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.
| · BEPS refers to tax planning strategies exploiting gaps in tax rules to shift profits to jurisdictions with lower tax rates.
· The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS, which India signed in 2017, aims to update international tax rules to prevent multinational tax avoidance.
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