INDIA – JAPAN DOUBLE TAXATION AVOIDANCE AGREEMENT

The government of India had entered into a Double Taxation Avoidance Agreement (“DTAA”) with the government of Japan for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital which came into force from 29 December, 1989. It was thereafter amended by protocols in 19990, 2000, 2006, 2008 and 2016 and a synthesized text complementing the provisions agreed to in the DTAA has also been issued, in order to bring about changes and bring the DTAA between the contracting states in consonance with the internationally accepted standards.

Applicability

The DTAA applies to the following taxes in the contracting states:

a. In Japan:

• the income-tax ; and
• the corporation tax

b. In India:

• the income-tax including any surcharge thereon.

The DTAA further specifies that any similar or identical tax that may be imposed in the contracting states after signing of this DTAA, shall also be covered under the DTAA.

Key takeaways

1. Residential status: As per the DTAA, the general rule is that the individual is deemed to be a resident of the state where his permanent home is available. Though there are other determinations also for determining the residency of an individual.
2. Withholding tax: The DTAA specifies the withholding tax rate of @10% in respect of dividends, royalties, interests and fees for technical services. However, an exemption has been granted to the interests and dividends earned by government institutions. It further specifies that the interests shall be taxable in the state of residence.
3. Capital gains: According to the DTAA, capital gains on immovable property shall be taxable in the jurisdiction where it is situated. Movable property like shares, forming part of business property of a Japanese entity deriving capital gains upon its sale, may be taxed in India while any property other than shares deriving capital gains upon its sale, may be taxable in the resident state. Any other asset deriving capital gains, earned by resident of Japan on any other asset shall be taxable only in the contracting state in which the transferor is a resident.
4. Mutual agreement procedure: The DTAA specifies that the competent authorities of contracting states shall determine by mutual agreement, the contracting state of which that person shall be deemed to be a resident. Additionally, all disputes arising in relation to any of the provisions of the DTAA, shall be resolved by a mutual decision.
5. Exchange of information: The DTAA provides that information in relation to all types of taxes imposed in either of the contracting states, shall be exchanged between the states as is considered to be relevant for the purpose of tax matters.
6. Methods for elimination of double taxation: The DTAA specifies that while granting credit in one jurisdiction for taxes paid in the other jurisdiction, an exception has been provided to the extent that the provisions of the tax treaty allow taxation to the other jurisdiction because such income is also derived by its resident.

Significance of DTAA between India-Japan

The DTAA between India and Japan includes various clauses and provisions such as the exchange of information, assistance in collection of taxes and mutual agreement procedure, which are also common in the international parlance. With the inclusion of such clauses, the DTAA has been brought in alignment with the international standards as laid down 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). Today, the DTAA has helped in improving the bilateral relations between the contracting countries and the numerous cases filed in the courts have also helped to clarify the stance of the provisions of the DTAA and their applicability.