India’s first multilateral agreement (MA) entered into with the South Asian Association for Regional Cooperation (SAARC) nations comprising Bangladesh, Bhutan, Maldives, Nepal, Pakistan and Sri Lanka apart from India is a limited MA on avoidance of double taxation and mutual administrative assistance in tax matters with a view to promote economic cooperation amongst its member States. The MA was signed on 13 November 2005 and is in force from 19 May 2010. In India, the MA would be effective from 1 April 2011 and would apply in respect of income derived in tax year beginning from 1 April 2011 and subsequent years.
The MA provides taxation rules in the hands of professors, teachers, students who are residents of a member State with respect to income earned in another member State. The MA also has provisions on exchange of information, assistance in collection of taxes, trainings to tax administrators, sharing of tax policies and such other related issues aimed at tax cooperation amongst member States.
India has entered into comprehensive double taxation avoidance agreements (DTAAs) with nearly 80 countries, including some SAARC countries such as Sri Lanka, Nepal and Bangladesh. In addition, India has entered into Tax Information Exchange Agreements (TIEAs) with Bermuda and it is reported that such similar TIEAs are under negotiation with few territories such as the British Virgin Islands, Cayman Islands etc. In a recent development, the Government of India has notified its first MA with SAARC countries which covers some aspects of cross-border taxation and facilitates exchange of information.
Taxes covered and relationship with existing DTAAs
- The MA applies to taxes on income imposed by or on behalf of member States. For this purpose, all taxes imposed on total income or on elements of income, including taxes on gains from alienation of movable or immovable property and taxes on total amounts of wages or salaries paid or deemed to be paid by enterprises are regarded as taxes on income.
- The existing taxes to which this MA applies are listed in the schedule to the MA. In relation to India, it applies to income tax, including any surcharge thereon.
- The MA has also been made applicable to any identical or substantially identical taxes imposed after the date of signature of the MA.
- The protocol to the MA further specifies that this MA shall apply only in member States where an adequate direct tax structure is in place. Where such a structure is not in place, the MA shall become effective from the date on which such a member State introduces a proper direct tax structure and notifies the SAARC Secretariat to this effect.
- The protocol to the MA also specifies that, in the event of a conflict between the provisions of the MA and any bilateral DTAA, the provisions of the MA or DTAA that is signed or amended at a later date shall prevail.
Persons covered and tie breaker rules
- The MA applies to ‘persons’ who are ‘residents’ of one or more member States.
- The term ‘person’ has been defined to include an individual, a company, a body of persons and any other entity which is treated as a taxable unit under the taxation laws in force in the respective member State.
- The term ‘resident’ has been defined to mean any person who is liable to tax by reason of his domicile, residence, place of management or any other criterion of similar nature as per the laws of each member State.
- There is also a tie breaker rule that stipulates how a resident of a member State is to be determined in case a member is a resident of more than one member State. These rules are comparable with similar provisions in a bilateral DTAA. In case of individuals, his/her status is determined by applying the test of permanent home, center of vital interests, habitual abode, nationality, in that order. Where all of these tests fail, it would be settled by mutual agreement by the Competent Authorities (CAs) of the concerned member States. The relevant CA, in relation to each member State, is also specified in a schedule. For India, the Finance Minister, Government of India or its authorized representative is specified as the CA. In case of persons other than individuals, the place of effective management (POEM) is specified as a tie breaker rule. Where the POEM cannot be determined, the CAs of the concerned member States would settle this question by mutual agreement.
Taxability of visiting professors, teachers and research scholars
- A professor, teacher or research scholar who is a resident of a member State, prior to visiting another member State for the purposes of teaching or engaging in research or both at a university or college or similar approved institution, shall be exempt from tax in that other member State for any remuneration received while performing the above activities. Such exemption would be available for a period of two years from the date of arrival in the other member State.
- For this purpose, an individual is deemed to be a resident of a member State if he/she is resident in that member State in the fiscal year in which he visits the other member State or in the immediately preceding fiscal year.
- The expression ‘fiscal year’ in relation to each member State is defined in the schedule to the MA. In India, a ‘fiscal year’ means the period 1 April to 31 March of the following year.
Taxability of students
- A student who is a resident of a member State, immediately before visiting another member State and who is present in that other state solely for the purpose of education or training, shall not be taxed in the other state on grants, loans, scholarships and any other payments received from sources outside that state for the purpose of his maintenance, education or training.
- In addition, such person shall be exempt from tax in the other state on remuneration to the extent of USD 3,000 per annum which is derived from employment exercised in such state, provided such
employment is directly related to the education.
- The benefit shall extend only for such a period as is customarily required to complete the education or training and in no event can it extend beyond six consecutive years from the date of his/her first arrival in that other state.
Exchange of information
- The CAs of member States shall exchange such information (including documents or certified copies) as is necessary for carrying out the provisions of the MA. Any information received will not be disclosed to any person other than to authorities (including courts and administrative bodies) in charge of the tax administration. However, such information may be disclosed in public court proceedings or in judicial decisions.
- The MA does not cast an obligation on member States to carry out measures at variance with the laws and administrative practices, supply information which are not obtainable under the laws or supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process or information which would be contrary to public policy.
Assistance in tax collection-Member States, by mutual agreement, shall assist each other in collecting taxes which also includes interest, penalties and cost of recovery. However, this procedure shall be invoked after all permissible measures of recovery under the domestic tax laws of member States have been exhausted.
Trainings for tax administrators and sharing of tax policy
- The MA provides for member States to endeavor to hold and organize training programs, seminars and workshops for the tax administrators with the objective to:
– Provide a forum for senior tax administrators to discuss problems of common concern.
– Enhance technical and administrative knowledge and skills.
– Evolve strategies to combat common tax problems like tax evasion in the SAARC region.
- The MA provides for each member State to endeavor to bring out a yearly report on changes made in its tax laws. This may also cover introduction of new systems or techniques for circulation among member States.
- Further, a member State may, on request, make available its pool of talented experts to other member States for the purposes of drafting and organizing legislation, tax procedures, operational management, on-the-job training programs, information system and technology etc.
Review and amendment of the MA
- The MA also provides for member States to meet in order to review this MA on request or at the end of five years from the date of its entry into force. The MA also provides for a waiver of such review where member States notify the SAARC Secretariat, in writing, that no such review is necessary.
- The MA also has provision for amendment by consensus by deposit of instrument of acceptance by all member States with the SAARC Secretariat. Such an amendment will become effective from the date of commencement of the fiscal year following the issuance of notification by the SAARC Secretariat.
Comments-The MA is expected to facilitate cross-border academic research and education in SAARC member States and to enhance regional cooperation amongst tax authorities of member States to prevent tax evasion