The recent Double Taxation Avoidance Agreement (DTAA) between India and Hong Kong has made headlines for various reasons. The agreement itself is a testament to the fact that there is growing mutual recognition between India and Hong Kong, with respect to their investment potential and to ensure prevention of fiscal evasion.
Hong Kong is India's 4th largest export destination, while India is Hong Kong's 7th largest trade partner. Several Memorandums of Understanding (MoU) exist between the two countries, e.g. MoU between Hong Kong Monetary Authority and Reserve Bank of India. In the financial year, 2016-17 Hong Kong rose from 16th to 12th position in the country-wise list of FDI inflow into India.
The DTAA is expected to emerge as a boon for business enterprises, as no tax shall be levied on the profits of an enterprise of a contracting party, who does not have a permanent establishment in the other contracting party. Although, tax shall be levied on profits if an enterprise carries on business through a permanent establishment, the actual impact of such levy shall also be subjected to other clauses of the DTAA. The DTAA allows deduction of expenses, which includes general and administrative expenses for determining the profits of permanent establishment.
The DTAA will impact the shipping and aviation industry, and the profits of an enterprise of a contracting party, from the operation of ships or aircraft in international traffic shall be taxable only by that country. It also provides for marginal reduction of taxes on profits of an enterprise of one country derived from the other country. In business terms, that translates to emergence of possible investment avenues in the shipping and aviation sector of the contracting parties.
Most of the entities leasing Rigs for Oil exploration are registered in Hong Kong, the DTAA will have significant impact on taxability of their revenue generated from their Indian operations. The DTAA also caters to the interest of the Technical Service providers by capping the taxation rate at 10 per cent of the gross amount of fee, in case of inter-territory provision of service between contracting parties.
The DTAA provides significant relief to investors looking for avenues of cross-border investment i.e. Indian investors looking to invest in Hong Kong and vice-versa. In case of such investments, taxation rate is capped at 5 per cent of the gross amount of dividends paid, thereby providing ample incentive for cross-border investment.
The DTAA contains an in-built general overriding clause, which enables domestic laws of the contracting parties to prevail over the DTAA in case of tax avoidance and/or evasion and other specified factors. This overriding clause seeks to eliminate the possibility of treaty abuse leading to tax evasion and consequential revenue loss.
The DTAA, also contains individual article wise overriding clauses in relation to certain types of income arising out of viz., dividends, interest, royalties, capital gains, etc. It stipulates that benefit under DTAA shall not be available if one of the main purpose for the transaction resulting in such income, is to take advantage of the particular article. Such provision gives power to the assessing officers to dispute benefit of DTAA, if they feel that the transaction is artificial or has been created only to take benefit of DTAA.
It is evident that the DTAA will open up various avenues for investors of both the countries. Thereby, facilitating establishment of trade relations and investment opportunities. Sectors like technical services, aviation, shipping and various cross-border investments are likely to benefit immensely in near future.
By Mr Monish Panda, Founder, Monish Panda & Associates (law firm)