Double taxation avoidance agreements are entered into between two sovereign nations. Section 90 of the Income tax Act authorizes the Central government to enter into such an agreement with the government of a foreign country outside India. India is now entering into Tax Information Exchange Agreements with jurisdictions, which may not be sovereign countries but are dependencies of various erstwhile colonial powers. To facilitate the entering into of such agreements, section 90 was comprehensively amended in 2009, and now it authorizes the Central government to enter into agreements not only with foreign countries but also with foreign territories. But what about countries which are not recognised by the Government of India and yet there is a need for an agreement considering the economic might of the country concerned and the flow of trade and commerce between the two countries? Taiwan is an example. Since it is not politically recognised by the Government of India, an agreement under section 90 would not be feasible.

A via media was found by enacting a new section 90A by the Finance Act, 2006 that allowed the Government of India to adopt an agreement entered into by specified associations. The section provides that any ‘specified association in India’ may enter into an agreement with ‘any specified association in the specified territory’ outside India and the Central Government may, by notification in the Official Gazette, make such provisions as may be necessary for adopting and implementing such agreement. Thus although it is not a government to government agreement, since the agreement is later adopted by the Central government, it will have the force of an official agreement. Subsequently, in 2009, by Notification no 93 of 2009 dated December 9, 2009, the ‘India-Taipei Association in Taipei’ and the ‘Taipei Economic and Cultural Centre in New Delhi’ were notified as the specified associations and the ‘territory in which the taxation law administered by the Ministry of Finance in Taipei is applied’, was notified as specified territories. Meanwhile, negotiations were going on between the officials of the Ministry of Finance of the two countries and the treaty finally got notified in 2011. Since this is the first treaty under the new Section 90A, which apart from the above stratagem, has all the elements of section 90, it is worthwhile to have a close look at it.

But before that a few words about Taiwan itself will explain why such rigmarole was necessary. The Republic of China (ROC), as it was then known, was one of the four members of the victorious allied forces in WW2 and was a founding member of the United Nations in 1945. In 1949, with the takeover of mainland China by the Communist regime, People’s Republic of China (PRC) came into existence and Chiang- Kai -Shek, then head of the Nationalist Group fled to Taiwan which then came to be known as the Republic of China and continued to hold the permanent membership of the UN Security Council till the year 1971. In those days at the height of the cold war, most of the western nations did not recognize PRC. However, things began to change with the secret visit of Henry Kissinger to China in 1970. In 1971, through the General Assembly Resolution 2758, the tables were turned and now PRC was not only admitted as a member of the United Nations but was also given the permanent membership of the Security Council. In the process, Taiwan got expelled from the United Nations systems and it is not even a member of the same. Nevertheless, the economic might of Taiwan continued to grow and it was known as one of the four original Asian tigers. Its GDP is over 420 billion dollars and over the years it has built up a formidable trade surplus and in terms of foreign exchange reserves, it is the fourth largest in the world. However, because of the PRC’s insistence on one China policy, there are very few countries, which recognize the legitimacy of Taiwan and India seems to be particularly concerned about the sensitivities of China in this regard.

Countries nevertheless found a way of dealing with such situation and as of September 2011, Taiwan has 22 comprehensive double taxation avoidance agreements and 14 international transport agreements. It is seen that out of the agreements entered into by Taiwan, in most of the cases, the agreements have been entered into either by a Government department or Ministry with the corresponding department or Ministry of Taiwan or between some trade office or representative office of the respective countries. In India also, in exercise of the powers vested by Section 90A, the agreement was entered into between India-Taipei Association in Taipei and Taipei Economic and Cultural Centre in New Delhi Only in the case of Gambia, Macedonia, Paraguay and Senegal, the treaties mention the Republic of China as the counter party to the agreement.

Coming to the treaty itself, there is nothing, which is very dramatic. In most of the articles also, there is no radical departure from the standard Indian practice. However, some of the important differences are mentioned in the following paragraphs.

The first important difference that is noticed relates to the taxation system followed by Taiwan. Taiwan follows the territorial system of taxation in respect of individual income tax and both the residents and non-residents are taxed only in respect of the income that arises within Taiwan. (In case of residents, income from China is also included). The model tax treaties, in so far as Article 4 relating to residence is concerned, generally contain a second line in Para.1 to the effect: ''This term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State.” However, as pointed out in the OECD MC, the idea is to exclude persons who are not subjected to comprehensive taxation in the source state and a strict interpretation would exclude from the scope of the convention all residents of countries adopting a territorial principle of taxation. Therefore in the treaty, instead of the second line of Para1, there is a separate Para2, which states that as long as residents of Taiwan are taxed on the basis of the territorial system, they will be treated as residents entitled to treaty benefits. The concession is obviously available only in respect of individuals as corporates are taxed on their worldwide income. The tiebreaker rule in case of dual residency also does not contain ‘nationality’ as a criterion.

Coming to the most important provisions relating to permanent establishment, it contains the usual Indian practice of enlargement of the PE concept by mentioning sales outlet and warehouse, farm or plantations in the examples of permanent establishment in Article 5 (2). Art.5 (3)(a) relates to construction PE and 5(3)(b) relates to service PE. While OECD model recommends one year and the UN model recommends six months, the time period test for construction PE has been kept at 270 days. To constitute a service PE again, the period must exceed 182 days within any 12 months period. Unlike in the treaty with China, however, the service PE provision contains the expression ‘the same or connected projects’. It also does not exclude the services dealt with in Art 12 relating to fees for technical services. That apart, there is also provision for insurance PE. There is no force of attraction provision.

As for dividends, there is no difference between portfolio and direct investment and the rate of taxation has been fixed in the treaty @ 12.5%. The present system of taxation of dividend in India makes the provision meaningless for foreign subsidiaries paying dividend to the parent. However, Indian companies remitting dividend to India will suffer withholding tax at 12.5%, which is higher than the usual rate of 10% found in most of the recent Indian treaties. Taiwan also has an additional income tax @10% on undistributed profits. India used to have such a tax long time back. But, there is no reference to either the Indian system or the Taiwanese system any where in the treaty.

The source country taxation right for interest is capped @ 10%. There are also some exempt entities like the Government, local authorities, Central Banks and Export Import banks. Scope is left open for more entities to be included subsequently by leaving the discretion to the competent authorities –‘any other institution as may be identified and accepted by the competent authorities from time to time.’

Unlike the OECD model, the definition of royalty in Article 12 also includes the right of use industrial, commercial and scientific equipment. ‘Fees for technical services’, which is a special feature of the Indian treaties is part of Article 12 itself. The definition of ‘fees for technical services’ includes fees for managerial and technical consultancy services including the technical services of other personnel. The source rule in respect of royalty and for technical services is tough and includes the case where the royalties etc., even though not arising in the source State relate to the use or right to use etc. in that State. In such event, these will be deemed to arise in the source State. This is basically an anti-evasion measure and finds place in some of India’s treaties.

Unlike in the case of Mauritius and Singapore, the provision relating to capital gains retains the right of taxation in respect of alienation of shares of a company to the country of source. Similarly, the right to tax capital gains arising from alienation of shares deriving more than 50% of their value from immovable is also given to the source State.

There is a provision for exempting income of professor, teacher and research scholar for a period of two years from the date of arrival. Similarly, there is a provision for exempting income of students as well. The exemption also extends to remuneration derived by the students from an employment if such employment is directly related to their studies. The benefits are available for six consecutive years. Such a liberal provision is now-a- days not found in recent treaties. Unlike in other treaties, there is no mention of business apprentices though.

The double taxation in both the countries is relieved by the ordinary credit method. There is no clear mention of the treatment of the dividend distribution tax levied by India.

The non-discrimination Article is more or less in line with the OECD Model with only difference that it restricted to the taxes, which are covered under the agreement and hence will not apply in the case of other taxes. Taiwan has an imputation credit system in respect of dividends. This is applicable to residents alone. There is no reference to the same in the non-discrimination article. Taxing of foreign companies at a higher rate by India is not considered discriminatory. However, there is no provision of branch profit tax, which is part of the DTC and is supposed to come into force from next year.

The exchange of information Article is more elaborate and is in line with the latest OECD Model. It contains the newly introduced para4 and para5 of the OECD Model. There is thus no domestic requirement provision nor is there any exception in the matter of banking information. However, the Article relating to assistance in collection of taxes is a shortened version limited to taxes covered under the treaty. There is also a limitation of benefits provisions but this is couched in general language and may lead to interpretation issues in the future.

The most interesting aspects of the treaty are contained in the protocol though. Under the Indian domestic law (section 90), the provisions of treaty or the provisions of the domestic law, whichever are more beneficial to the taxpayers, are applied. Such is not the case with many other countries. However, in the protocol, it is specifically mentioned that if a domestic law of a country is more beneficial to the non-resident taxpayer than the provisions of the treaty, then the domestic provisions shall apply. This is an interesting addition as otherwise India was unilaterally applying such beneficial provisions.

The protocol also mentions that nothing in the agreement will effect the position of Land Value Increment Act under the Land Taxes Act of Taiwan meaning thereby that no relief will be available in respect of such taxes. The other interesting aspect seems to be the concern of Taiwan in getting equality of treatment in the treaty provisions as compared to India’s tax treaty with the PRC. Accordingly, it is mentioned that if India and the PRC were to renegotiate the treaty provision relating to permanent establishment and were to decide on the deletion of the word ‘delivery’ in Article 5 (iv) (a) &(b), then the same should also apply automatically to the treaty with Taiwan. Similarly in relation to the Agency PE, Indian treaties generally contain the provision that even if the agent does not have the authority to conclude contract, but habitually maintains a stock of goods from which deliveries are made regularly or when he habitually secures order wholly or almost wholly for the enterprise, then it will be deemed that there is a PE. In the Protocol, it is specifically mentioned that if India were to relax the conditions in its renegotiation of the treaty with PRC, then the same will also automatically apply to the treaty with Taiwan. We have had MFN clauses in our treaties mostly in the area of the rate of royalty /FTS or the definition of the same, but this seems to be a novel addition.