India revises DTAA with S Korea; capital gains to be taxed at source

After Mauritius and Cyprus, India has revised double taxation avoidance agreement (DTAA) with South Korea, giving New Delhi the right to tax capital gains made from investment here subject to a threshold. Under the new treaty with South Korea, if the capital gains in India pertain to selling of shares up to five per cent of the paid-up capital, then it will be taxed in South Korea. If these are more than this level, the tax would be in India.

Amit Maheshwari, partner, Ashok Maheshwary & Associates, said this clause could set a standard for proposed revision of the India-Netherlands DTAA as well. Currently, the India-Netherlands DTAA talks of 10 per cent threshold for capital gains to be taxed in India.

Like Mauritius and Cyprus, capital gains provisions would also come into effect from April 1, 2017. While DTAA with Mauritius talks of only 50 per cent of capital gains tax of two years from April 1, 2017, and full tax afterwards, there is no such mention in India-South Korea DTAA as given in a statement by the Central Board of Direct Taxes. Like every new DTAA, the one with South Korea also inserted the limitation of benefits clause to ensure the benefits of the agreement are availed only by the genuine residents of both the countries.
 

Besides, article 9(2) is inserted in the revised DTAA to enable bilateral advance pricing agreements (APAs) between the two countries in transfer pricing. In bilateral APAs, the governments of both sides are involved along with companies concerned, while in unilateral agreement, it is only India and the company concerned. 

The article would also enable both the countries to apply the mutual agreement procedure (MAP) in transfer pricing disputes. MAP is a mechanism laid down in tax treaties to ensure that taxation is in accordance with the tax treaty. 

A memorandum of understanding (MoU) on suspension of collection of taxes during the pendency of MAP was already signed by India and South Korea in December 2015. The MoU provides for suspension of collection of outstanding taxes during the pendency of MAP proceedings for a period of two years, extendable for a maximum period of three years subject to providing on demand security and bank guarantee. 

To promote cross-border flow of investments and technology, the revised DTAA provides for reduction in withholding tax rates from 15 per cent to 10 per cent on royalties or fees for technical services and from 15 per cent to 10 per cent on interest income. 

To facilitate the movement of goods through shipping between two countries and in accordance with international principle of taxation of shipping income, the revised DTAA provides for exclusive residence-based taxation of shipping income from international traffic. This means tax would be levied in the country where the shipping companies are located. 

DTAA also has an updated provision for exchange of information. According to the revised provision, the country from which information is requested cannot deny the information on the ground of domestic tax interest. Further, the revised DTAA contains express provisions to facilitate exchange of information held by banks. Information exchanged under the revised DTAA can now be used for other law enforcement purposes with the authorisation of information supplying country. 

The DTAA was signed in May 2015 during the visit of Prime Minister Narendra Modi to Seoul. 

The earlier DTAA between India and South Korea was signed in July 1985 and was notified in September 1986.