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India approves DTAC with Italy

New Delhi, November 03, 2005

The Union Cabinet today gave its approval for signing of the Protocol amending the Double Taxation Avoidance Convention (DTAC). The two sides agreed to incorporate the Italian proposals as well as the Indian proposals through a ‘Protocol’ amending the existing Convention. 

The main provisions of the proposed protocol are : 

(A) Article 2 (Taxes Covered)-

The Italian side had proposed to substitute the local income tax with IRAP tax (Regional Tax on Productive Activities) in the Convention.

(B) Article 5 (Permanent Establishment)-

A new clause has been introduced in paragraph 2 of the Article 5 to provide that rendering of service by employees or other personnel will also constitute a Permanent Establishment (PE), if these activities continue for more than six months in any twelve months period.

A separate paragraph to treat an ‘insurance enterprise’ as having a Permanent Establishment (PE) is also introduced, if it collects premium and insures risks in the other contracting state.

These provisions have been introduced to take into account service sector as well as foreign insurance enterprise’s activities in India.

(C) Article 7 (Business Profits)-

In terms of the proposed protocol, 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 profit of 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.

Similarly, in case of contracts for a building site or construction or assembly project carried out by an enterprise of a contracting state through a PE situated in the other contracting state, the profit of such PE shall be determined on the basis of that part of receipts derived from the contract which is attributable to the actual activity of the PE.

The proposals clarify the existing provisions of the treaty.

(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 in 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 paragraph is proposed to be added so as to facilitate giving benefit 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 (MAP) provided for by Article 26 of the Convention and the Paragraph (E) of the proposed protocol. This would eliminate any discrepancy/disagreement in regard to computation of such transfer pricing benefits for adjustment purposes.

(F) Article 11 (Dividends), Article 12 (Interest), Article 13 (Fees for Technical Services and Royalty)-

In order to have a uniform tax structure with all other European Union countries the tax-withholding rate has been brought down to 10% in the case of dividends, interest and fees for technical services.

(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 case of personal services shall be in aggregate 183 days in any 12 months period commencing or ending in the fiscal year concerned.

(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. This variance in tax rates is for the reason that a domestic company pays dividends and consequently pays a dividend 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.

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