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India-Japan Double Taxation Avoidance Agreement (DTAA)
The Double Taxation Avoidance Agreement (DTAA) between the government of India and the government of Japan, aimed at preventing double taxation and fiscal evasion concerning taxes on income and capital, was initially implemented on 29 December 1989. It has since been amended by various protocols in 1990, 2000, 2006, 2008, and 2016. The DTAA seeks to ensure that the tax relationship between these two countries adheres to international standards.
Applicability
The India-Japan DTAA is designed to cover specific taxes in both countries:
- In Japan, it includes income tax and corporation tax.
- In India, it applies to income tax, including any associated surcharges.
The DTAA also outlines that any similar or identical tax introduced by the contracting states after the signing of the agreement shall also be covered.
Key Takeaways
Here are the crucial elements of the India-Japan DTAA:
- Residential Status: The DTAA provides guidelines for determining an individual’s residency. Generally, it considers an individual to be a resident of the state where they have a permanent home, but other criteria are also considered.
- Withholding Tax: The DTAA specifies a 10% withholding tax rate for dividends, royalties, interests, and fees for technical services. However, it grants exemptions for interests and dividends earned by government institutions. Interests are taxable in the state of residence.
- Capital Gains: Capital gains from immovable property are taxable in the state where the property is located. In the case of movable property, such as shares, capital gains may be taxable in India if derived by a Japanese entity. For all other assets, capital gains earned by a Japanese resident are taxed in the resident state.
- Mutual Agreement Procedure: The DTAA outlines that the competent authorities of the contracting states will determine an individual’s residency by mutual agreement. Furthermore, it provides for the resolution of disputes through mutual decision.
- Exchange of Information: The DTAA ensures the exchange of information related to all types of taxes imposed in either of the contracting states, as considered relevant for tax matters.
- Elimination of Double Taxation: The DTAA specifies the granting of credit in one jurisdiction for taxes paid in the other jurisdiction. An exception is provided to the extent that the tax treaty allows taxation in the other jurisdiction because the income is derived by its residents.
Significance of India-Japan DTAA
The India-Japan DTAA incorporates various provisions and clauses, including the exchange of information, assistance in tax collection, and the mutual agreement procedure. These clauses align with international standards, such as those established by the Organization for Economic Cooperation and Development’s Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting (MLI). The DTAA has contributed to improved bilateral relations between India and Japan, clarifying the provisions and their applicability through numerous court cases.
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To know more about DTAA relations between India and Japan, please download our Guide.
