|
Second
Protocol to India-Italy Tax Treaty
The
Union Cabinet gave its approval for signing the second Protocol
amending the Double Taxation Avoidance Convention ("DTAC")
between India and Italy with a view to boosting trade and investment.
The provisions stated in the Protocol would be effective only
after the Protocol is signed and notified by both the countries.
Some of the provisions of the proposed Protocol include substitution
by Italy of local income tax with a regional tax on productive
activities and broadening the scope of Permanent Establishment
("PE") to include rendering of services and insurance.
Further, the Protocol inter-alia also deals with reduction in
the withholding tax rates for dividends, interest and royalties,
and tax treatment of business profits, air transport and shipping.
The
main provisions of the Protocol are summarized below:-
(A)
Article 2 (Taxes covered):
Italy
will substitute the local income tax with IRAP tax (Regional Tax
on Productive Activities).
(B)
Article 5 (Permanent Establishment):
A
new clause has been introduced in paragraph 2 of Article 5 of
the DTAC to provide that rendering of service through employees
or other personnel will also constitute a PE, if these activities
continue for more than six months in any twelve-month period.
A separate paragraph to treat an 'insurance enterprise' as having
a PE has also been introduced, if it collects premium and insures
risks in the other contracting state.
(C)
Article 7 (Business profits):
Where
an enterprise of a contracting state sells goods or merchandise
or carries on a business in the other contracting state through
a PE, the profits of the PE shall be determined only on the basis
of that part of receipts which is attributable to the actual activity
of the PE and not on the total amount received by the enterprise.
(D)
Article 8 (Air transport) and Article 9 (Shipping):
A
new provision in Article 8 and Article 9 has been introduced so
that profits from the operation of aircrafts or ships in international
traffic shall include profits derived from the use or rental of
containers if such profits are incidental to the operations in
international traffic.
(E)
Article 10 (Associated enterprise):
A
new paragraph is proposed to be added so as to facilitate giving
benefits of the transfer pricing adjustment carried out by one
state in the other state. Such adjustment shall be made in accordance
with the Mutual Agreement Procedure provided for by Article 26
of the DTAC and this paragraph (E) of the said proposed Protocol.
This would eliminate any discrepancy/ disagreement in regard to
the computation of such transfer pricing benefits for adjustment
purposes.
(F)
Article 11 (Dividends), Article 12 (Interest), Article 13 (Fees
for technical services and royalty):
The
withholding tax rates are proposed to be brought down to 10 per
cent in the case of dividends, interest and fees for technical
services. As per the current provisions of the DTAC, the withholding
tax rate on dividends, interest and fees for technical services
are 15%/ 25%(depending on the level of shareholding), 15% and
20% respectively.
(G)
Article 15 (Independent personal services) and Article 16 (Dependent
personal services):
It
has been provided that the number of days for the purpose of tax
residence in the case of personal services shall be an aggregate
of 183 days in any twelve-month period commencing or ending in
the fiscal year concerned. As per the current provisions of the
DTAC, the number of days for the purpose of tax residence in the
case of personal services is an aggregate of 183 days in the relevant
fiscal year.
(H)
Article 25 (Non-discrimination):
The
Income Tax Act, 1961 distinguishes between domestic companies
and foreign companies and the tax rate applicable to the former
is lower. The reason for this variance in tax rates is that a
domestic company pays dividends and consequently pays a dividend
distribution tax, which a PE of a foreign company is not required
to pay. The proposed Protocol clarifies that this difference in
tax rates shall not be considered to be discriminatory in terms
of the DTAC.
(I)
New Article (Collection assistance):
A
new Article on Collection assistance is proposed to be added in
the DTAC as Article 28 to ensure assistance in collection of taxes
covered by this Convention by both the contracting states.
|
|
|
You
can direct your queries or comments to the authors
|
Source:
Press
Information Bureau, dated November 3, 2005
|
