SKP Tax Alert
Volume 9 Issue 24 | 9 January 2017
India amends tax treaty with Singapore - Singapore loses its advantage over Mauritius

The long-awaited outcome of the renegotiation proceedings between India and Singapore for the tax treaty has finally been declared with the Central Board of Direct Taxes (CBDT) issuing a press release stating that a third protocol to the tax treaty has been signed by both countries on 30 December 2016. While the text of the protocol has not been published by the Indian tax authorities, the Inland Revenue Authority of Singapore (IRAS) has published it.

The key takeaways from the third protocol are as under:

1. Capital Gains – Source based taxation of gains arising on alienation of shares of a company

The taxation of capital gains in the amended India-Singapore tax treaty is similar to the taxation of capital gains under the amended India-Mauritius tax treaty (Read our alert: India–Mauritius tax treaty: Advantage India[1]). Accordingly, the taxation of capital gains under the amended tax treaty is given below.

2. Revised LOB Clause for capital gains benefits

The third protocol to the India-Singapore tax treaty provides for a revised Limitation of Benefit (LOB) clause with regards to the capital gains from alienation of shares. The provisions of the revised LOB clause are principally in line with the existing LOB clause with regards to the principal purpose test and definition of 'shell/conduit companies'[2].

However, a resident will not be deemed to be a 'shell/conduit company' if:
  • The resident is listed on a recognised stock exchange; or
  • The resident’s annual expenditure on operations in the home country is equal to or more than SGD 200,000 or INR 5 million (as applicable) for:
    • Each of the 12 month period immediate preceding the period of 24 months from the date on which gains arise, in order to claim protection from tax for shares acquired prior to 1 April 2017.
    • The immediately preceding period of 12 months from the date on which gains arise, in order to claim benefit of paying only 50% of applicable tax rate on capital gains arising during transitionary period mentioned above.
3. Relief from economic double taxation - corresponding adjustments for transfer pricing cases

The amended tax treaty permits corresponding adjustments in transfer pricing cases, thereby providing relief from economic double taxation.

4. Domestic anti-avoidance provisions to apply over tax treaty

The amended tax treaty does not prevent a contracting country from applying its domestic law and measures concerning prevention of tax avoidance or tax evasion.

5. Other significant amendments
  • While the third protocol shall come into force only after being notified by both countries, in case of any delay beyond 31 March 2017, the same shall come into force on 1 April 2017.
  • An article in the 2005 protocol enabled an inter-governmental group (consisting of representatives of revenue authorities of both countries) to review and suggest improvements to the working of the protocol’s provisions, at the request of either country. This article now stands deleted by the third protocol.
[2] A shell/conduit company is defined to mean any legal entity with negligible/nil business operations or carrying on no real and continuous business activities
SKP's comments

As expected, the taxation of capital gains in the amended India-Singapore tax treaty is similar to the taxation of capital gains under the amended India-Mauritius tax treaty. However, the threshold expenditure in the revised LOB clause has not been reduced. A lower threshold is provided in the LOB clause of the amended India-Mauritius tax treaty, giving a slight advantage to Mauritius on this aspect.

Further, since the amended tax treaty does not alter the withholding tax rate of 10% and 15% on interest income, it could provide a definitive advantage to Mauritius and it could emerge as a preferred jurisdiction for routing debt investments into India as the amended India-Mauritius tax treaty provides for only a 7.5% withholding tax rate on interest income.

The amended tax treaty permits application of domestic laws for the prevention of tax avoidance/evasion over the tax treaty provisions. Accordingly, it appears that the provisions of General Anti-Avoidance Rule (GAAR) (proposed to be effective in India from 1 April 2017) may be invoked by India in case of the amended tax treaty, even though the treaty already has a specific anti-abuse provision in form of the LOB clause. Such a specific provision permitting application of domestic anti-avoidance law over the tax treaty provisions is not inserted in the amended India-Mauritius tax treaty. However, this fact should not mean that the Indian authorities cannot invoke GAAR in the case of amended India-Mauritius tax treaty.

However, providing relief from economic double taxation by permitting corresponding adjustments in transfer pricing cases is a welcome step and is in line with Article 17 of the Multilateral Convention of the OECD under the Base Erosion and Profit Shifting (BEPS) Project.

Singapore has been a preferred jurisdiction for investment in India for Foreign Direct Investment (FDI) and Foreign Portfolio Investors (FPIs) considering the exemption from tax in the case of capital gains under the existing tax treaty. However, since these investors will now need to pay tax in India on capital gains arising from the alienation of shares of an Indian company acquired on or after 1 April 2017, the tax cost of such investors will now increase. Accordingly, all businesses/investors who have operations in India through a Singapore entity may need to revisit their structures in India before 31 March 2017 to maintain the tax efficiency obtained till date.

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