Why is it in the news?

• India and Mauritius signed a protocol amending their Double Taxation Avoidance Agreement (DTAA), incorporating the Principal Purpose Test (PPT) to prevent tax evasion and avoidance.

More about the news

• The PPT stipulates that tax benefits under the treaty won’t apply if obtaining those benefits was the main purpose of any transaction or arrangement.
• This protocol aims to align the DTAA with Base Erosion and Profit Shifting (BEPS) Minimum Standards, which target tax avoidance strategies.
• The DTAA between India and Mauritius was initially signed in 1982 and amended in 2016, with the recent protocol further enhancing its effectiveness.
• DTAA facilitates cross-border investment by reducing tax burdens on foreign investors and ensuring equitable tax allocation between source and residence countries.
• It provides legal certainty regarding the taxation of international income, promoting a stable environment for investment.
• Common issues associated with DTAA include:

1) Treaty Shopping: Occurs when residents of a non-DTAA country exploit treaty provisions.

2) Double Non-Taxation: Involves abusing DTAA to evade taxes in both countries involved.

3) Differential Interpretations: Result in prolonged legal disputes due to varying understandings of tax treaty clauses.