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CONVENTIONS ON MUTUAL ADMINISTRATIVE ASSISTANCE IN TAX MATTERS OF THE ORGANISATION FOR EUROPEAN ECONOMIC CO-OPERATION
The Convention on the Organisation for European Economic Co-operation (“OECD”) was signed in Paris on 14 December, 1960 when the Organisation for European Economic Co-operation (OEEC) was formed in 1948 to administer aid under the Marshall Plan for the reconstruction of Europe after World War II.
Thirty eight (38) countries are now party to the Convention, out of which twenty (20) are “founder” members and a further eighteen (18) which subsequently became members.
The OECD was formulated with the main purpose to improve the global economy and promote world trade. It provides an outlet for the governments of different countries to work together to find solutions to common problems.
OECD and Double Taxation Avoidance Agreement
The OECD has long recognised that it is desirable to clarify, standardise, and confirm the fiscal situation of taxpayers engaged in commercial, industrial, financial, or any other activities in other countries through the application by all countries of common solutions to identical cases of double taxation. The OECD Model Tax Convention on Income and on Capital (the OECD Model) provides a means of settling on a uniform basis the most common problems that arise in the field of international jurisdictional double taxation.
The full version of the OECD Model contains the Articles and Commentaries of the OECD Model, non-member economies’ positions, the Recommendation of the OECD Council, the historical notes and the background reports. The OECD Model Tax Convention is published regularly to reflect updates. Under this, it also laid down a model Double Taxation Avoidance Agreement (“DTAA”) which may be followed in the signing of a DTAA by any of the member countries.
Key provisions under the model DTAA
The OECD has developed model tax treaties to help countries negotiate their bilateral tax agreements. Following are the key features of the DTAA agreements:
- Purpose: The primary objective of DTAA is to avoid double taxation on income earned by individuals or companies in two countries.
- Coverage: DTAA covers taxes on income, including personal income tax, corporate income tax, and capital gains tax.
- Residency: A DTAA specifies how residency of an individual or a company is determined for tax purposes. This is important because taxation depends on where a person or a company is resident.
- Taxation of business profits: DTAAs provide clarity on how business profits will be taxed in both countries, and they often give priority to the country in which the business has its permanent establishment.
- Dividends, interest, and royalties: DTAAs usually set a maximum tax rate for dividends, interest, and royalties paid from one country to another. The rate may vary depending on the type of income and the recipient.
- Capital Gains: DTAAs also cover the taxation of capital gains from the sale of assets, such as property or shares. The tax may be levied in the country where the asset is located or in the country where the seller is resident.
- Non-discrimination: DTAAs often contain a non-discrimination clause to ensure that residents of one country are not taxed more heavily than residents of another country in similar circumstances.
- Mutual agreement procedure: DTAAs provide for a mutual agreement procedure to resolve disputes between the tax authorities of the two countries.
Overall, DTAA agreements among OECD member countries aim to promote cross-border trade and investment by eliminating double taxation and providing greater tax certainty for taxpayers.Top of Form
The convention explicitly provides for automatic exchange of information and spontaneous exchange of information. It provides for service of documents in other member countries. The convention allows for exchange of past information in criminal tax matters.
To know more about DTAA relations between India and Organisation For Economic Co-operation and Development Member Countries, please download our Guide.