India: India Notifies Protocol Amending India-Spain Tax Treaty; Introduces Base Protection And Tax Transparency Measures

Last Updated: 27 September 2019
Article by Varsha Bhattacharya and Ashish Sodhani
  • India recently notified the Protocol signed in 2012 to the India-Spain tax treaty
  • Introduces unique Limitation of Benefit clause: provides for treaty-override to make Indian GAAR applicable, and beneficial ownership as pre-condition for availing treaty benefits
  • New provisions to facilitate cooperation in information exchange and assistance in recovery of taxes
  • Provision for mirroring transfer pricing adjustment to income of associated enterprise to eliminate double tax

The Indian government recently notified the protocol signed on October 26, 2012 ("Protocol") 1 to amend the India-Spain tax treaty ("Spain Treaty"). The Protocol, inter alia, introduces a unique Limitation of Benefit ("LoB") clause, and detailed provisions for cooperation in tax information exchange and tax recovery. It also introduces a provision for a mirroring adjustment for an associated enterprise in a state, where a notional transfer pricing addition has been made to a taxpayer's income under the laws of the other state.

 The Protocol brings about the first amendment to the Spain Treaty since it was first signed in 1993. The changes indicate a deliberate shift towards measures for increasing tax transparency and cooperation, and for curbing tax evasion, much in line with international changes.

CHANGES AND ANALYSIS

A. Corresponding Transfer Pricing Adjustment for Associated Enterprise

The Spain Treaty already permitted notional enhancement of income of a taxpayer of a state resulting from transactions with a related entity (i.e. an associated enterprise) in the other state. 2 The Protocol adds a provision to allow a mirror adjustment to the income of the associated enterprise in the other state, based on the amount of tax charged on the taxpayer in the first state. 3 It also allows for consultation between the competent authorities of both states to determine the adjustment, if felt necessary.

The addition seeks to avoid double tax on the same income by rationalizing transfer pricing adjustments, looking at transactions holistically instead of at an enterprise level. It specifically provides for these adjustments to form part of negotiations during mutual agreement procedures under the treaty.

B. Cooperation in Information Exchange

The Protocol replaces Article 28 of the Spain Treaty entirely. The countries have agreed to a more extensive set of obligations to obtain and supply taxpayer information to each other. The standard of information to be exchanged has been diluted from information 'necessary', to information that is 'foreseeably relevant', for carrying out provisions of the Spain Treaty or domestic laws of the countries. 4 Further, it has been made clear that the information shared can be used for 'other purposes' when the laws of both states allow use for such purposes. 5

The extent of protection on the information shared has been widened. The treaty earlier stated that information treated as a secret in the transmitting state would only be disclosed to tax authorities of the receiving state, that could only use it for designated purposes (except for disclosing in public court proceedings and judicial decisions). The Protocol extends this protection of information to all information received by a country – not only information treated as a secret under laws of the transmitting country. 6 This should facilitate smoother flow of information if countries feel safer trusting their taxpayer information in the hands of the other country. However, this could also result in higher administrative costs on the receiving state of such information if it needs to ensure that received information is adequately protected.

Instances where states can decline a request for information have been limited. Countries are now obliged to use their own information gathering tools to obtain information requested by the other, even if they don't require the information for their own tax purposes and cannot decline a request for information solely because it has no domestic interest in it. Neither can a country decline a request for information because the information is held by a bank or other financial institution, a nominee or person acting in an agency or fiduciary capacity, or because it relates to ownership interests in a person. 7 An explanation clarifies that countries can use other techniques as agreed upon by both competent authorities to obtain information which could be relevant for both countries, such as simultaneous examination, tax examination abroad and industry-wide exchange of information. These measures are geared towards creating a transparent international tax framework where secrecy can no longer be a tool for evasion.

Lastly but significantly, the Protocol gives the revised provision retrospective effect making it applicable to matters pre-dating the Protocol. There is no cut-off date or grandfathering provision, which begs the question of how this will impact cases pending adjudication in either state which did not have the benefit of wider information exchange provisions prior to the Protocol coming into force.

C. Cooperation in Tax Recovery

A new provision for assistance in collection of taxes, couched as a mandatory obligation, has been introduced. It requires that where a tax claim in one country is enforceable under its laws such that the taxpayer cannot stop collection of the tax, the other country on request of the competent authority of the first country is required to collect the tax according to its own procedures as if it is a claim in its own country. Further, for a tax claim that a country can take interim measures for under its own laws (such as freezing assets), the competent authority of the other country is bound to accept a request to take interim measures as if the claim is one arising under its own laws. 8

However, the provision does not require a state to undertake administrative measures varying from its or the other country's laws or practices; take measures against public policy; assist if the other country has not exhausted all available avenues for collection or interim measures under its own laws; or assist where the administrative burden is disproportionate to benefit to the other country. 9

This provision is intended to apply prospectively, and only to tax claims made after the coming into force of the Protocol, and only in cases where such claim is in respect of a tax year that commences after a date that is four years before the date on which the Protocol comes into force. Therefore, in case of recovery of taxes, the Protocol does not create retrospective rights which would have greatly prejudiced taxpayers.

D. Introduction of unique Limitation of Benefits clause

The Protocol has inserted a Limitation of Benefits ("LoB") provision by which India and Spain have contracted to apply their domestic anti-abuse rules, including in cases of treaty abuse. This is an express treaty override provision to allow application of India's domestic General Anti-Avoidance Rule ("GAAR") over beneficial treaty provisions, which complements a similar override provision under India's domestic law. 10 The issue of India's GAAR and its interaction with tax treaties has been a subject of intense debate, and consensus has come to rest on the view that the GAAR continues to apply unless adequate anti-avoidance provisions are present in a treaty. However, the Spain Treaty now negates the requirement of a standalone treaty LoB by incorporating domestic anti-abuse provisions directly.

The Protocol also clarifies that benefits under the treaty are only available to beneficial owners of income sourced from the other country. While intending to curb base eroding practices through this provision, the incorporation of a 'beneficial ownership' requirement may cause more confusion than desired and can prove to be highly litigious. The phrase is not defined in the treaty itself and has been interpreted differently by different jurisdictions leading to no consensus. A recent decision of an Income Tax Appellate Tribunal in India addressed the import of beneficial ownership of interest income received by a Cypriot entity from Indian debentures under the India-Cyprus tax treaty, and held that where the Indian tax authorities were unable to prove that (a) the taxpayer did not have exclusive possession and control over the interest, (b) the taxpayer had to seek approval or consent to invest in the debentures or (c) the taxpayer did not have complete discretion to utilize the interest income it received, unconstrained by any contractual, legal, or economic arrangements with any other third party; the taxpayer had to be regarded as the beneficial owner of the interest income and could avail treaty benefits. 11

CONCLUSION

The Protocol introduces aggressive measures to promote tax transparency and to curb base erosion. How effectively these measures are implemented remains to be seen.

While the Protocol was notified by the Indian government on August 27, 2019, the date of entry into force is December 29, 2014. The reason behind this gap of five years is anybody's guess, but more importantly it brings up questions regarding the implementation of the Protocol. While many of the changes are machinery provisions, one aspect where this delay could have impact is in implementation of the LoB provision which allows for override by domestic anti-abuse provisions. Does this mean then that although the LoB provision was only notified in August 2019, it can operate to deny treaty benefits in respect of a transaction from 2017? The notification by the Indian government does not shed light on this aspect and leaves open potential for litigation for taxpayers affected in this 5 year period.

Another point for consideration is the interaction of the India-Spain tax treaty with the OECD's Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting ("MLI") – a multilateral tax treaty that seeks to amend the bilateral tax treaties of its signatories to implement measures designed to better address multinational inter-jurisdictional tax avoidance. While India has signed and ratified the MLI, such that the date of entry into force of the MLI for India is October 1, 2019; Spain has only signed and has not ratified the MLI. Hence, the India-Spain tax treaty should continue to operate till Spain ratifies the MLI. Till such time, the new LoB provision providing an override for Indian GAAR will operate.

Once Spain ratifies the MLI and it operates to amend the India-Spain tax treaty, the new LoB provision is likely to be substituted with the anti-abuse provisions under the MLI. Hence, the new LoB provision is likely to apply only for a shorter period as an interim measure, till Spain ratifies the MLI.

Footnote

1 Ministry of Finance Notification No. 58/2019 dated August 27, 2019 https://incometaxindia.gov.in/communications/notification/notification58_2019.pdf

2 Article 10, India-Spain tax treaty

3 Article 10 Paragraph 2, India-Spain tax treaty

4 Article 28 Paragraph 1, India-Spain tax treaty

5 Article 28 Paragraph 2, India-Spain tax treaty

6 Ibid

7 Article 28 Paragraphs 4 and 5, India-Spain tax treaty

8 Article 28A Paragraphs 1, 2, 3 and 4, India-Spain tax treaty

9 Article 28A Paragraph 8, India-Spain tax treaty

10 Section 90(2A), Income Tax Act, 1961

11 Golden Bella Holdings Ltd. v. DCIT, ITA No. 6958/Mum/2017 dated August 28, 2019

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions