The Principle of Non-discrimination in Tax Treaties
Research and Insights
June 2019
2 PwC | The Principle of Non-discrimination in Tax Treaties
Contents
Preface 4
Chapter 1. The ‘what’ and ‘how’ of non-discrimination 5 • Whatistaxnon-discrimination? • Paragraph1:Nationality-relatednon-discrimination • Paragraph2:Non-discriminationforstatelessperson • Paragraph3:PE-relatednon-discrimination • Paragraph4:Expense-relatednon-discrimination • Paragraph5:Ownership-relatednon-discrimination • Paragraph6:Taxescovered • Howtoinvokenon-discrimination
Chapter 2. Expense-relatednon-discrimination 11 • AreIndianThinCapitalisationrulesdiscriminatory? • Cannon-discriminationbeexploredinallcasesofdisallowanceof
ThinCapitalisationinterest?
Chapter 3. Variants of taxation-related discrimination 14 • POEMofforeigncompanyandtaxation-relatednon-discrimination • PE-relatednon-discriminationfordeductionofexpenses • Non-discriminationfor‘companyinwhichthepublicaresubstantially
interested’ • Foreigncompanyholding-subsidiarymergerandtaxnon-discrimination • Transferpricingprovisionandnon-discrimination • Requisitioningadditionalinformationfromforeigncompanies–
adiscriminatorymeasure?
Chapter 4. Conclusion 17
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Glossary
Abbreviation Terminology
BIPA BilateralInvestmentPromotionandProtectionAgreement
OECD OrganisationforEconomicCo-operationandDevelopment
OECDMC OECDModelConvention
PE PermanentEstablishment
POEM PlaceOfEffectiveManagement
TaxTreaty DoubleTaxationAvoidanceAgreement
UN United Nations
UNMC UNModelConvention
US United States
USMC USModelConvention
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PrefaceDearreaders,
TheArticleonnon-discriminationwasconceptualisedintaxtreatiesfromoldfriendship,navigationandcommercetreaties,inwhichforeignnationalsweretreatedatparwiththenationalsofspecificcountries.Overtheyears,theambitofthenon-discriminationArticlehasexpandedtocoverotherelementsofnon-discrimination,includingforthepermanentestablishmentofaforeigncompany,expensedeductibility,etc.
Inthisreport,wehavewalkedyouthroughtheframeworkoftheextanttaxnon-discriminationArticlewithelementaryillustrationsandbusiness-relatedtaxincidents.Thisisnotatechnicalresearchpaper,butaimstohelpyoucomprehendtheapplicabilityofthenon-discriminationArticle.Andwhiletheremaybediverseschoolsofthoughtontaxnon-discrimination,whatwehaveattemptedtodointhisreportissimplifytheframeworkofthenon-discriminationArticle.
Inthefollowingchapters,wehaveprovidedinstanceswherecourtsandinternationalcommentarieshaveevaluatedtheapplicationofthenon-discriminationArticleandelaboratedonthelegalroutetoinvokeit.Chapter2,interalia,dealswiththecontemporaneoustopiconwhetherthenon-discriminationArticlecanbeappliedtodisallowanceofinterest-relatedexpenseonaccountofThinCapitalisationrules.Ifyouwanttoquicklymoveahead,youcouldomitChapter1andjumptoChapter2orChapter3,sincethechaptersareorganisedinsuchamannerthatthecontentineachiscomplete in itself.
Non-discriminationisnotgenerallyseenasaforefrontargumentintaxanalysis.Ihopethispublicationhelpstosimplifythenon-discriminationArticleforyou.Foracomprehensivetaxanalysis,youcandeliberateonnon-discrimination-relatedargumentstoensurethatanylegitimatetaxpositiononaccountofdiscriminationindomestic tax laws is not missed.
Wewillbehappytoreceiveyourinputandfeedbackonthisreport.
Happyreading! Frank D’Souza
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Chapter 1: The ‘what’ and ‘how’ of non-discrimination
“…a difference in treatment is discriminatory…if it ‘has no objective and reasonable justification’, that is if it does not pursue a ‘legitimate aim’ or if there is not a reasonable relationship of proportionality between the means employed and the aim sought to be realized….”
-EuropeanCourtofHumanRights1
1.1 The nucleus of the ‘non-discrimination’ principle isaptlycapturedintheexcerptabovefromthejudgmentonthenon-discriminationArticle(i.e.Article14)oftheConventionfortheProtectionofHumanRightsandFundamentalFreedoms.Article142providesfornon-discriminationongroundsofsex,race,colour,etc.
1.2 Asthewordsuggests,non-discriminationmeansanti-discriminationoragainstdiscrimination.EventheIndianConstitutionincludesthenon-discriminationprincipleinitsArticle14,whichprovidesthat“…the state shall not deny to any person equality before the law or the equal protection of the laws within the territory of India…”. Non-discrimination principles are also included intheIndiaModeloftheBilateralInvestmentTreaty3,whichstatesthatintentionalandunlawful
discriminationagainstforeigninvestmentonthebasisofnationalityconstitutesbreachoftheBilateralInvestmentTreaty.
1.3 Ingeneral,non-discriminationrulesincludeprinciplesthatdealwithprovisionsofthedomesticlawsofacountrydiscriminatingagainstcertaincategoriesofpersons.Theunderlyingobjectiveisrootedinensuringequality,sothatsuchpersonsarenottreateddifferentlyduetotheirdisparatecharacteristics.Theaimistoresolvenon-discrimination-relatedproblemsbymeansoffairandequitabletreatment. This is enshrined in taxation laws in taxtreaties.Ourreportseekstoprovidefocusedinsightsontax-relatednon-discriminationfromthe standpoint of direct tax and its practical applicationinIndia.
1. InthecaseofWalkerv.theUnitedKingdom,Applicationno.37212/022. Article14oftheConventionfortheProtectionofHumanRightsandFundamentalFreedomsprovidesthat“The enjoyment of the
rights and freedoms set forth in Convention shall be secured without discrimination on any ground such as sex, race, colour, lan-guage, religion, political or other opinion, national or social origin, association with a national minority, property, birth or other status.”
3. Article4.1oftheIndiaModelofBIPAprovidesthat‘each Party shall not apply to Investments, Measures that accord less favourable treatment than that it accords, in like circumstances to domestic investments with respect to the management, conduct, operation, sale or other disposition of Investments in its territory.’
FurtherArticle4.2providesthat,‘a breach of Article 4.1 will only occur if the challenged Measure constitutes intentional and unlawful discrimination against the Investment on the basis of nationality.’
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What is tax non-discrimination?1.4 Article24oftheOECDMC(2017),theUNMC
(2018)4andUSMC20065 comprise the non-discriminationArticle.OneoftheprimeobjectivesoftheArticleistoensurethatthesourcecountrydoesnotlevyanadditionaltaxationburdenonforeigninvestmentsvis-à-visdomesticinvestments.ThisArticleismeanttosupportthegoalofefficientallocationoftaxingrightsbetweenasourcecountryandanationalorresidentcountry,andthereby,supplementsthetax-relatedprinciplesofthetaxtreaty.Thenon-discriminationArticleisincorporatedinmosttaxtreatiessignedbyIndia,withafewexceptionssuchasitstaxtreatywithOman,SaudiArabiaandGreece.
1.5 Beforeweconcentrateonthegranularaspectsofthetax-relatednon-discriminationArticleandunderstanditspracticalapplication(asdetailedinChapter2andChapter3),itisimperativeforustounderstanditsbasicstructureanddenotation.
1.6 Thenon-discriminationArticleintheOECDMCisdividedintosixparagraphs.Thefirstfivedealwithdifferenttypesofdiscriminationinasourcecountry,i.e.nationality-baseddiscrimination,discriminationagainststatelesspersons,anddiscriminationrelatingtoPE,expenseandownership.ThelastparagraphdealswiththescopeoftaxescoveredundertheArticle.However,everyparagraphisaself-containedprovisioninitselfandshouldbereadon its own.
1.7 TheprimeobjectiveofArticle24istoidentifydiscriminativetreatmentinspecificcircumstances.Therefore,anyotherformofdiscriminationthatisnotcoveredinthefiveparagraphsofthenon-discriminationArticlecannotberegardedasanunwarrantedprovision.Moreover,insuchcases,thepleaofnon-discriminationcannotbeused.
Paragraph Particulars
Paragraph1 Nationality-relatednon-discrimination
Paragraph2 Non-discrimination of stateless person
Paragraph3 PE-relatednon-discrimination
Paragraph4 Expense-relatednon-discrimination
Paragraph5 Ownership-relatednon-discrimination
Paragraph6 Taxescovered
4. ConsideringthatOECDMCandUNMChavesimilarlanguagefornon-discriminationprovision,whereverinthepublication‘OECDMC’isreferred,thesameanalogycanalsobeappliedfortheUNMC
5. TheUSMCissimilarinlanguagetoOECDMC,withexceptionofanadditionalparagraphfordividend,‘Nothing in this Article shall be construed as preventing either Contracting State from imposing a tax as described in Paragraph 8 of Article 10 (Dividends)’
1.8 Paragraph1dealswithnationality-relatedtaxnon-discrimination.Itestablishesthatfortaxationpurposes,discriminationonthebasisofnationalityisforbidden,i.e.nationalsofonecountrycannotbesubjectedtoadditionaltaxationcomparedtothenationalsofthesourcecountry.Thisishoweversubjecttoboththenationalsbeinginthesamecircumstancesinthesourcecountry.Andunlikeintherestofthetaxtreaty,thepeculiarityofthisparagraphliesinitsemphasisonthenationalityof persons rather than on their residential status. Therefore,apersonmaybeanationalofonecountryandyetnotaresidentofthatcountry,andviceversa.Asacorollary,thisparagraphalsocoversanationalofonecountry,whomaynotbearesidentofanyofthetwocountriesinvolved.
1.9 Toillustratethisfurther,‘A’,anAustraliannationalearninganincomeinIndia,shouldnotbetreateddifferentlyinIndiavis-à-visIndiannationals,othercircumstancesremainingthesame.Thisisthecase,irrespectiveoftheresidentialstatusof‘A’inAustralia.Inthiscontext,thetaxationtreatmentaccordedto‘A’inAustraliaisirrelevant.
Paragraph 1: Nationality-related non-discrimination
“…Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, in particular with respect to residence, are or may be subjected. This provision shall, notwithstanding the provisions of Article 1, also apply to persons who are not residents of one or both of the Contracting States…”
-Paragraph1inArticle24ofOECDMC
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1.10 Thenationalityandresidentialstatusofacompanyisgenerallybasedonthecountryofitsincorporation.ThecommentaryonOECDMCprovidesaclassicexamplethatelucidatesnationality-baseddiscriminationwithrespecttocompanies.ThefollowingcasestudyisexplainedwithareferencetoDiagram1.1:
• UnderthedomesticIncomeTaxlawof‘countryS’,companiesincorporatedinitorwiththeirPOEMinitareitsresidents.
• UnderthedomesticIncomeTaxlawof‘countryN’,onlycompaniesthathavetheirPOEMinitareits residents.
• Company‘N’hasitsPOEMin‘countryS’,andthereforeisitsresidentaccordingtothetaxlawsof‘countryN’and‘countryS’.
• Companies ‘S1’ and ‘S2’ are incorporated in ‘countryS’andareresidentinit.
• Thedomestictaxlawof‘countryS’providesthatdividendspaidtoacompanyincorporatedin‘countryS’byanothercompanyincorporatedinitare exempt from tax.
Diagram 1.1
Country N Country S
Dividend Exempt? Dividend exempt
Company S1
Company NPOEM in country S Company S2
1.11 Inviewofthis,‘companyN’willhaveitsPOEMin‘countryS’andwillbearesidentof‘countryS’forthepurposeofthetaxtreatyofcountrySandcountryN.However,dividendspaidby‘companyS1’to‘companyN’willnotbeeligibleforthisexemption,ascompanyNisnotincorporatedin‘countryS’,eventhoughit(therecipientcompany)is in the same circumstances with respect to its residencyas‘companyS2’(whichisincorporated
in‘countryS’).Therefore,taxationofdividendsinthehandsofcompanyNwouldbediscriminatorytreatmentandconstituteabreachofParagraph1.
1.12 Againstthebackdropgivenabove,itispertinenttodwellonthemeaningoftheexpression‘taxation and connected requirements’usedinParagraph1.ThisisalsorelevantforotherparagraphsofArticle24.Theterm ‘taxation’goesbeyondonlytaxrates.Itreferstodifferentparametersintaxcomputationandincludesthoseparametersreferringtodeductionofbaddebts6 andprofit-linkeddeductions7.Practicalinsightson
‘taxation’arefurtherelaboratedinChapter3.
1.13 Theexpression‘connected requirements’ does not refer to taxation as such8,buttoallotherobligationsthatmayberequiredtomakethetaxlevyconcrete.Inthiscontext,theOECDMCsuggeststhat‘connected requirements’ include formalities connected with taxationsuchastaxreturnfiling,paymentoftaxesandprescribedtimelines9.AcaseinpointistheobservationmadebythePunebenchoftheTribunalin Daimler Chrysler India10thatanypreconditionsuchascarryforwardoflossesthathasavitalbearingondeterminationoftaxliabilityisarequirementconnected with taxation.
1.14 Thecrucialelementofthisparagraphisthatnationalsofbothcountries(i.e.thesourcecountryandthenationalcountry)needtobeinthe‘same circumstances’. This means that the nationals need tobeinsubstantiallysimilarcircumstances,bothinlawandfact,forapplicationoftaxationlawsandregulations.Moreover,the‘same circumstances’ can beseenintheirformofconstitution,forinstance,aforeignproprietorshipconcerncannotbesaidtobeinthesamecircumstancesasadomesticcompany.Similarly,thePEofaforeignbankcannotbesaidtobeinthesamecircumstancesasadomesticbank.
1.15 InthecontextofIndiantaxlaw,Paragraph1canbeinvokedincircumstanceswhenanyprovisionoftheIncome-taxAct,1961orataxtreatydiscriminatesagainsttaxationofthenationalofanothercountryvis-à-visthatofanIndiannational.Forinstance,section80R11andsection80RRA12oftheIncome-taxAct,1961wereobserved13tobediscriminatoryunderParagraph1,asthesesectionsonlyapplytocitizensofIndia.
6. StandardCharteredBankv.IAC(1991)39ITD57(MumbaiTribunal)7. CreditLlyonnaisv.DCIT(2005)94ITD401(MumbaiTribunal)8. Reginav.InlandRevenueCommissionersExp.CommerzbankAG[S.T.C.]271(QBD),publishedinCommonMarketLawReview3,
633(1991)9. OECDMC(2017)para15ofArticle2410. DaimlerChryslerIndia(P)Ltd.v.DCIT(2009)29SOT202(Pune)11. Section80RoftheIncome-taxAct,1961istheprovisionfordeductioninrespectofremunerationreceivedbycitizensofIndiafromcertain
foreignsourcesinthecaseofprofessors,teachers,etc.However,nodeductionisavailableunderthissectionwitheffectfrom01April,200412. Section80RRAoftheIncome-taxAct,1961providesfordeductioninrespectofremunerationreceivedbycitizensofIndiaforser-
vicesrenderedoutsideIndia.However,nodeductionisavailableunderthissectionwitheffectfrom01April,200413. CreditLlyonnaisvsDCIT[2005]94ITD401(Mum)
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1.16 Tosumup,fromtheperspectiveofIndia’staxlaw,ifyouareanationalofanycountry(otherthanIndia),andaresubjectedtoburdensometaxationinIndiavis-à-visanIndiannational,youmightwanttoexplorehowthisArticlecanhelpyouagainstsuchdiscrimination.
1.19 Paragraph3dealswithtax-relatednon-discriminationforaPE.ItemphasisesthattaxationleviedonthePEofaforeignenterpriseinitssourcecountryshouldnotbelessfavourablethantaxationoftheenterprisesofthecountryconductingthesameactivities.ThesourcecountrymaychoosetobutisnotobligedtograntpersonaltaxallowancesorreductionstothePEsofnon-residentindividuals,whichitmayhavegrantedtoitsownresidents.Theparagraphdoesnotprohibitthis.
1.20 Toillustratethisfurther,acompanyincorporatedinSpainmayhaveaprojectofficeinIndia,whichistobeconsideredaPEfortheIndia-SpainTaxTreaty.ByvirtueofParagraph3,suchaPEshouldnotbetaxedlessfavourablyinIndiavis-à-visanIndiancompanycarryingonthesameactivitiesinthecountry.
1.21 TheequaltreatmentgrantedbythisparagraphtoPEsvis-à-visresidententitieshaswidespreadinferences.Attheveryoutset,thisparagraphdoesnotrequirethe same rate of tax15tobeleviedontheprofitsofthePEofaforeigncompanyasthatleviedonaresidentcompany.Thisanalogyisderivedasresidentsareusuallytaxedontheirglobalincome,whereasnon-residentsareonlytaxedonincomesourcedfromaparticularcountry.Tofurtherfortifyitsposition,IndiahasreserveditsrighttoclarifyinthecommentarytotheOECDMCthatahighertaxrateleviedontheprofitsofaPEthanthatforasimilarIndiancompanywillnotbeinconflictwiththisparagraph.16
14. IndianTaxTreatywithRomaniaandLatviacontainstheParagraphofnon-discriminationforstatelesspersons15 AdvanceRulingApplicationNo.P-16of1998,Inre[1999]236ITR103(AAR)16. IndiahasalsoinsertedanExplanationtosection90oftheIncome-taxAct,1961,stating,‘…the charge of tax in respect of a foreign
company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company.’
Paragraph 2: Non-discrimination of a stateless person
“…Stateless persons who are residents of a Contracting State shall not be subjected in either Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of the State concerned in the same circumstances, in particular with respect to residence, are or may be subjected…”.
-Paragraph2inArticle24ofOECDMC
1.17 Paragraph2isrelevantforastatelesspersonwhoisnot considered a national of either of the countries foraparticulartaxtreaty.Thisparagraphprovidesthatstatelesspersonsshouldnotbesubjectedtomoreburdensometaxation,comparedtothenationalsoftheconcernedcountry.However,itisimportantthatstatelesspersonsandcomparativenationalsareinthesamecircumstances,especiallywith respect to their residential status.
1.18 Theintentofincludingthisparagraphwastoextend ‘national treatment’ to stateless persons whoreceiveassistancefromUNagenciesandperhapsenjoyprivilegesattachedtothosewhoarenationalsofaparticularcountry.Butthesestatelesspersonsarestillnotregardedasthecountry’s‘nationals’.However,thereislimitedapplicationofthisparagraph,andsomecountriessuchasIndia14,Japan,theUSAandSwitzerlandhavereservedtherightnottoinsertit.
Paragraph 3: PE-related non-discrimination
“…Taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities. This provision shall not be construed as obliging a Contracting State to grant to residents of the other Contracting State any personal allowances, reliefs and reductions for taxation purposes on account of civil status or family responsibilities which it grants to its own residents…”.
-Paragraph3inArticle24ofOECDMC
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1.22 Thephraseology‘less favourable’ treatment in Paragraph3iswithrespectto‘taxation’alone.Thus,equaltreatmentintaxationshouldbeaccorded,e.g.deductionofexpenses,claimofdepreciation,carryforwardorbackwardoflossesandclaimingoftaxincentives.Consequently,itisclearthatParagraph3doesnotextend‘lessfavourable’treatmentto‘connectedrequirements’.Asacorollary,connectedrequirementssuchasstringentinformation-relatedrequirements,groupconsolidationrulesandtransferpricing-relatedenquiriesfortransactionswithassociatedenterprisescannotbeconsideredtobeprohibitedbyimplyingthisparagraph.ThismakesitdistinctfromParagraph1,whichdealswith‘taxation and connected requirements’.
1.23 InthecontextofParagraph3,Indiancourt17 hasobservedthatthePEofaforeignenterprisewhoseactivitiesincludeborrowingandlendingofmoney,butwhichisnotregisteredasabankinIndia,cannotbesaidtobecarryingonthesameactivitiesasthoseconductedbyadomesticbank.Inanotherinstance,whereinPEnon-discriminationwasapplied,theCourt18 held that claimofataxincentiveprovisionfordevelopmentofeconomicallybackwardareascannotbedeniedtoaPEifitfulfilsthesameconditionsasthoserelevantforresidententerprises.
1.24 Tosumup,fromtheperspectiveofIndiantaxlaw,ifyouareaforeigncompanywithaPEinIndia,thisPEcannotbeaccordedlessfavourabletaxation-relatedtreatmentthananIndiancompany,whichiscarryingonthesameactivities.
1.25 Paragraph4dealswithexpense-relatednon-discrimination.Itemphasisesthataresidentcompanyshouldbeeligibletoclaimdeductionfordisbursementstoanon-residentforthepurposeofdeterminingitstaxableprofits,ifdeductionunderthesameconditionsisavailablewhenpaidtoaresident.SuchanexpenseclaimissubjecttotherigoursoftheArm’sLengthprincipleoftransferpricingenumeratedinArticle9(1),Article11(6)andArticle12(4)oftheOECDMC.Thesamesituationmayalsooccurinthesphereofcapitaltaxationinregardtodebtscontractedtoanon-resident.19 Thisparagraphdoesnotprecludecountriesfromintroducingmeasurestocurbtaxavoidanceordoublenon-taxationbyeitherbilaterallymodifyingtheirtaxtreatiesorintroducinganti-avoidancedomestictaxrules,aslongasthesemeasuresarecompatiblewiththeprovisionsofthetaxtreaty.
1.26 Toillustratetheabove,byvirtueofParagraph4,anIndiancompanyshouldbeeligibletoclaimexpenseforinterestpaidtoaFrenchcompanyif the interest expense in the same conditions is deductibleifpaidtoanotherIndiancompany.
1.27 Torecapitulate,fromtheperspectiveofIndiantaxlaw,ifyouareanIndiancompanymakingpaymenttoanon-resident,andsuchpaymentwouldbeaneligibleexpensehaditbeenmadetoaresidentpayee,thenpaymenttoanon-residentshouldalsobedeductiblefromitstaxableprofits.Moreover,onthebasisofthisparagraph,anyrestrictiononsuchpaymentsbyvirtueofdomestictaxlawwouldbediscriminatory.Chapter2ofthispublicationappraisesthisparagraphandanalyseswhethertherecentlyintroducedIndianThinCapitalisationrulesarediscriminatoryinnature.
17. ChohungBankvsDDIT[2006]286ITR231(Mum)18. RajeevSureshbhaiGajwanivsACIT[2011]8ITR(T)616(Ahmedabad)(SB)19. OECDMC,Para73toArticle24
Paragraph 4: Expense-related non-discrimination
“…Except where the provisions of Paragraph 1 of Article 9, Paragraph 6 of Article 11, or Paragraph 4 of Article 12, apply, interest, royalties and other disbursements paid by an enterprise of a Contracting State to a resident of the other Contracting State shall, for the purpose of determining the taxable profits of such enterprise, be deductible under the same conditions as if they had been paid to a resident of the first-mentioned State. Similarly, any debts of an enterprise of a Contracting State to a resident of the other Contracting State shall, for the purpose of determining the taxable capital of such enterprise, be deductible under the same conditions as if they had been contracted to a resident of the first-mentioned State…”
-Paragraph4inArticle24ofOECDMC
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1.28 Paragraph5dealswithownership-relatednon-discrimination.Theobjectiveofthisparagraphistoensurenon-discriminativetreatmenttoresidenttaxpayers,irrespectiveofwhoownsorcontrolscapital.Itdoesnotextendthebenefittonon-residents that own or control capital.
1.29 Toelaborateonthisfurther,letustaketheinstanceofahypotheticalIndiancompanywithItalianshareholders.ThecompanyshouldnotbesubjectedtomoreburdensometaxationorconnectedrequirementsthanthosesubjectedtoanIndiancompanywithIndianshareholders.
1.30 Thephrase‘taxation or connected requirements’ is similarlyinterpretedinParagraph1ofthisArticle.The term ‘other similar enterprises’ implies that foreign-ownedandlocallyownedsubsidiariesshouldbecomparable,andthatsuchforeign-ownedsubsidiariesshouldnotbecomparedwithsubsidiariesownedbytheresidentsofathirdcountry.
1.31 IncontextofParagraph5,theIndianCourt20 held thatanIndiancompanywhoseforeignholdingcompanyhasshareslistedonaforeignstockexchangeshouldbetreatedatparwithanotherIndiancompanythathasshareholderswhosesharesarelistedonanIndianstockexchange.
1.32 Tosummarise,fromtheperspectiveofIndiantaxlaw,ifyouareanIndiancompanywithaforeignshareholding,youcannotbesubjectedtomore
1.33 Paragraph6isgeneralinnatureandseekstocoverallformsoftaxes,irrespectiveoftheprovisionsofArticle221,whichcoveronlytaxesonincomeandcapital.TheUSCommentarytoitsMCconsidersCustomsDutytobeoutsidetheambitofthisparagraph.ManyIndiantaxtreaties22havelimitedthescopeofthisparagraphtoonlycoverthetaxestowhichthetaxtreatyapplies.
How to invoke non-discrimination1.34 Thebasicframeworkofthenon-discrimination
Articlecoverswithinitsambitfivespecificcircumstanceswhereindiscriminationcanbechallengedbyataxpayer.ThenextgermanepointisthemannerinwhichtheArticleisinvoked.
1.35 Theobligationtoproveapplicationofthenon-discriminationArticleisonthetaxpayer.UndertheIndiantaxationregime,taxpayershavetwobroadroutestheycanfollowtofacethetaxauthority―areactiveoneandaproactiveone.Theycanapplythisinterpretationwhilefilingtaxreturnsandanswerthetaxofficeratthetimeofassessmentorauditproceedings(inthereactivemodel).Andifthetaxofficerdoesnotagreewiththeirinterpretationofnon-discrimination,theycanoptforthetraditionalappellatemechanismorfileanapplicationwiththecompetentauthoritiesthroughtheMutualAgreementProcedure23.Alternatively,taxpayerscanfileanapplicationwiththeAuthorityforAdvanceRulings24toobtaincertaintyonitstaxinterpretation(inthepro-activemodel),eitherbeforeorafterfilingtaxreturns,butbeforetheissueisraisedbythetaxofficerinauditproceedings25.
20. DaimlerChryslerIndia(P)Ltd.v.DCIT(2009)29SOT202(Pune)21. Article2providesforTaxesCoveredundertheTaxTreaty22. Thetermtaxationisdefinedtomean,‘taxes to which this Convention applies’intheIndianTaxTreatieswithBrazil,Mauritius,Slovak
Republic,NewZealand,Japan,Morocco,SwissConfederation,China,Denmark,Kuwait,Italy,Singapore,Bangladesh,Indonesia,UK,SouthAfrica,China,Poland,UAE,UAR(Egypt),Philippines,Bhutan,Bulgaria,Ukraine,Qatar,Malta,Mongolia,Zambia,Thailand,Belarus,Uzbekistan
23. MAPisfiledunderTaxTreaty(correspondingtoArticle25oftheOECDMC),withinthreeyearsfromthefirstnotificationoftheaction,resultingintaxationnotinaccordancewiththeprovisionsoftherespectiveTaxTreaty
24. AdvanceRulingApplicationNo.P-16of1998,Inre[1999]236ITR103(AAR)25. Section245RoftheIncome-taxAct,1961prohibitstheacceptanceofapplicationfiledbeforetheAAR,iftheissueisalreadypending
beforeanyincome-taxauthorityorappellatetribunaloranycourt
Paragraph 6: Taxes covered
“…The provisions of this Article shall, notwithstanding the provisions of Article 2, apply to taxes of every kind and description…”
-Paragraph6inArticle24ofOECDMC
Paragraph 5: Ownership-related non-discrimination
“…Enterprises of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of the first mentioned State are or may be subjected…”
-Paragraph5inArticle24ofOECDMC
burdensometaxationorconnectedrequirementsvis-à-visthatleviedonanyIndiancompanywithanIndianshareholding.
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Chapter 2: Expense-related non-discrimination
intheIndia-USAtaxtreatywastoensurenon-discriminationintheconditionofdeductibilityofpaymentinthehandsofthepayerwherethepayeeiseitheraresidentoranon-resident.Thisobjectivewouldbedefeatedduetothediscriminationagainstthenon-residentpayee,bydisallowingtheexpenseinhandsofpayerifnotaxwaswithheldwhilemakingpaymentforadministrativeservicesintermsofsection40(a)(i)oftheIncome-taxAct,1961,whenanalogousprovisionsforresidentpayeeswerenotprovidedforinthetaxlaws.29
2.4 Whatalsomeritsattentionarethefollowingexceptions of expense-related non-discrimination outlinedatthebeginningofParagraph4:
• Article9(1):Transferpricingadjustmentfortransactionsbetweenassociatedenterprises
• Article11(6):Non-applicationofbeneficialprovisionsofthetaxtreatyfortaxabilityofinterest in the source state due to a special relationshipbetweenthepayerandthebeneficialowner of such interest income
• Article12(4):Non-applicationofbeneficialprovisionsofthetaxtreatyfortaxabilityofroyaltyin the source state due to a special relationship betweenthepayerandthebeneficialownerofsuchroyaltyincome
2.5 Paragraph4providesthatexceptinthescenariosmentionedabove,deductibilityofpaymentstonon-residentsshouldbeatparwithdeductibilityofpaymentsmadetoresidents.Againstthisbackground,itisrelevanttoanalysewhetherIndianThinCapitalisationrules,whichprovidefordisallowance of interest-related expense paid to non-residentassociatedenterprises,canbesaidtobediscriminatoryinnature.
2.1 Paragraph4ofthenon-discriminationArticle26 aims toprovideparityindeductibilityofexpensestopayerswhenpaymentismadetonon-residents,comparedtopaymentmadetoresidents.Thisparagraphprovidesforexpense-relatednon-discriminationforthebenefitofpayers(andnotpayees).Whatisimportanthereisthatdeductibilityofexpensesistobeviewed‘under the same conditions’whiledeterminingtaxableprofits,subjectto‘exceptions’providedinArticle9(1),Article11(6)orArticle12(4).
2.2 The expression ‘under the same conditions’ refers to the nature of receipt and conditions of deductibility.Acaseinpointissection40(a)(i)oftheIncome-taxAct,1961,whichprovidesfordisallowanceofpaymentmadetonon-residentsontheir failure to withhold taxes. Prior to the insertion ofsection40(a)(ia)27,similarpaymentsmadetoresidentswerenotdisallowed.Insuchscenarios,whenthesamepaymentwasmadewithoutwithholdingtaxestoresidentsandnon-residents,disallowancewasonlyattractedonpaymentmadetonon-residents.Thus,paymentsweremadeunderthesamecircumstances,butdisallowanceofpaymenttoonlynon-residentswasdiscriminatoryin nature.
2.3 Dealingwiththephrase‘under the same conditions’,theDelhiHighCourt(inthecaseofHerbalife)28heldthatlackofparityinallowingpayment(tonon-residentvsresidentpayees)asdeductionresultedindiscrimination.Inthiscase,thetaxofficerdisallowedpaymentmadebyanIndianpayertoaUSentityforcertainadministrativeservicesrenderedbythelatter.TheDelhiHighCourtobservedthattheobjectoftheexpense-relateddiscriminationparagraph
26. Article24(4)oftheOECDMC27. FinanceAct(No2)2004introducedsection40(a)(ia)toendthediscriminativetreatment,andprovidesfordisallowanceofexpenses
madetoresidentsonaccountoffailuretowithholdapplicabletaxes28. CITvsHerbalifeInternationalIndia(P.)Ltd[2016]384ITR276(DelhiHC)29. Therehavebeennumerousjudgmentsonthisissuewhereinitwasheldthatsection40(a)(i)oftheActwasdiscriminativetowards
non-residents.MillenniumInfocomTechnologiesLtdvsACIT[2008]117TTJ456(Delhi);CentralBankofIndiavsDCIT[2010]42SOT450(Mumbai);B4UInternationalHoldingsLtdvsDCIT[2012]18ITR(T)62(Mumbai);DCITvsIncentTours(P.)Ltd.[2012]25taxmann.com222(Delhi)
12 PwC | The Principle of Non-discrimination in Tax Treaties
Are Indian Thin Capitalisation rules discriminatory?2.6 Attheoutset,countriessuchasArgentina,Russia
andTunisiareservedtherighttoincludeaprovisiontoapplyThinCapitalisationmeasuresintheirdomesticlaws,notwithstandinganyotherprovisionsoftheOECDMC.IndiahasnotmadesimilarreservationsorclarificationforThinCapitalisationrulestotheOECDMC.
2.7 India’sThinCapitalisationruleswereintroducedundersection94BintheIncome-taxAct,1961witheffectfrom1April2017.Section94Bprovidesthatinterest-relatedexpensesclaimedbyanIndiancompanyorthePEofaforeigncompany(inrelationtointerestpaidtoitsnon-residentassociated enterprise or to a lender that is not anassociatedenterprise,buttheloanisbeingexplicitlyorimplicitlyguaranteedbyanassociatedenterprise)willbedisallowedforthelowerofthefollowingamounts:
• Totalinterestminus30%ofitsearningsbeforeinterest,taxes,depreciationandamortization
• Interestpaidorpayabletoassociatedenterprise
2.8 Toillustratethefactsmentionedabove,letustakethehypotheticalcaseofanIndiancompany,whichavailsaloanfacilityfromitsassociatedenterprisewhoisataxresidentofFrance.TheIndia-FranceTaxTreatyincludesrelevantprovisionscorrespondingtoArticle9(1),Article11(6)andArticle24(4)oftheOECDMC.TheIndiancompanypaysaninteresttotheFrenchassociatedenterpriseaccordingtothetermsoftheagreement.Withregardtothistransaction,Article10(1)oftheIndia-FranceTaxTreaty[correspondingtoArticle9(1)ofOECDMC]providesfortransferpricing-relatedadjustmentinthetaxableprofitsofthepayer,iftheinterestpaidisinexcessoftheArm’sLengthprice.Similarly,Article12(7)oftheIndia-FranceTaxTreaty[correspondingtoArticle11(6)oftheOECDMC]providesthatbeneficialprovisionofthetaxtreatywillnotbeavailabletothepayeetotheextentoftheinterestpaymentinexcessoftheArm’sLengthprice.
2.9 Thisinterestpayment,beinganinternationaltransaction,wouldhavetocomplywiththetransferpricingArm’sLengthprinciple,andthusbeinlinewithArticle10(1)andArticle12(7)oftheIndia-FranceTaxTreaty.Ontheotherhand,
IndianThinCapitalisationrulesarebasedontheprofitabilityparametersofanIndiancompany,i.e.subjectto30%ofitsearningsbeforeinterest,taxes,depreciationandamortisation.Therefore,theIndiancompanyhavingbusinesslossesorwithoutsufficientprofit,willsufferduetodisallowance of interest expense under section 94BoftheIncome-taxAct,1961,irrespectiveofthisbeingatArm’sLength.
2.10 Inviewoftheillustrationaboveunderpoint2.8,theissuetobeanalysediswhetherdisallowanceofArm’sLengthinterestpaymentbyanIndianpayertoitsFrenchassociatedenterpriseisinviolationoftheexpense-relatednon-discriminationparagraphoftheIndia-FranceTaxTreaty.
2.11 Thisissuecanbeanalysedfromtwoperspectives.Accordingtooneschoolofthought,disallowanceofinterestduetoIndianThinCapitalisationrulesisdiscriminatory,andhence,notpermitted.Thereasoningisthatsection94BoftheIncome-taxAct,1961isonlyapplicableinrespectofinterestpaymentsmadetoanon-residentassociatedenterprise,andthereisnosimilarprovisionundertheActtodisallowsimilarpaymentstoresidentassociatedenterprises.Consequently,accordingtoArticle26(4)oftheIndia-FranceTaxTreaty[correspondingtoArticle24(4)oftheOECDMC],interestpaidbyanIndiancompanytoaresidentofFranceshouldbedeductiblebyvirtueoftheexpensenon-discriminationparagraph.
2.12 Accordingtotheotherschoolofthought,discriminationinArticle26(4)oftheIndia-FranceTaxTreaty[correspondingtoArticle24(4)oftheOECDMC]iswithrespecttocomparisonofdeductibilityofnon-residentpaymentvsresidentpayment.India’sThinCapitalisationrulesonlylimit deduction of interest paid to non-resident associated enterprises and not all non-residents. Therefore,ThinCapitalisationrulescannotbesaidtobediscriminatory,butarebasedontheresidentialstatusofthepayee.Hypothetically,ifThinCapitalisationruleshadprovidedforlimitationoftheinterestpaidtonon-residents,whetherornottheywereassociatedenterprises,thenintheabsenceofasimilarprovisionforresidentpayees,ataxpayermayhaveresortedtotheoptionofexpense-relatednon-discrimination.WiththeextantframeworkofThinCapitalisationrules,itispossibletotakeastandthattheserulesarenotdiscriminatoryvis-à-vistheresidentialstatusofthepayee(residentvsnon-resident).
13PwC|ThePrincipleofNon-discriminationinTaxTreaties
2.13 Inviewofcontraryschoolsofthought,thisintricateissuemaycreateconvolutedtaxpositionsintheindustryandresultinprotractedlitigation.Theneedofthehouristhereforetoreceivecomprehensiveguidanceonthisfromlawmakers.Andifthisisnotforeseen,taxpayersmayneedtotakeproactiveactiontoobtaincertaintyontheirtaxpositionsbyseekingadvancerulings.
Can non-discrimination be explored in all cases of Thin Capitalisation disallowance of interest?2.14 Indiahasenteredtaxtreatieswithmorethan95
countries,andthecountisgrowing.However,not
alltaxtreatieshavesimilarlanguageforexpense-relatednon-discriminationasthatoftheOECDMC.Forexample,India’staxtreatieswiththeUK,Singapore,etc.donotincludeaparagraphonexpense-relatednon-discrimination.However,itstaxtreatieswithAustralia,China,Finland,France,Germany,Israel,Japan,Korea,Malaysia,theNetherlands,Norway,SouthAfrica,Spain,SwitzerlandandtheUSAincludeaparagraphonexpense-related non-discrimination such as that oftheOECDMC.Thisimpliesthatpaymentofinterest to associated enterprises in the countries mentionedabovecouldberelevantforapplicationof the expense-related non-discrimination argumentifthisisnotdeductibleunderIndia’sThin Capitalisation rules.
Australia China Finland France Germany
Israel Japan Korea Malaysia Netherlands
Norway South Africa Spain Switzerland USA
Diagram 2.1: India’s tax treaties with expense-related non-discrimination paragraph
14PwC|ThePrincipleofNon-discriminationinTaxTreaties
Chapter 3: Variants of taxation-related discrimination
theapplicablesurchargeandcess)willcontinuetoapplytoforeigncompanieswithPOEMinIndia.
3.4 Withthetaxratesapplicableforaresidentforeigncompanybeingdifferentfromthoseforaresidentdomesticcompany,themootpointiswhetherdifferenttaxratesfortworesidentcompaniescanbeconsideredasdiscriminationunderthenon-discriminationArticle.Inthisinstance,itisrelevanttorefertotheexamplefromthecommentarytotheOECDMCdiscussedinpoint1.10andpoint1.11above.InreferencetothediscussionondiscriminationintheOECDMC,foreigncompanieswithIndianPOEM,sufferingfromdifferenttaxtreatmentbasedexclusivelyontheirnationality32,mayconsidertakingrecoursetothenon-discriminationArticle.
PE discriminated against for deduction of expenses3.5 Section44CoftheIncome-taxAct,1961restricts
deductionofheadoffice-relatedexpenses(i.e.executiveandgeneralexpenses)uptoamaximumof5%oftheadjustedtotalincomefromthebusinessorprofessionofaPEinIndia.Article7(3)ofthetaxtreatyprovidesthataPEshouldbeallowed deduction for expenses in accordance withtheprovisionsofdomesticlaw.Article24(3)oftheOECDMCprovidesfornon-discriminationinrelationtotaxationofthebusinessprofitsofPEsvis-à-visresidentcompanies.
3.6 Therefore,thequestioniswhetherdomesticlaw-related restrictions amount to discrimination
3.1 The expression ‘taxation’findsitsplaceinmultipleparagraphsofthenon-discriminationArticle.Theseparagraphsprovidethat‘taxation’cannotbediscriminatoryinthefollowingcases:
• Paragraph1:Onthebasisofthenationalityofthetaxpayer
• Paragraph2:Forstatelesspersons
• Paragraphs3:ForPEs
• Paragraph5:ForanIndiancompanythatisforeign-owned
3.2 Thenon-discriminationArticleofmanyIndiantaxtreaties30definethephrase‘taxation’asthetaxestowhichtheyapply.Incaseswheretheterm‘taxation’isnotdefined,itneedstobeinterpretedin a manner that is wider than the rate of tax levied.Thismeansthattheambitof‘taxation’isdiverse.Againstthisbackdrop,thefollowingparagraphsdelvefurtherintothepracticalaspectsofdiscriminatorytreatmentenshrinedinArticle24oftheOECDMCvis-à-vis‘taxation’.
POEM of foreign company and tax-related non-discrimination3.3 POEMisanewlyintroducedconceptinIndia’s
domestictaxlaws.ThedefinitionofacompanyresidentinIndiahasbeenrevisedtoincludeaforeigncompanywhosePOEMisinIndiainaparticularyear.TobuttressimplementationofPOEMprovisionsinIndia,theGovernmenthasissuedanotification31dated22June2018,which,interalia,providesthatthetaxrateof40%(plus
30. Thetermtaxationisdefinedtomean,‘taxes to which this Convention applies’ intheIndianTaxTreatieswithBrazil,Mauritius,SlovakRepublic,NewZealand,Japan,Morocco,SwissConfederation,China,Denmark,Kuwait,Italy,Singapore,Bangladesh,Indonesia,UK,SouthAfrica,China,Poland,UAE,UAR(Egypt),Philippines,Bhutan,Bulgaria,Ukraine,Qatar,Malta,Mongolia,Zambia,Thailand,Belarus,Uzbekistan
31. NotificationNo.S.O.3039(E)dated22June201832. AcompanyincorporatedoutsideIndiaisgenerallytreatedasnationalofthecountryofitsincorporation
15PwC|ThePrincipleofNon-discriminationinTaxTreaties
againstthePEsofforeigncompanies,sincethereisnosimilarrestrictionforIndiancompanies.TheMumbaibenchoftheTribunal,inthecaseof Metchem Canada,33 held that restriction on admissibilityoftheheadofficeoverheadsofthePEofaCanadiancompanyconstituteddiscriminationagainstthePEvis-a-visadomesticIndianentitybecausenosuchrestrictionwasapplicablefordeductionoftheheadofficeoverheadsoftheIndiancompany.Accordingly,Article24(2)oftheIndia-CanadaTaxTreaty[similartoArticle24(3)oftheOECDMC]washeldtooverridetheprovisionsofArticle7(3)andtherestrictionimposedbysection44CoftheIncome-taxAct,1961washeldasdiscriminatory.AnanalogycanalsobeinferredforthebenefitofthePEsofforeigncompaniesfromothercountries,whoseIndiantaxtreatiesuseasimilarlanguage,e.g.Mauritius.
3.7 CertaintaxtreatiessignedbyIndia,suchasthosewithVietnam,theUSA,Spain,Sweden,Germany,FinlandandCyprus,specificallyprovidethattheprovisionsofArticle7(3)willprevailoverPE-relatednon-discrimination.Therefore,insuchcases,therestrictionsindomesticlawswillnotbetreatedasdiscriminatoryagainstaPE.
Non-discrimination for a ‘company in which the public are substantially interested’3.8 Section2(18)oftheIncome-taxAct,1961defines
a ‘company in which the public are substantially interested’toincludeacompany,thesharesofwhoseparentcompanyarelistedonarecognisedstockexchangeinIndia,inaccordancewiththeSecuritiesContracts(Regulation)Act,1956.Thisconceptof‘companyinwhichthepublicaresubstantiallyinterested’isrelevantinmultipleprovisionsoftheIncome-taxAct,1961,suchasdeemeddividendtaxabilityprovidedinsection2(22)(e)34,carryforwardandset-offofbusinesslossesprovidedinsection7935.
3.9 InthecaseofDaimler Chrysler India36,thePunebenchoftheTribunalexaminedwhetheranIndiancompanycanbesaidtobea‘company in which the public are substantially interested’ if
thesharesofitsGermanshareholdingarelistedoninternationalstockexchanges(andnotonanIndianstockexchange).TheTribunalobservedthatthesharesofaforeignparentcompanycouldneverhavebeenlistedonarecognisedstockexchangeinIndia,andtherefore,anIndiansubsidiaryofaforeigncompanywouldalwaysbeinadisadvantageouspositioninthesensethatthesharesofitsforeignparentcompanywouldonlybelistedoninternationalstockexchanges,andsoitwouldnotbetreatedasa‘company in which public are substantially interested’.Ontheotherhand,accordingtotheTribunal,theIndiansubsidiaryofadomesticcompanywouldbeentitledtobea
‘company in which public are substantially interested’ ifthesharesofitsdomesticparentcompanywerelistedinarecognisedstockexchangeinIndia.
3.10 Inthisfactualmatrix,theprecisepointofownership-relateddiscriminationwasthatanIndiansubsidiarywithanIndianparentcompany,whoseshareswerelistedonarecognisedstockexchangeinIndia,wouldbetreatedasa‘company in which the public are substantially interested’.However,ifthesubsidiaryofanIndiancompanyhasaGermanparentcompany,whoseshareswerelistedinanyinternationalstockexchange,itwillnotbegiventhe status of a ‘company in which public are substantially interested’.Thereisnorationalbasisforthisdifferenceintreatment,andthereforetheprovisionsofsection79,readwithsection2(18),wereheldtobeincompatiblewiththeownership-relatednon-discriminationprovisioninArticle24(4)oftheIndia-GermanyTaxTreaty[correspondingtoArticle24(5)oftheOECDMC].
3.11 Similartotheabove,theanalogyinapplyingnon-discrimination to a ‘company in which the public are substantially interested’canalsobeappliedinothersectionssuchasthatontaxabilityofadeemeddividend.TakingacuefromthedecisiononDaimler Chrysler India37,theIndiansubsidiaryofaforeignlistedshareholdercantaketheshelterofownership-relatednon-discriminationprovisionswhileprovidingloansoradvancestoitsshareholdersoronbehalfofitsshareholders,andarguenon-applicationoftaxabilityasdeemeddividends.
33. MetchemCanadaInc.vsDCIT99TTJ70234. Section2(22)(e)oftheIncome-taxAct,1961,interalia,providesthatifacompany(otherthanthecompanyinwhichpublicaresubstantially
interested)givesaloanand/oradvancetoitsshareholders,thensuchloanistreatedasadeemeddividendinthehandsoftheshareholder.35. Section79oftheIncome-taxAct,1961providesthatataxpayer(otherthana‘companyinwhichthepublicaresubstantially
interested’),shallhavetherighttocarryforwardandsetoffthebusinesslossonfulfillmentofcertainconditions.Onesuchconditionbeingthatonthelastdayoftheyearpertainingtoset-offofbusinesslosses,thesameperson/s,whoheld51%ofthesharesonthelastdayoftheyear/swhensuchlosswasincurred,beneficiallyheld51%oftheshares.
36. DaimlerChryslerIndia(P)Ltd.v.DCIT(2009)29SOT202(Pune)37. DaimlerChryslerIndia(P)Ltd.v.DCIT(2009)29SOT202(Pune)
16PwC|ThePrincipleofNon-discriminationinTaxTreaties
Foreign company holding subsidiary merger and tax-related non-discrimination3.12 India’sdomestictaxlawsprovideforexemption
fromCapitalGainsTaxincertaincorporaterestructuringcases.Acaseinpointissection47(via)oftheIncome-taxAct,1961,whichprovidesforexemptionontransferofanIndiancompany’ssharesbyaforeignshareholdercompanyamalgamatingwithaforeignamalgamatedcompany,subjecttosatisfactionofthefollowingconditions:
(a) Atleast25%oftheshareholdersoftheamalgamatingforeigncompanycontinuetoremainshareholdersoftheamalgamatedforeigncompany.
(b) Suchatransferdoesnotattracttaxoncapitalgainsinthecountryinwhichtheamalgamatingcompanyisincorporated.
3.13 Condition(a)stipulatedaboveraisesaquestionaboutwhetherthemergerofawhollyownedforeignsubsidiarywithaforeignholdingcompanyshouldbecoveredunderthissection47(via),hypotheticallyassumingthatcondition(b)abovewillbefulfilled.However,basedonstringentapplicationofthelaw,theanswerseemstobeinthenegative.Interestingly,theFinanceAct2012introducedanexceptioninsection47forissueofsharesbyanamalgamatedcompanyinthecaseofthemergerofaholding-subsidiary.TheMemorandumtoFinanceBill2012aptlysuggeststhatinaholding-subsidiarymerger,itisnotpossibleforanamalgamatedcompanytoissuesharestoitself.Hence,legislativeamendmentswereproposed.Thereafter,theprovisionsofsection47(vii)relatingtodomesticamalgamationsofholdingsubsidiarieshavebeenrelaxed.However,nosimilarrelaxationisavailableforforeignmergersinsection47(via).
3.14 Inthecaseoftheforeignmergermentionedabove,theamalgamatingforeigncompanymaynotbeeligiblefortaxexemptionundersection47(via)duetonon-satisfactionoftheconditionmentionedabove.Inthisregard,itmaybearguedthattheforeigncompanyisdiscriminatedagainstincomparisonwithanIndiancompany,whichiseligiblefortaxexemptiononaholdingsubsidiarymergerundersection47(vi).Thislineofthoughtisworthexploring,althoughitcouldbeargued
thatsection47(vi)envisagestheresultingentitytobeanIndiancompany,andtherefore,cannotbecomparedwithsection47(via),whichenvisionsaforeigncompany.
Application of transfer pricing provision – a case of discrimination?3.15 Article7oftheOECDMCprovidesthat
attributionofincomeorexpensestoaPEshouldbeaccordancewithArm’sLengthstandards.Similarly,byvirtueofArticle9,transactionsbetweenaresidententerpriseandaforeignenterpriseshouldbeinlinewiththeArm’sLengthprinciple.Thus,onecannotimplythatapplicationoftransferpricingrulestothePEofaforeignenterpriseinIndiaresultsintaxationofthePE,whichislessfavourablyleviedthanthatondomestic enterprises38,andtherefore,thereisnodiscrimination in this case.39
Requisitioning additional information from foreign companies – a discriminatory measure?3.16 In Indian audit or assessment proceedings, a tax
officer may seek additional information from a non-resident company to ensure similar levels of compliance and verification. In this context, there is no discrimination when a foreign enterprise is required to provide additional information, including transfer pricing-related enquiries that may be different from the requirements imposed on a local enterprise during tax proceedings.40
38. OECDMC(2017)para42ofArticle2439. M/sTechnipItalyS.P.AvsDCITITANo.7171/DEL/201740. OECDMC(2017)para75ofArticle24
17PwC|ThePrincipleofNon-discriminationinTaxTreaties
Chapter 4: Conclusion
4.1 Theconceptoftax-relatednon-discriminationiscomplexandthought-provoking.AndwiththedearthofIndianrulingsonthesubjectofnon-discriminationandevolvingtaxation,thereisenoughroomforopendebate.Inthiscontext,taxpayersfirstneedtoidentifytheapplicabilityofthenon-discriminationArticletotheircircumstances.Thiscanbedeterminedbyundertakingadetailedanalysisofthecategoryofdiscriminationincoherencewiththelanguageoftherelevanttaxtreatiesandconditionsprovidedtherein.
4.2 Thisreportprimarilyfocusesonnon-discriminationinIndiantaxlawsforinboundinvestments,butthebenefitofnon-discriminationcanalsobeexploredforIndia’soutboundinvestmentsmadeinforeigncountries,subjecttotheirtaxlaws.
18PwC|ThePrincipleofNon-discriminationinTaxTreaties
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