Volume 5, Issue 1

12th January, 2012

Tax Alert
Protocol amending India-Australia DTAA and its implications


India had earlier signed a Double Taxation Avoidance Agreement (‘DTAA’) with Australia on 25th July 1991. Now the Government of India and Government of Australia have, on 16th December, 2011, signed a protocol amending the DTAA to facilitate better reciprocal co-operation between the two nations.

The Protocol amending the DTAA shall be effective in India in respect of income derived in any fiscal year beginning on or after 1 April next following the date on which the Protocol enters into force, which shall be provided by way of notification by India. Nevertheless, for ‘Non-discrimination’ and ‘Exchange of information’ articles, the effective date would be the date of entry into force of this protocol as notified by India.

The protocol intends to bring the existing DTAA at par with the international standards of international taxation. The key amendments brought out by this protocol are as below:

Relevant Amendments:

  1. Amendment to Article 3– General Definition: The protocol has inserted the definition of ‘Nationals’ by amending Article 3 of the DTAA. The term ‘National’ has been defined as any individual possessing the nationality or citizenship of respective countries and any legal person, company, partnership or association deriving its status as such from the domestic laws of respective country. It is to be noted that the term ‘National’ seems to have only been referred to in the non-discrimination article i.e. Article 24A and does not replace the definition of ‘person’ under the DTAA.

  2. Amendment to Article 5– Permanent Establishment (PE): The threshold limit for constituting the Service PE has been increased from 90 days in a 12 months’ period to 183 days (for same or connected projects). The same threshold will also apply to the services rendered to Associate Enterprises. Further, existing DTAA does not provide for any threshold limit for constituting PE in case of operations of substantial equipment in the exploration for or exploitation of natural resources. However, the protocol provides threshold limit of 183 days in any 12 months’ period in case of substantial operation of equipment and in other cases limit of 90 days in any 12 months’ period. This amendment should encourage cross-border movement of capital and services between the two countries.
  1. Amendment to Article 7– Business Profits: The protocol has deleted the force of attraction rule. The rule provides that either country may tax foreign enterprise in respect of the entire income derived from that country whether or not the said income is directly attributable to the PE. With the deletion of force of attraction rule there will be no dispute in relation to allied or related services, with only profits attributable to the PE now taxable in that country.

  2. New Article 24 A – Non discrimination introduced:
    The protocol has brought in new Article i.e. Article 24A – Non Discrimination to the DTAA which will protect nationals and businesses of one State from non-discrimination in the other State with regards to taxation or any requirement connected therewith which is other than or more burdensome than the taxation and connected requirements of the second mentioned State.

  3. Amendment to Article 26 – Exchange of Information:
    The “Exchange of Information” article will facilitate exchange of information about the taxpayers in either country by the revenue authorities of both countries to. Hitherto it was difficult to obtain information from Australian government and there was an implicit restriction on the use of the information which was obtained. This amendment will facilitate smooth exchange of information between revenue authorities of both countries.

  4. Amendment to Article 26A – Assistance in collection of Taxes:
    The protocol has inserted new article i.e. Article 26A ‘Assistance in Collection of Taxes’ which will strengthen the hands of the revenue authorities of respective countries in the matter of collection of outstanding taxes.

SKP Comments and Conclusion:

Considering the fact that as per the statistics issued by the Department of Industrial Policy and Promotion, Australia is one of the top 25 countries investing in India, the protocol has brought in welcome amendments in the form of deletion of ‘force of attraction’ rule and introduction of ‘Non-discrimination’ article. Such amendments should encourage the Australian investors to invest more in India.

Further, by specifying threshold limit in case of activities in connection with exploration and exploitation of natural resources and by increasing the threshold limit in case of Service PE, more FDI in these sectors can be expected from Australia in the near future.