The Hindu Business Line : No hollow shell

INDIA has entered into double tax avoidance agreements (DTAAs) with many countries, the principal reason behind these being to prevent taxing an income twice in the same person's hands as also to provide for preferred rates of tax. Recently, India and Singapore tinkered with their DTAA with an intent to amend a few Articles.

A new insert in Article 1 is that gains derived by a resident of a contracting state from the alienation of any property, other than certain property, shall be taxable only in that state. However, Article 3 is quick to point out that the benefits of Article 1 would not be applied if its affairs were arranged with the primary purpose of taking advantage of the benefits.

This clause could turn into a humdinger with the appellate authorities striving to prove the intent of companies and companies clamouring that they are always on the right side of law.

Another rider to the rule that gains from alienation of property shall be taxable only in one state is that this would not be applicable to shell/conduit companies.

To make matters clear, shell/conduit companies are defined to mean: a resident; negligible or no business operations; and no real and continuous business activities.

Deemed shell companies are those that have annual expenditure on operations that are less than 200,000 Singapore dollars or Rs 50 lakh in the immediately preceding 24 months from the date the gains arise.

Annual expenditure has been defined to mean expenditure during a period of 12 months and the period of 24 months shall be calculated by referring to two blocks of 12 months immediately preceding the date when the gains arise.

Companies would not be deemed to be shell companies if: listed on a recognised stock exchange of the contracting state; have annual expenditure on operations that are more than 200,000 Singapore dollars or Rs 50 lakh in the immediately preceding 24 months from the date the gains arise.

In what is probably a significant change, Article 4 is amended to provide that royalties and fees for technical services may be taxed in the contracting state but if the recipient is the beneficial owner of the royalties or fees for technical services the tax charged shall not exceed 10 per cent.

Indian software companies rendering services in Singapore will be major gainers of the improved DTAA between the two countries. The effective tax liability of these companies will drop. The benefit of a lower withholding tax rate under the Indo-Singaporean tax treaty will be broad-based. Software product companies that licence technology to Singaporean companies will be among the major gainers from this move.

A non obstante clause is introduced vide Article 6, which says that Articles 1, 2, 3 and 5 shall remain in force so long as any DTAA between the two countries provides that any gains from the alienation of shares in any company which is a resident of a contracting state shall be taxable only in the contracting state in which the alienator is a resident.

To give an administrative touch to the entire DTAA, it has been provided that there shall be an inter-governmental group consisting of representatives of the revenue authorities of both India and Singapore, who shall review the working of the DTAA at least once a year or earlier at the request of either country.

(The author is a Hyderabad-based chartered accountant.)

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