Economic Analysis of India's Double Tax Avoidance Agreements

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Economic Analysis of India's Double Tax Avoidance Agreements
Article in SSRN Electronic Journal · July 2010

DOI: 10.2139/ssrn.1632939
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DISCUSSION DRAFT. COMMENTS WELCOME
Economic Analysis of India's

Double Tax Avoidance Agreements
Arindam Das-Gupta
July, 2010
Senior Professor and Head, Economic Research Cell

Goa Institute of Management
Ribandar, Goa, 403006
ronnie@gim.ac.in
+91-832-2490300
Arindam Das-Gupta Economic Analysis of India's DTAAs pg 1
Abstract
Bilateral Double Taxation Avoidance Agreements (DTAAs) with particular reference to India's
network of DTAAs are analysed here to assess national benefits from DTAAs and make suggestions
for future policy directions for India's DTAAs. Though DTAAs are a tool of tax coordination used by
nations to apportion tax bases in the global fiscal commons, there are potential costs from DTAAs if
too many taxing rights are ceded to a partner country and also since DTAAs can facilitate tax
avoidance and evasion So the paper attempts to make a contribution through the development of a
tool for the economic assessment of the impact and benefits, if any, of DTAAs. The paper also
contains an overview of key features of India's DTAAs filling a current information gap. Based on the
analysis, suggestions are made for future policy in India involving DTAAs.
Keywords: DTAAs, tax treaties, tax avoidance, double tax relief, round-tripping, tax havens, global
fiscal commons, treaty shopping, harmful tax Initiative, foreign direct investment.
Outline
1. Introduction
2. Background: The global fiscal commons and national tax bases
The global fiscal commons
Double tax avoidance agreements (DTAAs) or tax treaties
Economically efficient allocation of global commons tax bases and DTAAs
Allocation of tax jurisdictions and the role of DTAAs
Other functions of DTAAs
The revenue and investment impact of DTAA tax allocations
DTAAs and tax avoidance in the fiscal commons
Anti-avoidance initiatives
3. A framework for assessing national benefits of DTAAs
4. India's DTAA network
5. The impact of India's DTAAs
6. DTAA policy for India: A suggestion
7. Conclusion
References
1. Introduction
The topic addressed here is bilateral Double Taxation Avoidance Agreements (DTAAs) with particular
reference to India's network of DTAAs. The purpose is to assess DTAAs and make suggestions for
future policy directions India could take with respect to DTAAs. DTAAs are viewed as a tool of tax
coordination used by nations to apportion rights to tax different bases in the global fiscal commons.
However there are potential costs to countries from DTAAs if taxing rights are ceded to a partner
country without a sufficient quid pro quo. DTAAs can also facilitate tax avoidance and evasion
potentially imposing additional costs on signatory countries. Accordingly a contribution the paper
seeks to make is the development of a tool for the economic assessment of the impact and benefits, if
any, of DTAAs. The paper also contains an overview of key features of India's DTAAs which, to the
author's knowledge, fills a current information gap.
In section 2 of the paper, the global fiscal commons is introduced and apportionment of taxing rights,
with particular reference to DTAAs, is discussed. Also discussed is the nature of tax abuse in the
fiscal commons, in part via tax havens, and the role of DTAAs in both enhancing and reducing tax
abuse. In section 3 a presentation of the framework to assess DTAA benefits referred to in the
previous paragraph is made. The framework is used to classify factors affecting the impact of DTAAs
and identify situations where DTAAs can or cannot be beneficial relative to (optimal) unilateral tax
policies. In section 4 an overview of India's 77 DTAAs is presented by examining their chronology,
their allocation of taxing rights, and double tax mitigation rights to source or residence countries, the
extent to which they are based on either of the two Model Tax Conventions (by the OECD and the
United Nations Conference on Trade and Development or UNCTAD), and withholding tax rates
specified in the DTAAs. The impact of India's DTAAs is then assessed in section 5. However, the
limited information and research available precludes a complete assessment. Instead information
gaps are identified. Nevertheless, large scale tax avoidance facilitated by DTAAs, reviewed here, is
pointed out to be sufficient to conclude that DTAAs are largely contrary to national interests. The
analysis in the paper is used to derive suggestions for Indian policy towards DTAAs in Section 6. The
suggestions identify treaty provisions needing renegotiation and includes suggestions for the
identification of treaties that should be scrapped. Information and administrative cooperation are
identified as important areas for treaties to deal with.
2. Background: The global fiscal commons and national tax bases

The global fiscal commons1
The global fiscal commons consists of potentially taxable entities or transactions with at least some
characteristic involving more than one jurisdiction – be it purchase, sale, trans-shipment, source,
residence or ownership. According to Bird and Mintz (2003), acceptable characteristics are those that
permit jurisdictions to claim what they term “economic allegiance” of an economic activity. 2 Commons
entities include multinational business entities, “footloose” industries, cross-border portfolio investors,
investors making foreign direct investments (FDI), and mobile skilled workers or professionals in
scarce global supply. Besides entities engaged in legitimate activity, there are also those engaged in
illicit activities including the drug trade, human and organ trafficking and terrorism. 3
Though the loose "existing tax consensus" is described below, in point of fact there is no universally
accepted apportionment of property rights of the fiscal commons between countries. In the absence of
coordination among countries this can result in either double taxation or no taxation of cross-border
income and capital flows. In particular, double taxation, reduces returns and inhibits cross-border
1
This discussion in this section is drawn from Das-Gupta (forthcoming).
2
A discussion of the concept of sovereignty which encompasses “tax sovereignty”, a concept that possibly
underlies “economic allegiance”, is in Christians (2008).
3
There are also non-governmental actors that shape commons activity such as multinational accounting firms.
activity. So both non-taxation and double taxation ultimately reduce fiscal revenue of concerned
countries. Rapid expansion of the global fiscal commons due to increasingly mobile fiscal bases
resulting from cross-border capital and skilled labour flows, and new types of cross-border
transactions, makes this an important fiscal issue.4
Cooperation in tax matters between countries is hampered by a fundamental conflict arising from their
need to compete to attract commons entities to their jurisdictions to reap non-tax benefits.5 It is,
therefore, vital for countries to have unilateral tax policies that protect their sovereign fiscal space and
safeguard their commons exploitation ability if bilateral or multilateral negotiations break down. “With
business operations integrated in various ways across borders, the untangling of profits and their
assignment to different source jurisdictions becomes an artificial exercise, and rule of thumb
measures often have to be adopted. Furthermore, this practice lends itself to profit shifting by the
taxpayer to lower tax jurisdictions. Most fundamentally, rules are needed to assign equitable shares to
the source countries in the income accruing to multinational corporations. Common source rules
employing unitary combination and uniform formula apportionment are needed to avoid arbitrary and
predatory practices for determining source.” (Musgrave, 2006, p176).
Tax cooperation between countries tends to follow the path carved out by early movers, particularly
OECD member countries, with other countries following their lead especially where OECD
publications exist, such as their Model Tax Convention. These principles often encompass reciprocal
6
concessions. Examples of cooperation to coordinate rights to commons exploitation include bilateral
double tax avoidance treaties (DTAAs) and guidelines produced by the OECD‟s Committee on Fiscal
Affairs, especially its Harmful Tax Initiative, and International Accounting Standards. 7
Double tax avoidance agreements or tax treaties

According to the World Investment Report (UNCTAD, 2009), as of 2008 there were 2805
comprehensive or limited bilateral treaties between countries from a possible maximum of around
50,000 treaties. These treaties are usually between countries with substantial trade or other economic
relations. Most treaties are between pairs of developed countries while, of the balance, most are
between developed and developing countries. DTAAs (a) provide reciprocal concessions to mitigate
double taxation, (b) assign taxation rights roughly in accordance with that “existing consensus”
described below and (c) largely though not rigidly follow the OECD Model Tax Convention or, for
developing countries, the UN Tax Convention.8 Recent treaties contain new clauses following the
OECD Model Tax Conventions of 2005 to 2010 which extend areas of cooperation to administrative
and information issues. While current treaties deal mainly with the right to tax incomes and,
occasionally, capital, the OECD‟s recent Model VAT Guidelines could expand the scope of bilateral
treaties in future to also cover the VAT (Owens, 2002).
4
Bird and Mintz (2003) use the term fiscal externalities for exploitation of a commons by a country which
causes it to shrink, as mobile factors move out. See also Asian Development Bank Institute (2001).
5
According to Tanzi (2008) countries compete to attract foreign: financial and real capital, consumers, workers,
high income individuals and pensioners.
6
See Bird and Mintz (2003) who refer in their discussion to the implicit “OECD consensus”..
7
Consumption tax examples of institutions whereby countries have ceded what was considered part of
sovereign fiscal space include the World Trade Organization impact on tariffs – and even some domestic
consumption taxes to ensure non-discrimination; membership in free trade areas and customs unions; and the
European Union’s abolition in 1993 of “fiscal frontiers” and tax related checks at national borders.
8
The latest version of the OECD model tax convention was finalised in 2008. Further draft amendments,
released in 2010, are under public discussion. Another influential tax treaty, especially as regards Indian taxes,
is the UN Model Tax Convention, which modifies the OECD Convention to make it more suitable for
developing countries, the 2009 draft being the latest.
Economically efficient allocation of global commons tax bases and DTAAs

Economic thinkers have identified tax jurisdiction allocations which are economically efficient or
nationally "optimal". These rules, briefly reviewed here, have had a limited influence on the allocation
of taxing rights.9 The starting point for tax base coordination principles for economic efficiency or,
alternatively, what Musgrave and Musgrave (1989) term “inter-nation” equity,10 is the mutual
recognition of the ability and right of more than one sovereign nation to tax commons entities. 11
Efficient taxation of capital in this literature is synonymous with taxation that ensures international tax
neutrality so that taxes do not distort international capital flows by driving wedges between returns to
different investors.12
The best known principle, followed for example by the US, is capital-export neutrality (CEN)
whereby an investor faces the same marginal tax rate, regardless of which country the
investment is made in. This requires the residence country to credit foreign taxes against its
own taxes and, if needed, provide residents with a net tax refund when the foreign tax credit
exceeds other tax dues. As Musgrave puts it “ensuring international tax neutrality is thus in
the hands of the residence country” (Musgrave, 2004, p177). CEN reduces to residence
country taxation only if source countries levy no taxes on asset returns.
On the other hand, capital import neutrality (CIN) requires domestic and foreign savers to
receive the same marginal rate of return from investment in a jurisdiction. This principle
implies that only the source country taxes investment income. Simultaneous achievement of
CEN and CIN is infeasible.
“National tax neutrality” (NN) whereby foreign taxes are treated as a cost domestically, so that
foreign income net of tax and other costs is treated on par with domestic income, implies a
deduction for foreign taxes and other costs.13
An ownership perspective has been recently proposed by some scholars.14 They point out that capital
exports, particularly FDI, need not result in an actual transfer of savings from home to host countries.
Instead, some investment commonly accounted as FDI merely transfers ownership and control,
unrelated to the quantum of saving in the two countries. Accordingly, they propose ownership
neutrality as an appropriate benchmark. They suggest two ownership neutrality concepts.
9
The efficiency principles discussed here are limited to income taxes. As pointed out by Desai (2003), the
importance of taxes other than income taxes has been increasing around the world, so that principles for
dealing with income taxes now have less importance. Principles for efficient commodity taxation look at
origin and destination based commodity taxes. A careful analysis of second best efficient international
taxation where there are many jurisdictions is in Keen and Wildasin (2004). They conclude from their analysis
that allocation of resources (and commodities) in line with international efficiency may not be necessarily
desirable given a situation with minimum fiscal revenue needs. In particular, “Second-best” international
taxation may imply the use of commodity taxes which include both origin and destination taxes and possibly
the deployment of both domestic taxes and tariffs, and also capital taxes based partly on the source and partly
on the residence principle.
10
Early treatment of international tax principles is in Musgrave and Musgrave (1989) drawing on pioneering
earlier work of each of the authors. A good overview of this normative analysis is in Musgrave (2006).
Alternative principles are discussed in Desai and Hines (2003). A critique of Musgrave’s analysis as well as a
wide-ranging survey of emerging issues in the domain of international taxation is in Graetz (2001).
11
The OECD’s Harmful Tax Practices initiative is one case in which the right to tax of some havens is not
recognized by other usually more powerful countries though ability to tax (or spare tax) is clearly present in
these havens. This is discussed further below.
12
A good discussion of the efficiency concepts presented here is in Desai and Hines (2003).
13
As discussed in Graetz (2001), this principle was proposed by Peggy B. Musgrave in 1963.
14
Desai and Hines (2003).
Capital ownership neutrality (CON) "demands that tax rules do not distort ownership patterns
and can be achieved with exemption [of foreign income] as the owner with the highest
reservation price (and greatest productivity) owns the asset. Like CEN, unlimited foreign tax
credits also achieve CON." (Desai, 2003).
National ownership neutrality (NON) "suggests, much as is evident in practice in the world,
that countries designing tax rules in their own narrow interest will exempt foreign income."
(Desai, 2003).
A different approach to efficiency analysis of DTAAs is taken by Davies (2003).15 He examines
strategic equilibria between countries whose governments wish to maximize national income.
Governments are allowed to choose tax relief methods (deductions, credits or exemptions) and tax
rates in his analysis. He uses his framework to conclude that in equilibrium16 tax deductions will be
used by at least one country. He shows that this situation is an inefficient Prisoner's Dilemma resulting
in unexploited national income increasing opportunities for at least one country.17 Since most DTAAs
use credits, as does the OECD (or UN) Model Conventions, they improve international efficiency
compared to the no treaty situation. However attainment of full efficiency also requires tax rate
harmonization. Most treaties only cover withholding tax rates.
Efficiency principles are of limited use in the actual design of treaties since revenue considerations
are also of importance. Nevertheless, they suggest that by not using inefficient methods of tax relief
(deductions and exemptions) treaties help improve economic efficiency. Similar weakness from a
design perspective applies to principles of equity or fairness, such as reciprocity or favourable tax
treatment of poorer jurisdictions.18
Allocation of tax jurisdictions and the role of DTAAs19

The "existing tax consensus" broadly allocates the right to tax "active" income to source countries and
passive income to residence countries. Thus wages, salaries, technical and management fees and
business income (but also income from immoveable property) are allocated to the country where
payments are made, while "passive incomes" like dividends, royalty, capital gains and most types of
interest are allocated to the country of residence of the receiver. In particular, for business income, a
source country has the right to tax profits of non-resident businesses from that source country if these
concerns have a "permanent establishment" there.20 There is no immediate economic or fairness
rationale for these rules.21 Third countries other than the source or residence are held not to have any
taxing rights over such income, though this has led to much international tax policy activity in recent
years, as discussed below.22 In practice, since most source countries are loath to let various income
15
Earlier work along these lines is reviewed in Davis (2003).
16
That is, a subgame perfect Nash Equilibrium.
17
It may be recalled that deductions achieve national ownership neutrality (NN): they are efficient from a single
country perspective if retaliation is ignored.
18
Brief discussion is in Keen and Wildasin (2003) and also in Graetz (2001). As Bird and Mintz (2003) put it
“Unfortunately, there do not appear to be principles that are both acceptable and feasible with respect to how
to divide up such a complex and changing target as the international tax base in the multiplayer international
tax game”. p422. They identify several possible principles that may be used in future and evaluate their
relative merits.
19
Discussion of India's tax treaties is in a later section of the paper.
20
One major difference between OECD and UN Model Tax Conventions is that the scope of a permanent
establishment in the latter is broader than in the OECD Treaty. See, for example, Kosters (2004) and McIntyre
(2007).
21
See Asian Development Bank Institute (2000).
sources remain untaxed, they often apply withholding taxes not only to active but also to passive
incomes. Correspondingly, residence countries often shoulder the burden of relieving double taxation
by allowing tax relief for source country taxes paid by their residents.23
DTAAs can result in inequitable treatment of treaty partners. For example, most source countries
ordinarily tax business income on a net basis if it is earned by a “permanent establishment” in the
country. They tax other capital income such as interest, dividends, and royalties on a gross basis
often through withholding taxes which can be at a lower rate than the normal rate on these types of
income in that country (McLure, 2006). As Musgrave says, clearly, the usual treaty requirements of
non-discrimination in corporate income tax combined with reciprocity in withholding tax rates is
unsatisfactory with respect to inter-nation equity.” (Musgrave, 2004, p176)
Other functions of DTAAs

DTAAs serve at least four other important coordination functions.24 First, they ensure that countries
adopt common definitions for factors that determine taxing rights and taxable events. Crucial among
these is the definition of a permanent establishment. Most treaties also specify a Mutual Agreement
Procedure (MAP) which is invoked when interpretation of treaty provisions is disputed. 25 Third, to
prevent abuse of treaty concessions, treaties increasingly incorporate restrictions and rules, such as a
general anti-avoidance rule (GAAR), that allow tax authorities to determine if a transaction is only
undertaken for tax avoidance or not. Benefit limitation tests and controlled foreign corporation (CFC)
rules also place limits on claims of residence in countries eligible for treaty concessions. Fourth,
exchange of tax information on either a routine basis or in response to a special request is provided
for in most treaties to assist countries counter tax evasion. A fifth area, assistance in collection of
taxes, is present in some treaties that follow the OECD Model Convention. However, two related
OECD conventions (one a multilateral convention) for tax collection assistance also serve as the
basis for separate bilateral agreements between some countries.26
The revenue and investment impact of DTAA tax allocations

Globalisation and decreasing national tax capacity: Limited work exists on studying the impact of
globalisation on tax revenues. Baunsgaard and Keen (2005) study the impact of trade liberalisation on
tax revenue of different groups of countries. They find that only high income countries – out of 111
countries in their sample – have benefited from trade liberalisation during the past 25 years. Of other
countries, low income countries have fared the worst. 27
DTAAs: The limited international evidence (Neumayer, 2007) suggests that FDI flows to low income
developing countries are unlikely to be sufficient to justify losing revenue from a DTAA. DTAAs
typically lead to lower taxes in capital importing countries as they substitute residence-based taxation
for source-based taxation of capital income such as interest, dividends, royalties and capital gains.
22
For consumption taxes rights to tax of producing or origin countries and of consuming or destination countries
are generally recognised. No widely accepted convention for origin/destination rights for commodity taxes
exists though destination taxes are limited in practice given administrative difficulties. However, the OECD's
draft VAT/GST Guidelines (OECD, 2006) favour destination taxes on cross-border goods and service flows.
23
Model Convention provisions are constantly under revision in response to new forms of economic activity as
is evident from, for example, OECD (2010).
24
See Blonigen and Davies (2004).
25
Owens (2002) emphasises the importance of treaty articles prescribing Mutual Agreement Procedures since
there are inevitable gaps in the coverage of treaties. See also Rixen (2008)
26
See UNCTAD (2009). The conventions are the Model Convention for Mutual Administrative Assistance in
the Recovery of Tax Claims (1979) and the multilateral Convention on Mutual Administrative Assistance in
Tax Matters (1995).
27
They also find that the VAT or its absence does not affect their finding.
These revenue costs could be worth incurring if they lead to a sufficient increase in foreign direct
investment (FDI). In one of the first studies examining the impact of DTAAs on FDI flows to
developing countries, Neumayer (2007) finds that only middle income developing countries having
more DTAAs with the US and other capital exporting countries receive more FDI. This is not the case
with low-income developing countries. Even for middle income countries, he does not assess whether
the increase in FDI is sufficient to offset revenue loss. Overall, the limited evidence precludes clear
conclusions but is far from encouraging.
DTAAs and tax avoidance in the fiscal commons

An important problem in the international fiscal commons is the emergence of third countries that
have found ways to tap tax bases by manipulating existing international tax laws. This typically results
in the erosion of both source and residence country tax bases. Most such third countries have come
to be known as tax havens and offshore financial centres (OFCs).28
The emergence of tax havens: The importance of tax havens in increasing the scope for tax
avoidance has been extensively reviewed in recent literature.29 Tax havens are countries or
autonomous jurisdictions having low tax regimes for non-residents. Low tax regimes are often coupled
with secrecy laws or practices which result in limited information provision about non-residents to
fiscal and financial regulators, possibly opaque and discretionary tax and financial regulations, and
lenient laws for incorporation of businesses by foreigners. Hines (2004) found that tax havens
themselves benefit from being havens. “What is less clear is the impact of this avoidance on the
economies of countries with high tax rates.” (Desai, Foley and Hines, 2005, P15). Serious problems
associated with OFCs and some tax havens, with greater ramifications than just tax avoidance, relate
to unidentified cross-border capital flows for terrorism, drug trafficking and other criminal activities.
Tax avoidance opportunities, inter alia, arise from residence country tax provisions in treaties. The
incentives arising from tax systems to shift income from high-tax to low-tax jurisdictions exist if the
home country exempts foreign-source income. This incentive is absent only if income is repatriated by
a firm resident in a country that taxes worldwide income if, furthermore, the firm is unable to claim
sufficient foreign tax credits to attain zero tax status.
Due to the interaction of DTAAs and tax havens, countries (India included) claim to lose a large
amount of revenue on cross-border transactions.30 Commons entities can engage in a variety of tax
avoidance strategies to reduce taxes. Important examples are routing financial flows through entities
legally resident in a tax haven, thin capitalisation, transfer pricing, double dipping, hybrid entities and
timing arbitrage, round-tripping and treaty shopping.31 Of these, DTAAs can facilitate round-tripping
and of course, treaty shopping besides thin capitalization and, possibly, double-dipping. So DTAAs
28
OFCs cause more financial sector problems than only eroding "legitimate" tax bases. For discussion see, for
example, Dwyer (2002), Zagaris (2003) and McLure (2006).
29
See OECD ( 1998), Blum et. al. (1998), Webb (2004) and McLure (2006) and a series of related papers
authored by one or more of Mihir Desai, C. Fritz Foley, James R. Hines, Jr. and Dhammika Dharmapala since
1998. In OECD (1998), the OECD Committee on Fiscal Affairs identifies 47 jurisdictions engaged in
“harmful tax practices” (HTPs), discussed below.
30
See, for example, "Taxguru" (2009, April 7).
31
Thin capitalisation refers to financing a subsidiary or other concern through debt rather than equity to reduce
apparent profits. Through transfer pricing a firm can apportion profits of related entities to a low tax
jurisdiction through artificially high costs of items acquired from the related entity situated there or low prices
for goods sold to the related entity in the high tax jurisdiction. Double-dipping takes advantage of differences
in the tax treatment of a transaction in two jurisdictions. A hybrid entity exploits cross-border differences in
the treatment of tax entities and taking advantage of different tax accounting rules enabling tax deferral. Round
tripping is the illegal re-routing of income of a resident through a non-resident entity in a tax haven or other
low tax jurisdiction. Treaty shopping refers to setting up a legal entity in a country with the most favourable
tax treatment in its DTAA with a country where investment is targeted. See, for example, ADBI (2000).
and tax laws for non-resident income have to incorporate defensive measures to pre-empt tax base
capture by such jurisdictions.
In certain cases fiscal interests can be aligned with that of company owners not involved actively in its
management. Tax minimisation strategies of corporations which involve tax havens are generally
difficult for non-managerial shareholders to observe. Equally, illegal self-enrichment strategies of
managers employing tax havens cannot be easily observed by shareholders (Desai, Dyck and
Zingales, 2003). Stricter enforcement that reduces corporate evasion, especially through havens,
also benefits minority shareholders (Desai, Dyck and Zingales, 2003).
Anti-avoidance initiatives
To counter avoidance strategies, countries have taken a variety of measures. The OECD has taken
the lead in this through its Harmful Tax Practices (HTP) initiative and various information sharing,
coordination and transparency conventions to counter OFCs and tax havens.32
Important information and transparency conventions include (a) the 1998 "Ottawa Taxation
Framework" for e-commerce;33 (b) ratification by OECD members and others of guidelines in the 2000
report "Improving Access to Bank Information for Tax Purposes";34 (c) the 2002 "Agreement on
Exchange of Information on Tax Matters";35 and (d) the 2006 International VAT/GST Guidelines.36
Continuing work of OECD members and its "Participating Partners" in devising strategies to combat
international tax abuse is carried out through their Global Forum on Transparency and Exchange of
Information on Tax Matters.37 Several countries also unilaterally require their residents to disclose
their foreign assets, an early example being the United States through their Report of Foreign Bank
and Financial Accounts (FBAR).38
The OECD’s Harmful Tax Initiative: 39 This was initiated in 1998 in response to several countries,
whose rights to exploit the fiscal commons were not accepted by the OECD, that were eroding OECD
member countries‟ tax bases using what they considered illegitimate means. Some commentators
perceive this initiative as the use of “strong-arm” tactics by the rich and powerful members of the
OECD to deprive smaller nations of their sovereign rights to tax. For example, the following quote
from Langer (2000) is of interest.
"Mitchell says that this OECD effort „. . . contradicts international norms and threatens the
ability of sovereign countries to determine their own fiscal affairs.' He adds that the OECD
proposal ‟. . . would create a cartel by eliminating or substantially reducing the competition
these high-tax nations face from low-tax regimes.‟ " (Langer, 2000, pg 2).40
Under this initiative, the OECD (see OECD, 1998) defined four key factors to identify tax havens and
harmful preferential tax regimes in non-haven jurisdictions.
32
For a recent overview see OECD (2008c).
33
OECD (2003)
34
OECD (2003b).
35
OECD (2009) and OECD (2009b).
36
OECD (2006).
37
The permanent web link for the Forum on the OECD website is www.oecd.org/tax/transparency.
38
United States Internal Revenue Service (2010).
39
OECD (2006b)
40
“Commons capture” and apportionment are discussed in Langer (2000), Bird and Mintz (2003) and Rattsø
(2003), the latter in the context of the European Union.
Low, nominal or zero special tax rates for mobile income is the first criterion which, however,
needs to be combined with one or more of the other three factors for a country‟s tax regime to
be regarded as “harmful”.
The second criterion is existence of “ring-fencing” whereby the domestic economy is partially
or fully isolated insulated from the tax regime for foreign taxable entities. In tax havens with
limited domestic economic activity, ring-fencing is replaced by the criterion of “absence of
substantial economic activity”. A common example of ring-fencing is a restriction of special
tax benefits to non-residents.
The third criterion is lack of effective information exchange on taxpayers benefiting from low
tax regimes in a jurisdiction.41
The fourth criterion is lack of transparency in legislative or administrative tax provisions giving
on tax administrations latitude in interpretation of tax laws and room for negotiated taxes due
from favoured entities.
Dharmapala and Hines (2006) discuss the impact of OECD efforts since 1998 to get jurisdictions to
improve their transparency and information exchange practices. They identify between 33 and 40
jurisdictions with tax regimes (in 2005) qualifying them as tax havens. As of May 2009 no jurisdiction
remains on the OECD list of uncooperative tax havens.42 A possibly surprising finding of Dharmapala
and Hines (2006) is that tax havens are (or were) relatively affluent countries known for good
governance.43
3. A framework for assessing national benefits of DTAAs

Drawing on the preceding discussion, a framework to assess DTAAs is proposed here. The
framework is used to assess if and to what extent a bilateral DTAA, enabling two countries to
coordinate their international tax regimes, benefits a nation as compared to unilateral tax policy. As in
the existing literature, the focus here is limited to income taxation, ignoring consumption, production
and other taxes.
Basic framework
The framework has two countries ("home" and "foreign") and assumes one type of income,
investment income. It could equally well be presented in terms of any other income flows, such as
labour income, or several types of income. For the analysis here, without any loss there is presumed
to be only one foreign country. Implications of many foreign countries and types of income are briefly
commented on at the end of the section. For simplicity but without significant loss, residents of each
country are also assumed to be nationals of that country.
Notation used in the framework employs subscripts H and F for the home country and foreign country
respectively. Where there are double subscripts, the first subscript is for country and the second is for
the resident. Specifically,
YHH, YHF and YFH are respectively pre-tax income sourced in the home country accruing to its
residents, pre-tax income sourced in the home country accruing to non-residents and pre-tax income
sourced in the foreign country accruing to home residents. These incomes are assumed to be returns
41
Effective exchange of information has three dimensions: (a) Relevant information must exist. (b) Tax
authorities need to have access to it. (c) The information needs to be exchangeable.
42
The last three countries to be removed from the list were Andorra, Lichtenstein and Monaco. See OECD
(2010b).
43
The discussion does not extend to “rogue nations” that act as financial havens for crime, terrorism and
individual tax evasion or money laundering. Such jurisdictions exist but are by no means characteristic of a
typical tax haven.
on investment and so can be decomposed as YHH=rHKHH, YHF=rHKHF and YFH = rFKFH, where r denotes
the per unit return on capital (K).
The effective tax rates on these incomes (i.e. taxes legally due as a proportion of pre-tax income,
after taking into account all available tax concessions) are respectively tHH, tHF and tFH. A fourth tax
rate is that applied to foreign income of non-residents by the foreign country (tFF on YFF). Of these tHH
and tFF are taken to be pre-determined in this analysis, since they apply to all types of investment
income of residents in the respective countries.
Third, foreign tax credits given by each country to its residents are denoted cH and cF. Typically the
foreign tax credit fully offsets foreign taxes unless they exceed domestic taxes. So later in the
exposition it will be assumed that cH = min[tFH,tHH] and cF = min[tHF,tFF] . This implies net-of-credit tax
rates max[tHH – tFH,0] at home and max[tFF – tHF,0] in the foreign country on foreign income of their
respective residents.
Tax revenue of the home government is denoted GH.
Finally, in case of any discrepancy between true incomes and incomes reported to tax authorities
reported incomes are denoted by an asterisk (e.g. Y*HH).
As in Davies (2003), it is assumed that the objective of DTAA policy is to maximise national income.
In case multiple policies can achieve the same national income, a secondary goal is taken to be
maximisation of own fiscal revenue. Also as in Davies (2003), only the three elements relevant to
DTAAs analysis are explicitly included in national income. For the home country this implies
YH = Income from home accruing to residents + taxes collected by home on income sourced
from home accruing to non-residents + foreign source income of home residents net of
foreign taxes, or
YH = YHH + tHFYHF + [1-tFH]YFH.

Given the superiority of tax credits (equivalently, deduction of foreign taxes paid from domestic taxes
due) discussed earlier, tax credits are taken to be the method of relief employed. 44 Correspondingly
home fiscal revenue in the absence of tax evasion is
GH = tHHYHH + tHFYHF + [tHH – cH]YFH.
Given income concealment and misreporting, actual fiscal revenue is
G*H = tHHY*HH + tHF[YHF + μ(YHH + YFH – Y*HH – Y*FH)] + [tHH – cH]Y*FH.
In the expression above μ denotes the fraction of undeclared income of residents masquerading as
income of non-residents due to earlier round-tripping of resident investment.45 The magnitude of this
parameter and its sensitivity to tax policy changes is important in determining government revenue
loss. Second, for YFH to profitably masquerade as YHF it must be that tHH – cH > tHF. With full tax
credits this implies max[tHH – tFH,0] > tHF. So the benefit to home residents from this strategy will either
be absent or relatively small implying that the associated revenue loss will also be either small or
absent. Therefore, to simplify the exposition it is assumed that Y FH = Y*FH.46 Revenue loss due to mis-
reporting can be found (with YFH = Y*FH) to be
44
Davies (2003) reviews earlier partial analyses where credits are not the best policy. Note further that credits
are the method prescribed in the majority of India's DTAAs and also under section 91 of the Income Tax Act
which provides for unilateral tax relief for foreign taxes paid.
45
Other tax avoidance strategies that have been mentioned earlier, thin capitalisation, transfer pricing, double
dipping, hybrid entities and timing arbitrage, are not directly helped by DTAAs. Treaty shopping, hybrid
entities and double dipping are dealt with later.
46
Net fiscal revenue from fines and penalties – less tax administration costs – are also ignored in this framework
since their magnitude should be relatively small and since they ought not to be key policy determinants.
GH – G*H = [tHH – μtHF][YHH – Y*HH].

In the framework the net of tax return to different types of investments can be found to be
on foreign investment declared by residents (abbreviated outbound FDI): [1-tFH+cH – tHH]rF,
on declared home investment by residents: [1-tHH]rH,
on round-tripped home investment by residents: [1-tHF]rH,
on foreign investment by non-residents [1-tFF]rF, and
on non-resident investment in the home country (abbreviated inbound FDI): [1-tHF+cF - tFF]rH.
This completes the development of the framework.
Optimal unilateral policies and potential coordination gains

To use the framework, first consider the benchmark situation of a country's national income and fiscal
revenue in the absence of a DTAA.47 To (lexicographically) maximize home national income and fiscal
revenue the home must choose tHF and cH appropriately. The best unilateral policy choices, in terms
of tHF and cH, of the home government under different situations are summarised in Table 1. The table
shows that there are potential gains to the home country from tax coordination via a DTAA with the
foreign country four cases. To see why this is so and to identify the scope for gains from policy
coordination, consider factors affecting policy choices and each of the cases in turn.
For outbound FDI (by residents), three factor influence policy. First, investment flows (and so
investment income) may be sensitive to their net of tax return, which partly depends on the home
country foreign tax credit, cH. The degree of sensitivity is, therefore of great importance. Second, the
foreign government can strategically choose to offset any increase in cH by raising the tax rate on
non-resident earnings, tFH, without affecting the net return on investment. Third, to escape home taxes
(tHH), some foreign income of home residents may not be declared despite the tax credit. In principle,
this can be tackled by lowering taxes on declared foreign income of residents but this will result in
discrimination against domestic investment.
Similarly, for inbound FDI three factors influence policy choices: As with outbound FDI, inflows and so
capital stock can be sensitive to their net of tax return. National income depends, in turn, on the return
to capital. Second, any decrease in the effective home tax rate on non-residents, tHF, can be
strategically offset by a decrease in the foreign tax credit, cF, offered to their residents by the foreign
government. It should be noted that tHF can be changed in at least two ways. The first is by
Unilaterally introducing or changing tax concessions for inbound FDI. The second is by changing final
withholding tax rates on payments to non-residents. In practice, both of these are employed with the
difference that the latter can be tailored via DTAAs to discriminate between different foreign countries.
Third, the key potential abuse here is round-tripping: Residents may disguise their funds repatriated
from abroad as inbound FDI to benefit from lower taxes. 48 This will decrease tax revenues on income
of home residents.
Cell (1,1) in the table is the case where capital flows are not sensitive to returns on investment. In this
case, the home (and also the foreign) government can set taxes and credits unilaterally to maximise
revenue without affecting national income. The best response policy in this case entails double
taxation of foreign incomes in both countries. High tax rates on income from inbound FDI will also
ensure that round-tripping has no tax benefits.
Cells (1,2) and (1,3) are where outbound FDI is sensitive to net returns, making a foreign tax credit
desirable. Negotiation with the foreign government to lower taxes on income of home residents will
47
Though it is possible to express various neutrality concepts discussed earlier in terms of these net of tax
returns, this is not done here.
48
Discussion of money laundering and "hawala" transactions is not attempted here.
result in a lower foreign tax credit bill in the home country. However, this will be detrimental to
revenue in the foreign country. If FDI from this foreign country is unimportant, then there is no
possibility of gains to both countries. Where FDI flows are important in both directions, the foreign
country can benefit at home‟s cost from lower taxes on home income of foreign residents (t HF). If this
tax rate was set optimally in the unilateral case (to maximize t HFYHF), this will lower home country
national income and fiscal revenue while raising foreign fiscal revenue and possibly foreign national
income.
The analysis of the cases in Cells (3,1) and (4,1) is similar to that in the previous paragraph: There is
a trade-off between income and revenue and clear coordination gains to both countries may not exist.
Furthermore, if outbound FDI to this foreign country is not important, then coordination gains will be
absent.
Table 1: Unilateral Tax Policy Choices of the Home Government
Outbound FDI Outbound FDI sensitive to
not sensitive to the effective tax rate
the effective tax Foreign Foreign
rate government government
will offset will not offset
home tax home tax
concessions concessions
Inbound FDI not sensitive to the 1,1 1,2 1,3
effective tax rate Low tax on non- Low tax on Low tax on
resident income non-resident non-resident
not needed. income not income not
Foreign tax needed. needed.
credit not Foreign tax Foreign tax
needed credit not credit
effective.
Inbound Round-tripping of domestic 2,1 2,2 2,3
FDI funds sensitive to the Tax rate on non- Low tax on Tax rate on
sensitive effective tax rate resident income non-resident non-resident
to the determined by income not income
effective income and effective. determined
tax rate revenue Foreign tax by income
gain/loss. credit not and revenue
Foreign tax effective. gain/loss.
credit not Foreign tax
needed. credit
Round- Foreign 3,1 3,2 Not
tripping of government Low tax on non- Low tax on Consistent
domestic will offset resident income non-resident
funds not home tax not effective. income not
sensitive to concessions Foreign tax effective.
the credit not Foreign tax
effective needed. credit not
tax rate effective.
Foreign 4.1 Not 4,3
government Low tax on non- Consistent Low tax on
will not offset resident income. non-resident
home tax Foreign tax income.
concessions credit not Foreign tax
needed. credit
The second row of the table considers cases where round-tripping is sensitive to tax rates as is
inbound FDI. To see the revenue implications consider the effect of decreasing tHF to, say, t'HF.
Assume that this decreases Y*HH to Y'HH but raises YHF to Y'HF and μ to μ'. The net impact on fiscal
revenue is
∆G*H = [t'HFY'HF – tHFYHF] + [tHH(Y'HH – Y*HH) + t'HFμ'(YHH – Y'HH) – tHFμ(YHH – Y*HH)].
The first square bracketed term in this expression is the revenue gain, if any, from taxing higher FDI
inflows. This is also the source of change in national income. Only if this term is positive, which
requires inbound FDI to be sufficiently sensitive to net returns, is there a potential gain from lowering
tHF. The second square bracketed term reflects the loss from additional round tripped income of
residents.
Given the offsetting forces, if the tax on non-resident income is optimally chosen, there are no
coordination gains to the home country if outbound FDI is not responsive to net returns or unimportant
as in cell (2,1). In cells (2,2) and (2,3) home and foreign tax policy coordination can be beneficial for
national income and fiscal revenue in both countries but only if FDI in both directions is of importance.
Analysis of the remaining cells, (2,2), (2,3), (3,2) and (4,3), leads to a similar conclusion: Gains are
possible from policy coordination, but only in the presence of two way FDI flows.
Measuring gains from a DTAA

Let the optimal unilateral values of policy parameters and associated income flows be denoted by the
superscript U and values with a DTAA be denoted by the superscript T. Then national income gains
from a DTAA will be
YTH – YUH = {YHH + tTHFYTHF + [1-tTFH]YTFH} – {YHH + tUHFYUHF + [1-tUFH]YUFH}
=[ tTHFYTHF – tUHFYUHF] – [tTFHYTFH – tUFHYUFH] +[YTFH – YUFH].
= revenue loss on non-resident income less foreign revenue loss on their non-resident
home country income (i.e. foreign income of home residents) plus increase in foreign
income of home residents (from greater outbound FDI).49
Revenue gains from a DTAA are
GTH – G*H = {tHHYTHH + tTHF[YTHF + μ(YHH – YTHH)] + [tHH – cTH]YTFH}
– {tHHYUHH + tUHF[YUHF + μ(YHH – YUHH)] + [tHH – cUH]YUFH}
= {tHH [YTHH – YUHH] + μ[tTHF(YHH – YTHH) – tUHF(YHH – YUHH)]} + [ tTHFYTHF – tUHFYUHF]
+ [max[tHH – tTFH,0] YTFH – max[tHH – tUFH,0] YUFH].
= revenue loss from lower declared resident income partly offset by increased taxes on
round tripped income plus revenue loss on non-resident income (in the braces) plus
revenue gain, if any, due to taxes on increased foreign income of home residents (from
greater outbound FDI).
Here μ, the fraction of undeclared income of residents reported as non-resident income, has been
assumed to remain unchanged for simplicity.50 Furthermore, it has been assumed that the tax credit
fully offsets foreign taxes on foreign income of home residents unless they exceed domestic taxes.
The verbal descriptions of the gains make use of the assumption that unilateral tax rates are chosen
to maximise national income by both countries – therefore any other tax rates, including treaty rates,
must lower national income. Second, the descriptions assume that capital flows are responsive to net
returns. If the DTAA causes effective tax rates on foreign income of residents to be lowered in both
countries this will result in increased capital flows and so foreign source incomes.
49
In the special case of only residence taxation, t FH = tHF = 0
50
This causes the revenue gain to be overstated compared to the impact of DTAA tax changes if it were
accounted for, since μ is unlikely to decrease.
The equations offer interesting insights. The first two terms of the national income gain equation
appear in the gain equations for both countries but with opposite signs: both countries cannot make
net gains from taxing foreign source income under a DTAA. The country for whom the DTAA causes
relatively greater increases in outbound FDI will have a net gain. The size of the net gain will depend
on the extent to which DTAA tax rates are lowered: The greatest gain (matched by the greatest loss
from income taxes on inbound FDI) is if the DTAA stipulates residence taxation. The major national
income gain will likely come from the increase in income from outbound FDI captured in the third
term. The main conclusion is that capital exporting countries stand to gain most from a DTAA if capital
exports increase after the DTAA takes effect.51
The revenue gain equation shows that conditions for a revenue increase following a DTAA are even
more stringent than for national income: Only a capital exporting country that levies relatively high
taxes on domestic income compared to its treaty partner can gain from a DTAA. However this gain
may not be enough to offset lost taxes on income of non-residents or increased round-tripping.
With more countries or types of income, other DTAA abuses become possible. The most important of
these is treaty shopping, particularly in conjunction with DTAAs with low tax rate havens. As
discussed, entities in countries without a tax treaty or with high tax rates, can try to route their FDI
through a country with a DTAA specifying low withholding tax rates. If these third countries also have
low tax rates on non-resident income, then the investing entity can avoid a significant proportion of
source country taxes. A benefit of DTAAs mentioned earlier is common tax nomenclature and
definitions. If these are absent, entities can take advantage of differences in the way transactions are
treated in partner countries to get tax relief or be subject to low or no taxes in both jurisdictions
(double-dipping). This can also be done if entities fall into different groups (hybrid entities) in different
jurisdictions.52
Overall, therefore, the framework suggests that DTAAs favour capital/labour/technology exporting
countries at the expense of importing countries. This may partly explain the empirical results of
Neumayer (2007) and Blonigen and Davies (2004) discussed earlier. The framework ignores benefits
from intangible employment creation, efficiency improvements and demonstration effects discussed in
the FDI literature by not considering the possible dependence of Y HH on FDI: For capital importers this
appears to be the only potential source of gains from a DTAA, an issue discussed further below.
Ignoring these possible benefits, the framework suggests that benefits from signing DTAAs are
unlikely to accrue to both treaty partners and that the country with a large dependence on foreign
capital or other productive inputs is the worse off treaty partner. India's DTAAs are now examined.
4. India's DTAA network53

The principle followed in India is to tax residents on their global income and tax non-residents on their
Indian source income.54 However, unilateral tax credits for foreign taxes paid are allowed to residents
under section 91 of the Indian Income Tax Act.
India: (a) has a network of 77 comprehensive DTAAs, the oldest, with Greece, signed in 1965; (b) is
also reported to be in the process of negotiating another 12 treaties with autonomous territories; and
(c) is also a signatory to the 2005 multilateral SAARC avoidance of double tax convention and some
51
It should be noted that this conclusion holds for any income generating factor export including labour and
technology – the use of capital and investment income is purely for expository convenience.
52
A favourite avoidance tactic in some countries is to set up trusts through which income is routed. For a recent
news story on this in the context of the India-Singapore DTAA see Sen and Sikarwar (2010, 28 June).
53
Fernanda Andrade provided excellent research assistance compiling information on the structure of India's
DTAAs and making a treaty by treaty comparison with the OECD model convention. Her background, used
by the author to compile Tables 1 to 5.
54
See, for example, Rao (2008, January 7).
other bilateral treaties which, however, are not comprehensive. Comprehensive DTAAs are listed
along with their signing dates in Table 2.
The dates of signing different treaties suggests that the initiative for the DTAAs may not always have
come from India in the early years. Greece being a major shipping nation would benefit from a treaty
that gave the right to tax shipping income to the residence country – which the India-Greece treaty
does. The next five treaties, with Egypt, Tanzania, Libya, Zambia and Sri Lanka, signed by a
protectionist, high tax India, seem to offer no clear advantage to it, given limited cross-border factor
flows. The seventh treaty, with Mauritius in 1982, has turned out to be a major source of revenue loss
for India as discussed below. Treaties with major source countries for investment and technology for
India or labour and capital from India (and two low tax countries) were signed mainly in the early
1990s. After 2000 India's treaties appear to once again be with countries with which it has limited
economic relations. A key policy issue is if India really requires all these tax treaties. The previous
discussion suggests that the economic rationale for treaties (except for administrative information
sharing) is limited except where productive factor flows respond elastically to tax treaty rights
allocations and tax rates.
Table 2: India's Comprehensive DTAA Partners and Year of Signing the DTAA
(numbered from first DTAA signed to most recent)
Country Year signed Country Year signed Country Year signed
Developed Countries Asian Developing Countries 5. Zambia 5/6/1981
4
1. Greece 11/2/1965 6. Sri Lanka 27/1/1982 10. Kenya 12/4/1985
8. Finland 10/6/1983 7. Mauritius 24/8/1982 24. Brazil 11/3/1992
13. New
Zealand 3/12/1986 9. Syria 6/2/1984 43. Turkey 1/2/1997
14. Norway 31/12/1986 11.Thailand 13/3/1986 49. South Africa 28/11/1997
18. Netherlands 21/1/1989 13. Korea 1/8/1986 53. Namibia 22/1/1999
55. Trinidad &
19. Denmark 13/6/1989 16. Indonesia 19/12/1987 Tobago 13/10/1999
4
21. Japan 29/12/1989 17. Nepal 1/11/1988 58. Morocco 20/2/2000
4
22. USA 18/12/1990 25. Bangladesh 27/5/1992 65. Sudan 15/4/2004
23. Australia 30/12/1991 26. UAE 22/9/1993 66. Uganda 27/8/2004
27. UK 26/10/1993 29. Philippines 21/3/1994 73. Mexico 10/9/2007
32. France 1/8/1994 30. Singapore 27/5/1994 76. Botswana 20/1/2008
33. Cyprus 21/12/1994 32. China 21/11/1994 Ex Soviet Bloc Countries
34. Switzerland 29/12/1994 35. Vietnam 2/2/1995 15. Romania 14/11/1987
35. Spain 12/1/1995 40. Mongolia 29/3/1996 20. Poland 26/10/1989
37. Malta 8/2/1995 41. Israel 15/5/1996 28. Uzbekistan 25/1/1994
39. Italy 23/11/1995 45. Oman 3/6/1997 38. Bulgaria 23/6/1995
46.
42. Germany 26/10/1996 56. Jordan 16/10/1999 Turkmenistan 7/7/1997
44. Canada 6/5/1997 57. Qatar 15/1/2000 48. Kazakhstan 2/10/1997
47. Belgium 1/10/1997 64. Malaysia 14/8/2003 51. Russia 11/4/1998
70. Saudi
50. Sweden 25/12/1997 Arabia 1/11/2006 52. Belarus 17/7/1998
54. Czech
59. Portugal 20/4/2000 72. Kuwait 17/10/2007 Republic 27/9/1999
60. Kyrgyz
61. Austria 5/9/2001 74. Hong Kong 2/11/2007 Republic 10/1/2001
63. Ireland 26/12/2001 Other Developing Countries 62. Ukraine 31/10/2001
71. Luxembourg 25/4/2007 2. UAR (Egypt) 20/2/1969 67. Armenia 9/9/2004
75. Iceland 21/12/2007 3. Tanzania 5/9/1979 68. Slovenia 17/2/2005
4. Libya 2/3/1981 69. Hungary 4/3/2005
77. Serbia 23/9/2008
Notes:
1. Information for three jurisdictions (Luxembourg, Hong Kong and Mexico, given in italics) has been taken from
newspaper reports – they are not listed in the Ministry of Finance, Government of India website. Of these Hong
Kong is a "specified territory" and not a sovereign nation.
2. According to the Ministry of Finance, Government of India website, treaties with Sierra Leone, The Gambia,
Nigeria, and Gold Coast (now Ghana) have lapsed or been terminated.
3. Comprehensive or information exchange treaties are reported to be in the negotiation stage with Myanmar and
nine "specified territories" including Bermuda, The British Virgin Islands, The Cayman Islands, Gibraltar,
Guernsey, The Isle of Man, Jersey, The Netherlands Antilles and Macau. (See Tax Treaty Analysis, 2010, April
13).
4. As of November 13, 2005 India also has a multilateral treaty with SAARC countries, " SAARC Limited
Multilateral Agreement on Avoidance of Double Taxation and Mutual Administrative Assistance in Tax Matters"
with Bangladesh, Bhutan, the Maldives, Nepal, Pakistan and Sri Lanka. However, the treaty only contains articles
relating to payments to (a) professors, teachers and research scholars, and (b) students, besides articles relating
to tax administration including mutual agreement, exchange of information, service of documents and collection
assistance. There are also novel articles relating to training and sharing of tax policy. The impact on earlier
DTAAs with Sri Lanka, Nepal and Bangladesh requires clarification.
Source: Government of India, Ministry of Finance (no date), Department of Revenue, Income Tax
Department, International Taxation (DTAA Comprehensive Agreements – with respect to taxes on
income) available at: http://law.incometaxindia.gov.in/TaxmannDit/IntTax/Dtaa.aspx accessed May 25,
2010.
The typical allocation of rights to tax in India's DTAAs follow the "existing tax consensus" discussed
earlier: The source country has residual rights after withholding taxes to tax active income while the
residence country has residual rights over passive income. Table 3 provides an overview of allocation
55
of taxing rights obtaining in most (but not all) of India's DTAAs. . This is supplemented by additional
information in Tables 4 through 6. In particular, for business income, source countries have only the
right to tax permanent establishments defined largely as in the UN Model Convention. Besides this
allocation of bases, almost all Indian treaties provide for double tax relief via foreign tax credits.
Sportsmen (source countries can levy withholding tax), students and teachers merit special mention
(taxing rights, if any, are with the country of prior residence in both cases) in most Indian tax treaties.
Table 3: "Typical" rights to tax non-residents in India's DTAAs for different types of income
or income of specified entities
Sl Nature of Income or other Source country Residence Remarks
receipt taxing rights country
taxing
rights
1 Income From Immovable Yes No Withholding rates are prescribed in
Property most cases in the (Indian) Income
Tax Act, 1961.
2 Business Profits Only profits of a Yes Double Taxation Relief (DTR) given
Permanent in residence for source tax on the
Establishment PE.
(PE) (if any) in Withholding rates are prescribed in
source most cases in the (Indian) Income
Tax Act, 1961.
3 Profits, etc from Shipping and On profits earned Yes Not present as a separate article in
Inland Waterways in source all DTAAs
4 Profits etc. from Transport & Air No Yes
Transport
5 Profits of Associated Included in profits No Relief to be allowed in residence for
Enterprises of source source tax
associate
6 Dividends Withholding tax Yes DTR to be allowed in residence for
on source source tax.
dividend at rate Usually higher withholding rates are
specified prescribed in the (Indian) Income
Tax Act, 1961. The DTAA rate
applies if specified.
6a Dividends received by Apportioned as Yes DTR to be allowed in residence for
residence entity from PE in with business source tax.
source or entity with fixed place profits or income Usually higher withholding rates are
of business, etc. in source from independent prescribed in the (Indian) Income
personal services Tax Act, 1961. The DTAA rate
as appropriate applies if specified.
55
Allocation of taxing rights as also a listing of withholding tax rates in DTAAs can also be found on the
Income Tax Department website. See Table 6 below which is based on information in the website.

taxing
rights
7 Interest Withholding tax Yes DTR to be allowed in residence for
interest at rate Usually higher withholding rates are
(b) Interest Tax Act, 1961. The DTAA rate
received by PE applies if specified.
taxable in source
8 Royalties (and technical fees) Withholding tax Yes DTR to be allowed in residence for
royalties at rate Usually higher withholding rates are
(b) Royalties Tax Act, 1961. The DTAA rate
received by PE applies if specified.
taxable in source
9 Capital Gains (a) On source On gains Withholding rates are prescribed in
immoveable from the (Indian) Income Tax Act, 1961.
property gains moveable Withholding can be waived if
(b) On gains from property requested and merited.
moveable and shares Residence country taxing rights of
property and in some gains from share sales are a major
shares in some cases concern of India in relation to its
cases DTAAs with Mauritius, Singapore,
UAE and Cyprus.
10 Income from Independent Income of PE or Yes DTR to be allowed in residence for
Personal Services entity with fixed source tax
place of Withholding rates are prescribed in
business, etc. in most cases in the (Indian) Income
source Tax Act, 1961.
apportioned
11 Income from Dependent If stay at least at If stay is DTR to be allowed in residence for
Personal Services/Income from or above below source tax.
employment prescribed prescribed Withholding rates are prescribed in
minimum minimum most cases in the (Indian) Income
Tax Act, 1961.
12 Directors‟ Fees, and Yes No
Remuneration Of Top-Level
Managerial Officials
13 Income of Artistes and Yes No Withholding rates are prescribed in
Sportsmen the (Indian) Income Tax Act, 1961.
14 Pensions No Yes
15 Remuneration and Pensions for Yes for source Yes for
Government Service nationals residence
nationals
16 Payments to Students, (a) Not usually (a) Exempt
Trainees, etc mentioned if for
source is not specified
place of study duration if
(b) Taxable if place of
source coincides study/resid
with residence ence is not
after a period source
(b) Taxable
if source
coincides
with
residence
after a
period

taxing
rights
17 Payment to Professors, Yes, if duration is Yes, if
Teachers and Researchers at least at or duration is
above specified below
minimum specified
minimum.
18 Other Income No Yes Some DTAAs (e.g. Singapore) allow

double taxation
19 Capital Yes (in country of No Present in few DTAAs and not
income source) uniform
Other Provisions
20 Elimination of Double Taxation No Yes Credit method (deduction of source
taxes from residence taxes) in most
DTAAs
21 Mutual Agreement Procedure NA NA Present in all India DTAAs
22 Exchange of Information or NA NA Present in most India DTAAs
Document
23 Collection Assistance NA NA Absent in 70% of India's DTAAs
especially those signed in earlier
years
Source: Based on author's analysis of DTAA's available in Government of India, Ministry of Finance (no date),
Department of Revenue, Income Tax Department, International Taxation (DTAA Comprehensive Agreements –
with respect to taxes on income) available at: http://law.incometaxindia.gov.in/TaxmannDit/IntTax/Dtaa.aspx
accessed May 25, 2010.
India does not have articles covering assistance in tax collection in DTAAs with any of its major
economic partners, even though such articles, along with exchange of information agreements, are
possible the most important benefit from DTAAs. Table 4 suggests that this could be because the
treaties were signed before such assistance articles became common. If so, then this may be an area
requiring treaty renegotiation or ratification of multilateral conventions. Other articles not covered in
most Indian treaties are taxes on capital (not income from capital). This is consistent with capital and
wealth taxes increasingly falling out of favour globally. Model convention provisions are constantly
under revision in response to new forms of economic activity. For example OECD (2010) seeks to
revise the OECD Convention and its applicability by addressing the incomes of three types of entities
or transactions of growing importance. These are Collective Investment Vehicles, state-owned
entities, including Sovereign Wealth Funds and Common (cross-border or borderless)
Telecommunication Transactions. These are missing from all of India's DTAAs. Consequently several
treaties may require to be further augmented.
Table 4: Articles in the OECD/UN Model Conventions seldom found in India's DTAAs
(figures are DTAA article numbers)
Taxation of Capital Assistance in the Territorial extension

(OECD - 1965: Art 22 collection of taxes (OECD – 1965: Art 29
Date of UN Art 22) (OECD – 1965: Art 27 UN: NA)
treaty UN: NA)
Sri Lanka 27/1/1982 23
Finland 10/6/1983 23
Norway 31/12/1986 24 29
Romania 14/11/1987 29a
Netherlands 21/1/1989 22 28
Denmark 13/6/1989 22 27 29
Poland 26/10/1989 28
Bangladesh 7/5/1992 29 a
UAE 22/9/1993 23
Taxation of Capital Assistance in the Territorial extension

(OECD - 1965: Art 22 collection of taxes (OECD – 1965: Art 29
Date of UN Art 22) (OECD – 1965: Art 27 UN: NA)
treaty UN: NA)
Uzbekistan 25/1/1994 24
France 1/8/1994 24
Cyprus 21/12/1994 24
Spain 12/1/1995 24
Mongolia 29/3/1996 23
Israel 15/5/1996 23
Germany 26/10/1996 22
Canada 6/5/1997 22
Turkmenistan 7/7/1997 23 28
Belgium 1/10/1997 27
Kazakhastan 2/10/1997 23 28
South Africa 28/11/1997 26b
Sweden 25/12/1997 23 28
Belarus 17/7/1998 23 28
Czech Republic 27/9/1999 23 28
Trinidad & Tobago 13/10/1999 28
Jordan 16/10/1999 27
Qatar 15/1/2000 27c
Morocco 20/2/2000 27
Portuguese Republic 30/4/2000 27c
Kyrgyz Republic 10/1/2001 27
Ukraine 31/10/2001 23 28
Sudan 15/4/2004 27
Uganda 27/8/2004 27
Armenia 9/9/2004 27
Iceland 21/12/2007 28
Serbia 23/9/2008 24
Botswana 1/4/2009 28
Notes:
1. Treaties are listed by date of signing.
a: Exact article title: "Assistance in Collection";
b:Exact article title: "Assistance in Recovery".
c. Exact article title: "Collection Assistance"
Source: Based on own analysis of DTAA's available in Government of India, Ministry of Finance (no date),
Department of Revenue, Income Tax Department, International Taxation (DTAA Comprehensive
Agreements – with respect to taxes on income) available at:
http://law.incometaxindia.gov.in/TaxmannDit/IntTax/Dtaa.aspx accessed May 25, 2010.
On the other hand, some Indian DTAAs have articles which are not present in model conventions
(Table 5). The most widespread of these are articles pertaining to payments to professors, teachers
and researchers mentioned below. Limitation of benefits clauses, a key anti-abuse provision along
with beneficial ownership and control tests are, however, present in 7 Indian treaties. Renegotiation to
add these to more treaties is on the current agenda of Indian policy makers. 56
56
See ENS Economic Bureau (2009, Nov 11).
Table 5: Articles not in OECD/UN Model Conventions present in Indian DTAAs

Sl Article Number of Countries Article number and exact title
DTAAs whose
DTAAs with
India have the
Article
1 DTAAs WITHOUT 9 Belarus
article(s) about Canada
Payments to Professors Denmark
and/or Teachers and or Finland
Researchers/Research Germany
Scholars Israel
Namibia
Oman
Turkey
2 Limitation of Benefits 7 Armenia Art 28
Iceland Art 24
Kuwait Art 27
Namibia Art 24:
UAE Art 29
Singapore Art 24: Limitation of relief
USA Art 24
3 Source of Income 1 Australia Article XXIII
Taxable in a state
deemed to be from that
State
4 Technical Fees 11 Cyprus Art 13
Israel Art 13: Fees for technical Services
Kenya Art 15: Management & professional fees
Malaysia Art 13: Fees for technical services
Malta Art 13
Namibia Art 14: Fees for technical Services
Oman Art 14
Tanzania Art 15: Management fees
Uzbekistan Art 13
Vietnam Art 13
Zambia Art 14: Management and consultancy fees
5 Other Articles 13 Bangladesh Art 23: Income Of government and institutions
Canada Art 28: Miscellaneous Rules
Italy Art 29: Refunds
Kuwait Art 28: Miscellaneous Rules
Libya Art 3: Tax Home
Malta Art 14: Alienation Of Property
Norway Art 23: Offshore Activities
Romania Art 13: Commission
Saudi Arabia Art 26: Other Provisions
Singapore Art 22: Income Of Government
UAE Art 24: Income Of Government & Institutions
UK Art 25: Partnerships
USA Art 14: Permanent Establishment Tax
Source: Based on author's analysis of DTAA's available in Government of India, Ministry of Finance (no date),
Department of Revenue, Income Tax Department, International Taxation (DTAA Comprehensive Agreements –
with respect to taxes on income) available at: http://law.incometaxindia.gov.in/TaxmannDit/IntTax/Dtaa.aspx
Table 6 lists rates of withholding taxes in most Indian DTAAs and also rates applicable in the absence
of a DTAA.57 It should be noted that most treaties provide for taxpayers to elect voluntary to take
advantage of treaty provisions or not. So if non-treaty withholding rates are more favourable, they can
57
Unfortunately, information on capital gains withholding taxes is not readily available in collected form and
has to be compiled treaty by treaty. They are not mentioned in several key treaties. In particular the right to tax
gains from financial transactions is with the residence country in key treaties like those with Mauritius, Cyprus
and Switzerland.
elect not to have taxes withheld at the higher rate. Even without further information about rates of tax
on foreign source income in the partner countries, variation across countries of withholding rates seen
in the table suggests that scope for treaty shopping exists for all four types of income. This suggests
the need either for widespread revision of withholding tax rates to bring about greater uniformity, or
more widespread treaty revision to introduce effective beneficial ownership clauses.
Table 6: Withholding tax rates in selected Indian DTAAs (as in 2010-11)
(All figures are tax rates in percent)
Dividend [not Interest Royalty Fees for
covered by section technical
115-O] service
With No Tax Treaty 20 20 10 10
(u/s 115A)
Armenia 10 10 10 10
Australia 15 15 [N2] [N2]
Austria 10 10 10 10
Bangladesh 15 (10/10) [N5] 10 [N1] 10
Belarus 15 (10/25) [N5] 10 [N1] 15 15
Belgium 15 15, 10 [N6] 10 10
Botswana 10 (7.5/25) [N5] 10 10 10
Brazil 15 15 [N1] 15 (trademark No separate
use: 25) provision
Bulgaria 15 15 [N1] 20, 15 [N9] 20
Canada 25 (15/10) [N5] 15 [N1] 10-20 10-20
China 10 10 [N1] 10 10
Cyprus 15 (10/10) [N5] 10 [N1] 15 10
Czeck Republic 10 10 [N1] 10 10
Denmark 20 (15/25) [N5] 15, 10 [N1], [N6] 20 20
Germany 10 10 [N1] 10 10
Finland 15 10 [N1] 15, 10 [N10] As for royalty
France 10 10 10 10
Greece 20 20 30 No separate
provision
Hungary 10 10 10 10
Indonesia 15 (10/25) [N5] 10 [N1] 15 No separate
provision
Iceland 10 10 10 10
Ireland 10-15 10 [N1] 10 10
Israel 10 10 [N1] 10 10
Italy 20 (15/10) [N5] 15 [N1] 20 20
Japan 10 10 10 10
Jordan 10 10 [N1] 20 20
Kazakstan 10 10 [N1] 10 10
Kenya 15 15 [N1] 20 17.50
Korea 20 (15/20) [N5] 15, 10 [N1], [N6] 15 15
Kuwait 10 10 10 10
Kyrgyz Republic 10 10 15 15
Libyan Arab 20 20 30 No separate
Jamahiriya provision
Malaysia 10 10 10 10
Malta 15 (10/25) [N5] 10 [N1] 15 10
Mangolia 15 15 [N1] 15 25
Mauritius 15 (5/10) [N5] 20 (Nil in some 15 No separate
cases) [N1] provision
Morocco 10 10 [N1] 10 10
Namibia 10 10 [N1] 10 10
Nepal 20 (10/10) [N5] 15,10 [N1], [N6] 15
Netherlands 10 10 [N1] 10 10
Dividend [not Interest Royalty Fees for

covered by section technical
115-O] service
New Zealand 15 10 [N1] 10 10
Norway 20 (15/25) [N5] 15 [N1] 10 10
Oman 12.5 (10/10) [N5] 10 [N1] 15 15
Philippines 20 (15/10) [N5] 15, 10 [N6] 15[N11] No separate
provision
Poland 15 15 [N1] 22.50 22.50
Portuguese 10 10 10 10
Republic
Quatar 5-10 10 [N1] 10 10
Romania 20 (15/25) [N5] 15 [N1] 22.50 22.50
Russian Federation 10 10 [N1] 10 10
Saudi Arabia 5 10 10
Serbia and 15 (5/25) [N5] 10 10 10
Montenergro
Singapore 15 (10/25) [N5] 15, 10 [N6] 10 10
Slovenia 5-15 10 10 10
South Africa 10 10 [N1] 10 10
Spain 15 15 [N1] 20, 10 [N3] 20, 10 [N3]
Sri Lanka 15 10 [N1] 10 10
Sudan 10 10 10 No separate
provision
Sweden 10 10 [N1] 10 10
Swiss 10 10 [N4] 10 10
Syria [N7] Nil 7.5 [N1] 10 No separate
provision
Tanzania 15 (10/ 10 for at least 6 12.50 20 No separate
months prior to the provision
dividend date) [N5]
Thailand 20 (15/10 and 20, 10 [N6] 15 No separate
company is an provision
industrial company)
[N5]
Trinidad and 10 10 [N1] 10 10
Tobago
Turkey 15 15, 10 [N1], [N6] 15 15
Turkmenistan 10 10 [N1] 10 10
Uganda 10 10 10 10
Ukraine 10-15 10 [N1] 10 10
United Arab 15 (5/25) [N5] 12.5, 5 [N6] 10 No separate
Emirates provision
United Arab 10 20 30 No separate
Republic [N8] provision
United Kingdom 15 15, 10 [N1], [N6] [N2] [N2]
United States 20 (15/10) [N5] 15, 10 [N6] [N2] [N2]
Uzbekistan 15 15 [N1] 15 15
Vietnam 10 10 [N1] 10 10
Zambia 15 (5/25 for at least 6 10 [N1] 10 No separate
months prior to the provision
dividend date) [N5]
Notes:
N1: Dividend/interest earned by the Govt and institutions like the Reserve Bank of India exempt from
taxation in the source country.
N2: Royalties and fees for technical services are taxable in the source country at (a) 10% for rental of
equipment and services provided along with know-how and technical services; (b) in any other case
(i) during the first five years of the agreement: 15% if the payer is the Government or specified
organisation; and 20% otherwise; and (ii) in subsequent years, 15% in all cases.
Income of Government and certain institutions will be exempt from taxation in the country of source.
N3: Royalties and fees for technical services are taxable in the source country at: (a) 10% for
royalties relating to use of, or the right to use, industrial, commercial or scientific equipment; (b) 20%
for fees for technical services and other royalties.
N4: 10% of the gross interest on loans made or guaranteed by a bank or other financial institution
carrying on bona fide banking or financing business or by an enterprise which holds directly or
indirectly at least 20% of the capital.
N5: (A/B) means rate A% applies if at least B% of company shares is owned by the recipient.
N6: The lower rate applies if the recipient is a bank (and, in some DTAAs an insurance company or
specified financial institution).
N7: In the DTAA with Syria, the residence country has the right to tax dividends.
N8: In the UAR (i.e. Egypt) DTAA the source country has the right to tax all four income types.
N9: The lower rate applies to iterary, artistic, scientific works other than films or tapes used for radio or
television broadcasting.
N10: The lower rate is for equipment royalty. Rates were 15%-20% during 1997-2001.
N11: If payable under a collaboration agreement approved by the Govt. of India.
Source: Adapted from Government of India, Income Tax Department website
http://law.incometaxindia.gov.in/DIT/File_opener.aspx?fn=http://law.incometaxindia.gov.in/Directtaxla
ws/dtrr2005/R10.htm accessed June 25, 2010
5. The impact of India's DTAAs

To evaluate the real economic impact of DTAAs information is needed on first, their impact on cross
border income generating flows, including portfolio flows, FDI, labour, technology and know-how and
cultural, education and related activity. This essentially requires the sensitivity of these activity flows
to rates of return to be estimated. One key counterfactual is estimation of the quantum of flows that
would take place in the absence of DTAAs so that the net impact on flows of DTAAs can be
assessed.58 Second, the impact, in turn, of enhanced or decreased FDI flows on national income and
government revenue needs to be assessed. Unfortunately, no adequate studies are available except
possibly of FDI, precluding a fully satisfactory assessment of the overall impact of DTAAs. A recent
India specific study of the impact of FDI on economic growth, Chakraborty and Nunnenkamp (2006),
find the effect to be mixed having clearly positive effects only in the manufacturing sector though FDI
flows mainly to the services sector. While acknowledging the limited scope of this study, it further
reinforces scepticism about the value of DTAAs to the economy. 59
In the absence of clear evidence, inferences from the theoretical discussion must be given due
weight. To recap, even if tax avoidance does not take place (except possibly through round-tripping)
(a) DTAAs with countries from which India receives inward factor flows are unlikely to be beneficial to
India. (b) On the other hand, DTAAs with destinations for Indian outward factor flows may be
beneficial to India. (c) With two way factor flows between treaty partners, outward factor flows from
India will largely determine if the DTAA benefits India or not. Second, leaving aside DTAAs, it is
important to note that benefits provided to inward flows can, in any case, be achieved through
unilateral actions (e.g. tax holidays) without the need for signing DTAAs, though DTAAs allow for
discriminatory treatment between different countries. Third, DTAAs do facilitate tax avoidance, which
needs to be taken into account in assessing their benefits.
In fact, the data available leaves little doubt that India's DTAAs, whatever their impact on factor flows,
cause great loss of fiscal revenue due to FDI being routed through low tax countries. This is so even if
reliable estimates of the quantum of revenue loss are not available. This is a matter about which
58
Some authors suggest that rates of return variations caused by income tax regime changes are unimportant
compared to changes in indirect tax rates and such things as the quality of infrastructure, manpower available,
logistics and proximity to markets or suppliers. See Figueroa (1992) and also Desai (2003). If true, then
revenue effects of DTAAs should be the main concern in their assessment. However, opposing evidence is in
and Gastanaga, Nugent and Pashamova (1998) and Desai, Foley and Hines (1992).
59
A review of studies of both determinants and effects of FDI in general and in the Indian context is in
Chatterjee (2009).
policy makers in India have shown great concern and which has received (and continues to receive)
much news coverage in India during the past 5 years.
Evidence of this is can be seen by comparing Tables 7 and 8 with Table 9. Tables 7 and 8 present
official statistics relating to India's inbound and outbound FDI by origin/destination country. The high
inbound FDI shares of Singapore, Cyprus, the UAE and particularly Mauritius in Table 7 are striking.
These are all low tax rate countries which have DTAAs with India. Of them only Singapore is likely to
be, to a greater or lesser extent, a source of genuine FDI and not just a route for avoidance of Indian
taxes. In particular, the absence of financial capital gains taxes in Mauritius, Cyprus and Singapore,
reported in numerous press stories, combined in Mauritius and Cyprus with residence taxation of
these gains under their DTAAs with India make these countries ideal bases from which to invest in
India and avoid capital gains taxation.60,61 A second benefit, that has received less coverage being
more limited and less easily detected, is low rates of taxation of business profits, interest and other
business income flows, making them ideal partner countries for transfer pricing by multinationals
operating in both jurisdictions and also for sourcing of debt for thinly capitalised Indian companies.
Round-tripping of funds from India is also likely to be reflected in the figures in Table 7 as asserted by
Rajan and Gopalan (2010). Unfortunately, the importance of round-tripping relative to genuine FDI is
not known.
Table 7: Share Of Top Investing Countries in FDI Equity Inflows 2006-07 to 2009-10
Rupees crore (US$ in million)
Cumulative %age of
Inflows -- total rupee
Country 2007-08 2008-09 2009-10 Apr '00 - Nov. '09 inflows
Mauritius 44,483 (11,096) 50,794 (11,208) 40,421 (8,377) 201,694 (45,241) 44 %
Singapore 12,319 (3,073) 15,727 (3,454) 7,579 (1,576) 41,431 (9,387) 9%
U.S.A. 4,377 (1,089) 8,002 (1,802) 7,235 (1,510) 35,194 (7,845) 8%
U.K. 4,690 (1,176) 3,840 (864) 1,775 (370) 24,679 (5,596) 5%
Netherlands 2,780 (695) 3,922 (883) 3,328 (692) 19,180 (4,282) 4%
Japan 3,336(815) 1,889 (405) 4,979 (1,034) 16,204 (3,565) 4%
Cyprus 3,385 (834) 5,983 (1,287) 6,021 (1,255) 16,070 (3,527) 3%
Germany 2,075 (514) 2,750 (629) 2,309 (481) 11,798 (2,654) 3%
U.A.E. 1,039 (258) 1,133 (257) 2,678 (556) 6,684 (1,476) 1%
France 583 (145) 2,098 (467) 1,141 (238) 6,622 (1,466) 1%
Total FDI 98,664 122,919 93,354
Inflows* (24,579) (27,329) (19,379) 486,480 (109,219) 100 %
Notes:
(i) *Includes inflows under NRI Schemes of RBI, stock swapped and advances pending for issue of
shares.
(ii) Cumulative country-wise FDI inflows (from April 2000 to November 2009) – Annex-„A‟.
(iii) %age worked out in rupees terms & FDI inflows received through FIPB/SIA+ RBI‟s Automatic
Route+ acquisition of existing shares only.
Ministry of Commerce and Industry, Department of Industrial Policy and Promotion
http://www.dipp.nic.in/fdi_statistics/india_FDI_November2009.pdf accessed February 6, 2010.
60
A sample of recent writings, this from a tax analysis website "Taxguru":
"… in some cases, these treaties are misused to avoid taxes, leading to a loss of revenue to a country’s
exchequer. As per some available estimates, India loses more than $600 million every year in
revenues on account of the DTAA with Mauritius. … Both India-Mauritius and India-Cyprus tax
treaties provide that capital gains arising in India from the sale of securities can only be taxed in
Mauritius and Cyprus. This leads to zero taxation as there is no capital gains tax in these countries."
(Taxguru, 2009, April 7)
61
The recent draft Direct taxes Code Bill has sought to resolve a related source of litigation, in relation to the
India-Mauritius treaty, characterisation of income from share transactions of foreign institutional investors as
business income or capital gains, by deeming all such income as capital gains.
The same four countries figure among the top destinations for outbound FDI along with the
Netherlands, the UK and the US in Table 8. This suggests that the treaty network of these countries
with other countries targeted by Indian investors also makes them useful bases for special entities
through which Indian residents route foreign investments.
Table 8: Direction of India’s Outward FDI (Cleared Proposals)
(US $ million)
Country 2007-08 2008-09
January-March April-March January-March April-March
Singapore 1,194.70 8,350.50 1,300.80 4,255.00
Netherlands 295.7 5,341.10 300.4 3,530.60
Cyprus 429.4 661.4 2,358.40 2,629.00
UK 224.2 543.4 78.4 2,344.20
US 224.2 1,052.90 238.7 2,302.00
Mauritius 603.6 1,478.60 425.1 2,049.10
UAE 424.8 617.2 162.9 908.7
Switzerland 18 478.3 44.6 343.2
Australia 18.1 38.2 168.9 302.8
Denmark – 497.6 – 278.4
Source: Government of India, Reserve Bank of India (2009, July)
Though data on ultimate FDI sources and destinations are hard to come by, Rajan and Gopalan
(2010)62 compare official FDI data with mergers and acquisition (M&A) data compiled by private
sector firms. The M&A data are first, partial and incomplete and second, not necessarily for exactly
comparable time periods as official FDI data. Third, they reflect only a part of FDI. Nevertheless, the
comparison of FDI data in Tables 7 and 8 and Rajan and Gopalan's information in Table 9 is striking:
Of the major Indian sources and destinations of M&A funds only Singapore, the UK, and the US are
common to the list.63 While further evidence gathering and careful analysis is clearly needed, even at
this stage there can be little doubt that tax avoidance on this scale (not to mention round-tripping)
implies that India's DTAAs cause it great revenue loss.
Table 9: Summary of Information in Rajan and Gopalan (2010)
M&As by global firms in India 35%: US (35%)

16%: UK (mainly via Mauritius)
27%: Netherlands
18%: East Asia (Japan, Singapore, Malaysia and Hong Kong),
FDI into India 18%: US + UK
15%: Netherlands, France, Germany, etc
10%: Singapore, Japan, etc
M&As by Indian firms 34%: Canada
globally (2000-07) 24%: US
16%: "Resources rich countries" (Russia, Egypt, Australia and South
Africa)
17%: UK and Europe.
62
See also Gopalan and Rajan, 2010.
63
Of the major destinations of M&A activity by Indian firms, these authors point to certain genuine advantages
of countries like the Netherlands and Singapore besides good DTAA networks and low tax rates on their
domestic entities. These are the use of English, good human capital availability and excellent logistics and
air/sea connections. Unfortunately, there is no study that quantitatively studies the relative importance of
these "real" factors compared to the tax regime.
FDI from India 2002-08 6%: UK

6%: US
22%: Singapore
15%: Netherlands
25%: Mauritius and other OFCs
Notes: OFC: Offshore financial centre, M&A: Mergers and acquisitions
Source details: Compiled by the authors: M&A data from the Zephyr database and The Economist,
May 29, 2009; FDI data from Government of India, Ministry of Commerce and Industry,
Department of Industrial Policy and Promotion, http://siadipp.nic.in/publicat/newslttr/apr2008/index.htm and
Ministry of Finance, Department of Economic Affairs,
http://finmin.nic.in/the_ministry/dept_eco_affairs/dea.html
The limited work reviewed in this section provides some information on FDI flows. No information is
available on other types of cross-border flows and incomes from them. In particular the impact of
DTAAs on remittances and other cross-border income flows involving the large and growing body of
expatriate Indian professionals is still to be studied.
6. DTAA policy for India: A suggestion

Given the complex structure and sophistication of the global fiscal commons, India's participation in
formal and informal agreements and multilateral fora such as the OECD's Global Tax Forum is clearly
important and to be commended.
Regarding DTAA's the analysis in this paper suggests certain measures that should be part of India's
current strategy. Most basically the main purpose of tax treaties needs to be reconsidered. Treaties
should be viewed not so much as means of providing relief from double taxation but as platforms for
strengthening information exchange and administrative cooperation to prevent tax evasion.
Nevertheless, for a country from which India receives FDI and other factor flows, a DTAA (as opposed
to an administrative and information sharing tax treaty) is unnecessary unless there are non-economic
reasons to accord discriminatory treatment to that country. If a DTAA is persisted with, it should not
provide only for residence country taxes but should also provide for source country tax withholding.
For a country that is primarily a destination for Indian factor flows India's concern is with foreign tax
credits. Here India can rely on competition for FDI and other inflows (or accepted convention) to keep
foreign withholding taxes at a reasonable level. If this is felt to be insufficient in particular cases, then
DTAA renegotiation to put a cap on double tax relief, implying double taxation to some extent, should
be considered.
Having regard to treaty shopping, India should attempt to renegotiate DTAAs that specify low
withholding rates, so that they are raised to make them uniform or nearly so on similar types of
income with other DTAAs. In fact, to curb round tripping, concessional rates of tax on non-resident
income should either be removed or accompanied by effective beneficial ownership clauses.
DTAAs that are rarely invoked currently should also be reviewed, particularly with respect to
apportionment of taxing rights, definitions of key terms, and particularly withholding tax rates, to
ensure that they cannot become future targets of treaty shoppers. Such a review should also take
account of the non-resident tax regime and rules for setting up resident entities in that country.
It is also of great importance for India to take advantage of the current global move to greater
transparency and openness by strengthening information sharing and administrative assistance
provisions in its DTAAs.64
64
On this issue the views of Jeffrey Owens, Director of the OECD's fiscal Affairs Department are of interest:
See Ranganathan, Chandra (2009, November 30), Swiss should treat India on par with US, France on DTAAs:
OECD director.
As a final point, researchers should be encouraged to try, with the cooperation of tax authorities, to fill
the glaring data gaps with respect to different types of cross border flows, their growth impact, and
their impact on DTAAs. 65
To meet these ends the following short term fiscal strategy is suggested:
1. Conduct an internal (sample based) review of DTAAs to assess which ones are used and if
their use is mainly in relation to withholding tax rates on Indian source income, or for foreign
tax credits on foreign source income of residents, for both, or for other reasons. The types of
income for which DTAA provisions are invoked should also be recorded. Particular attention
should be given to classifying treaty partners according to whether they are sources of factor
flows to India, the reverse or both. This should allow a classification of treaties according to
whether they are causing revenue loss or gain or are not being used. It should also help
assess which types of incomes benefit most from DTAAs.
2. Assess if there is scope to renegotiate DTAAs that are causing large scale revenue losses
through one or more of the following measures
a. Revision of withholding tax rates to stop treaty shopping.
b. In particular, ensuring that there is provision allowing for purely residence taxation of
a source of income: source withholding taxes to protect revenue to some extent
should invariably be present.
c. Introduction of articles or sub-articles relating to beneficial ownership and effective
control as preconditions for an entity being entitled to treaty benefits
d. Strengthen information sharing either via additional DTAA provisions or by becoming
signatories of the OECD initiated "Agreement on Exchange of Information on Tax
Matters" discussed earlier.
3. If not, or if the treaty partner proves uncooperative, terminate the DTAA.66
7. Conclusion
Too little is known by fiscal scholars and practitioners about India's DTAAs and their impact. The
message emerging in this paper is that DTAAs are possibly a suboptimal fiscal policy tool, particularly
with respect to countries from which India receives FDI and other factor flows. They may be of some
use for countries serving as destinations of Indian factor flows if these partner countries are naïve
enough to tolerate fiscal losses or if intangible FDI benefits are felt by them to be significant.
The discussion here attempts to make a beginning in filling the information gap on DTAAs and
identifying areas where more information is needed. It also tries to identify and suggest DTAA policy
for India.
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Economic Analysis of India's

Senior Professor and Head, Economic Research Cell

2. Background: The global fiscal commons and national tax bases

Double tax avoidance agreements or tax treaties

Economically efficient allocation of global commons tax bases and DTAAs

Allocation of tax jurisdictions and the role of DTAAs19

Other functions of DTAAs

The revenue and investment impact of DTAA tax allocations

DTAAs and tax avoidance in the fiscal commons

3. A framework for assessing national benefits of DTAAs

YH = YHH + tHFYHF + [1-tFH]YFH.

GH – G*H = [tHH – μtHF][YHH – Y*HH].

Optimal unilateral policies and potential coordination gains

Measuring gains from a DTAA

4. India's DTAA network53

Sl Nature of Income or other Source country Residence Remarks

Sl Nature of Income or other Source country Residence Remarks

18 Other Income No Yes Some DTAAs (e.g. Singapore) allow

Taxation of Capital Assistance in the Territorial extension

Taxation of Capital Assistance in the Territorial extension

Table 5: Articles not in OECD/UN Model Conventions present in Indian DTAAs

Dividend [not Interest Royalty Fees for

5. The impact of India's DTAAs

M&As by global firms in India 35%: US (35%)

FDI from India 2002-08 6%: UK

6. DTAA policy for India: A suggestion

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GH – GH = [tHH – μtHF][YHH – YHH].