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2018-04-26
Prelude
Hong Kong is India’s new Double Tax Avoidance Agreement (‘Tax Treaty or DTAA’) partner. The Government of India and the Hong Kong Special Administrative Region of People’s Republic of China (‘Hong Kong’) signed the DTAA on 18th March 2018. It is imperative to note here that the signing of India-Hong Kong DTAA has been much anticipated for more than a decade. Hong Kong ranks as India’s top economic trade partner and vice-versa. Further, the number of Foreign Direct Investment (FDI) from Hong Kong to India has been in huge numbers. Therefore, it remains an enigma (political relations with China?) as to why India’s DTAA between Hong Kong has never surfaced, considering that India has signed DTAA with more than 100 odd countries.
It is worth to mention here that Hong Kong is an autonomous region under the Mainland China. Therefore, the DTAA which India has entered with China will not be applicable. If one may see the India-China DTAA, Article 3 of the DTAA where it defines “China” specifically mentions that the DTAA shall be applicable only to the territory of People’s Republic of China. Hong Kong is an autonomous territory and has its own taxation system, hence it is termed as Hong Kong Special Administrative Region of the People’s Republic of China. Therefore, with non-applicability of India-China DTAA, it was imperative that India entered into DTAA with Hong Kong, so as to provide clarity with regards to avoiding double taxation.
This article will provide a snapshot on the features of the recently signed India- Hong Kong DTAA which one may take cognizance of.
Snapshot on key features of the DTAA
|
S.no |
Article |
Comments |
|
A |
Article 28 – Miscellaneous Rules (Anti Avoidance Provisions) |
· This is a new clause and is in line with India’s focus and convergence towards the Base Erosion Profit Shifting (BEPS) recommendations. This article of the DTAA specifically mentions that the domestic law will override DTAA wherever there is tax evasion or tax avoidance. · Legal entities not having bonafide business activities will also be covered under this article. |
|
B |
Principal Purpose Test (PPT) in Substantive Articles (Articles 5,10,11,12, 14 etc.) |
The PPT provisions are again influenced and fallout from the BEPS action plans. Apart from the blanket rule on purpose test for avoidance or evasion of tax. All the articles in the substantive provisions also contain a specific clause where in if the main purpose or one of the main purpose is to take tax benefit, then the treaty shall not be applicable. |
|
C |
Article 4- Resident: Dual Residency for Non-Individuals |
This is another fallout of the BEPS action plan. Wherein non-Individuals are dual resident in both countries then in such a scenario to resolve the conflict it is suggested that the competent authorities shall determine through Mutual Agreement Procedure (MAP) as for determining the residency. |
|
D |
Article 14- Capital Gains |
Source based taxation on Capital Gains. Where in gains for a resident of one country on sale of shares of a company deriving more than 50 per cent of its asset value directly or indirectly from immovable property situated in the other country may be taxed in the other country. |
|
E |
Article 5 – Permanent Establishment |
The DTAA covers the following PE: · Fixed PE · Service PE (more than 183 days in any 12 months period) · Construction PE (six months threshold) · Agency PE (Standard, does not cover MLI provisions, further agent will be dependent if he is wholly dependent on the principal) |
|
F |
Rates |
· Dividends – 5% on gross basis · Interest – 10% on gross basis · Royalty and FTS – 10% on gross basis (No make available clause in the DTAA). |
|
G |
Exchange of Information |
Apart from exchange of information pertaining to Direct taxes, as part of the protocol to the DTAA, the taxes pertaining to GST, Customs etc shall also be exchanged by India to Hong Kong. |
Effective Date of Treaty
The treaty shall come into force in India in respect of income derived in any fiscal year beginning on or after the first day of April following the date on which the Agreement enters into force. Since the DTAA is only signed and not yet ratified. On ratification, the agreement shall enter into force, which is likely to be during this year fiscal year 2018.
Therefore, the treaty shall be applicable for incomes that will be derived from 1 April 2019.
Epilogue
The broad features of the DTAA is a concoction of the OECD convention model and incorporation of the BEPS action items. The signing of the DTAA, will definitely bring lot of cheer among the Indo-Hong Kong trade community as it will bring in certainty on taxation matters and also avoid double non-taxation, tax evasions and avoidance.
The Central Board of Direct Taxes vide a press release in 2010 mentioned that Hong Kong has been notified as a specified territory under Section 90 of the Income tax Act and accordingly it was expected that the DTAA will come soon. However, after almost waiting for a decade, there is now a glimmer in the form of signing the said DTAA.
As the saying goes “Better late than never” can be a mere consolation at this juncture.
