Amendment of Section 90 and 90A on Agreement with Foreign Countries can be entered to Curb Practices like ‘Treaty Shopping’ from Assessment Year 2021-22

To understand the amendment proposed by the Finance Bill 2020 under Sections 90 and 90A, it is imperative to understand the following facts:

1. India has signed the Multilateral Convention to implement tax treaty related measures to prevent Base Erosion and Profit Shifting (commonly referred to as MU). The MU is an outcome of the G20-OECD project to tackle the tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no corporate tax being paid.

2. MU has been ratified by India and has been entered into force with effect from 01-10-2019. The provisions of MU are applicable on India’s DTAAs from the Financial Year 2020-21 and onwards.

3. Article 6(1) of MU provides a model text for preamble. As per this, the intention of countries to enter into tax treaty is divided into following three sections:

   • Intending to eliminate double taxation with respectto taxes covered in agreement

   • Not creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance

   • Not creating opportunity for treaty shopping arrangements aimed at obtaining relief provided in tax treaty for indirect benefit of resident of the third country not a party to the tax treaty.

4. The MU will modify India’s DTAAs to curb revenue loss through treaty abuse and base erosion and profit shifting strategies by ensuring that profits are taxed where ‘substantive economic activities generating the profits are carried out’.

5. In compliance to Article 6(5), India should notify the relevant clause of tax treaties entered into with foreign countries, wherein the preamble language has been used. Where both the countries have notified the clause, the preamble language of Article 6(1) would be read as replacement to preamble in the tax treaty.
   However, in case any one or both the countries that are party to a tax treaty do not notify, then the preamble of Article 6(1) would be read in addition to the existing preamble in such tax treaty.

6. The Central Government enters into the agreement with the Foreign Country/Specified Territory within the powers provided under section 90A/section 91.

7. The Central Government can’t update preamble of DTAAs to give effect of MU, as the corresponding powers are not provided to Govt. under Section 90A/Section 91

Accordingly, Section 90A/91 is proposed to be amended to empower the Central Govt. to enter into an agreement with the Government of any country outside India or specified territory outside India for:

1. The avoidance of double taxation of income under the Act and under the corresponding law in force in that country/specified territory;

2. Not creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance; and

3. Not creating opportunity for treaty shopping arrangements aimed at obtaining relief provided in tax treaty for indirect benefit of resident of the third country not a party to the tax treaty.