Revised Double Taxation Avoidance Agreement Treaty of India-South Korea

Double taxation avoidance agreement (DTAA) between India and South Korea has been revised and the provisions of the new DTAA will be come to force from 1St of April 2017. The revised DTAA was signed on May 18, 2015, during the visit of Prime Minister Narendra Modi to Seoul and was notified on September 12, 2016.

Essential features of the amendment in Treaty

The treaty with South Korea had provided for residence based taxation of capital gains on transfer of shares. With the revision of the treaty as approved by the Cabinet, the source jurisdiction also gets the right to tax the capital gains on sale of shares comprising more than 5% of the share capital. However, capital gain on sale of shares upto 5% of the share capital continues to be governed by residence based taxation rule.

It provides for reduction in rate of deduction of tax from 15% to 10% on fees for technical services, royalties and interest income which would further promote the trade between both the countries.

The new DTAA also provides the tax payers the facility to apply for mutual agreement procedure in transfer pricing disputes and also provides them the facility to apply for bilateral advance pricing agreements. It also provides for residence-based taxation of shipping income from international traffic.

The revised DTAA provides for limitation of benefits clause, which would restrict the benefits of DTAA only to bonafide parties. It also provides for enlarging the scope of dependent agent permanent establishment in line with India’s policy of source based taxation.

Impact

The change in treaty related to residence based taxation to source based taxation will enable the Indian government to tax capital gains of Korean residents on the sale of shares of Indian companies which consequently will increase the revenue of Indian govt and also prevent treaty shopping.

The reduction of tax deduction rate will boost the flow of investments between the two countries.

The shipping companies are benefitted from residence based taxation for income from international traffic.

Amit Maheshwari, Partner, Ashok Maheshwary & Associates LLP, a top tax firm in India, said that the amendment related to capital gains is interesting and it may have a bearing on the renegotiation for the India-Netherlands and India-Singapore treaty which may come up next for renegotiation.

Shekhar Gupta has been actively blogging for over six years on a myriad number of topics including accounts, finance, insurance, taxation etc. He presently writes for Ashok Maheshwary & Associates and has a proven expertise in Finance & Accounting.