INDIA – MALAYSIA DOUBLE TAXATION AVOIDANCE AGREEMENT

The government of India and the government of Malaysia had signed a Double Taxation Avoidance Agreement (“DTAA”) on 9 May, 2012 for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, which came into force from 26 December, 2012.

Applicability

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

1. In India: the income tax, including any surcharge thereon.
2. In Malaysia:

• the income tax; and
• the Petroleum income tax.

Key takeaways

1. Residency: As per the DTAA, resident means any person who, under the laws of that state, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature and also includes that state and any political subdivision or local authority or a statutory body established under an act of the Parliament or State Legislative Assembly thereof.
2. Income from immovable property: Income derived by a resident of a contracting Sstate from immovable property situated in the other contracting state, may be taxed in that other state. This provision shall apply to income derived from the direct use, letting, or use in any other form of the immovable property.
3. Business profit: The profits of an enterprise of a contracting state shall be taxable only in that state unless the enterprise carries on business in the other contracting state through a permanent establishment situated therein.
4. Dividends: Dividends paid by a company which is a resident of a contracting state to a resident of the other contracting state, may be taxed in that other state.
5. Interest: Interest arising in a contracting state and paid to a resident of the other contracting state, may be taxed in that other state.
6. Royalties: Royalties arising in a state, payable to a resident of the other state may be taxed in that other state.
7. Fees for technical services: Fees for technical services arising in a contracting state which are derived by a resident of the other contracting state may be taxed in that other state.
8. Capital gains: Gains derived by a resident of a state from the alienation of immovable property situated in the other state, may be taxed in that other state.
9. Director’s fees: Directors’ fees and other similar payments derived by a resident of a contracting state in his capacity as a member of the board of directors in a company which is a resident of the other contracting state, may be taxed in that other state.
10. Withholding tax rates: A withholding tax rate of 5% on dividends and 10% on interests, royalty and fees for technical services has been agreed upon in the DTAA. Additionally, an exemption has been granted to interests earned by government institutions.

Inference

When the agreement was written, the government of Malaysia and India had the purpose of avoiding double taxation. It was also drafted with the main aim to prevent tax evasion when it comes to income taxes. When it comes to the credit against the Malaysian tax of the payable tax in another country, the tax paid in India according to the taxation laws by a Malaysian resident with respect to the income from India can have a credit against tax payable in Malaysia. This way, the two countries can freely conduct business with each other without having to worry about double taxation. The DTAA has been incorporated with various other beneficial clauses and provisions like the mutual agreement procedure which specifies that the disputes related to the treaty shall be resolved amicably. Further, it also includes provisions for exchange of information related to taxation with the competent authorities in each country.