India-South Korea revised DTAA notified, capital gains to be levied at source

In order to avoid double taxation, India has notified the revised Double Tax Avoidance Agreement (DTAA) with South Korea under which capital gains tax will be levied at the source. Provisions of the new DTAA will have effect in India in respect of income derived in fiscal year beginning from April 1, 2017. The revised DTAA was signed on May 18, 2015 and was notified on September 12, 2016, on completion of procedural requirements by both the countries.

The Central Board of Direct Taxes (CBDT) said that the revised DTAA aims to avoid the burden of double taxation for taxpayers of two countries in order to promote and stimulate flow of investment, technology and services between India and Korea. It will provide tax certainty to the residents of India and Korea. The existing DTAA, which has been in vogue for three decades, provides for residence-based taxation of capital gains on shares, which means taxes were to be paid where the investor was a resident. The revised DTAA provides for source based taxation of capital gains arising from alienation of shares comprising more than 5% of share capital.

In order to promote cross border flow of investments and technology, the revised DTAA provides for reduction in withholding tax rates from 15% to 10% on royalties or fees for technical services and from 15% to 10% on interest income. The treaty also allows investors to invoke Mutual Agreement Procedure (MAP) in transfer pricing disputes as well as apply for bilateral Advance Pricing Agreements (APAs). It provides for exchange of information, including by financial institutions. Information exchanged under the revised DTAA can now be used for other law enforcement purposes with authorization of information supplying country.

CBDT further said that to facilitate movement of goods through shipping between two countries and in accordance with international principle of taxation of shipping income, the revised DTAA provides for exclusive residence-based taxation of shipping income from international traffic. The reworked DTAA inserted new Article for assistance in collection of taxes between tax authorities. It also inserted new Limitation of Benefits Article i.e. anti-abuse provisions to ensure the benefits of the agreement are availed only by the genuine residents of both the countries.