly after the amendment to India-Mauritius DTAA earlier this year. As per GOI press release, the 2016 Protocol is in line with India s treaty policy to prevent double non-taxation, curb revenue loss as also to check the menace of black money through automatic exchange of information. This is reflected also in India s recently revised DTAAs with Mauritius and Cyprus and the joint declaration signed by India with Switzerland. Along the lines of amended India- Mauritius DTAA, 2016 Protocol also grandfathers and continues to retain residence-based taxation in respect of shares acquired prior to 1 April 2017 while providing reduced taxation in transitory period of 1 April 2017 to 31 March 2019. However, both these reliefs are subject to compliance with the modified LOB conditions as applicable. Source-based taxation in India will be in respect of shares of a company resident in India and will not extend to any other securities, including convertible or nonconvertible debt instruments, derivatives or to shares of a foreign company which may derive value from Indian assets. Unlike the 2005 Protocol, the modified LOB conditions are not made applicable in respect of capital gains arising from transfer of assets other than shares of a company resident in India. Introduction of co-relative adjustment for transfer pricing variations is in line with India s commitment under OECD s project on BEPS to provide access to Mutual Agreement Procedure in transfer pricing cases. Further, 2016 protocol also states that the DTAA will not prevent a country from applying its domestic [7] Source www.dipp.nic.in, media reports
law and measures concerning the prevention of tax avoidance or tax evasion. GAAR provisions of Indian domestic law are to be operative from 1 April 2017 and while Indian Tax Laws (ITL) does specifically provide that domestic law provisions apply only to the extent they are beneficial compared to a tax treaty, GAAR can still be applied even if its application is not beneficial. At Annexure, we have provided quick summary of relative tax treatment in India under the recently amended India s DTAAs with Mauritius, Cyprus and Singapore in respect of capital gains taxation in different situations and certain other key provisions.
Tax treatment in India (source country) under amended DTAAs with Singapore, Mauritius and Cyprus w.e.f. 1 April 2017 Annexure Transactions Capital gains from alienation of shares of an Indian company acquired after 1 April 2017 - Grandfathering for shares Source taxation in India under DTAA Singapore Mauritius Cyprus acquired till March 2017 - Lower taxation for transitory period of 2 years (April 2017-2019) ( transitory relief ) LOB provision (for capital gains exemption on alienation of shares) Capital gains from alienation of debt instruments including convertible debts, derivatives, etc. Capital gains from alienation of shares of foreign company deriving value from India assets (Applicable for grandfathered and transitory relief) Interest 10/15% (Note 1) Fees for technical services 10% (Restrictive scope as fees for included services ) Other Income (Taxable in accordance with ITL) Notes (Applicable only for transitory relief) (Only where value of shares is based on immovable property in India) 7.5% 10% 10% 10% (Taxable if arises in India) (Taxable in resident state except as referred in Note 2) 1. Reduced rate of 10% for interest paid on loans granted by a banking/financial entity or insurance institution. Taxation at 15% in all other cases. 2. Source taxation in respect of income from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or gambling or betting
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