India Now Able To Negotiate Tax Treaties With Non-Sovereign Territories

by Mary Swire, Tax-News.com, Hong Kong

14 July 2009

India's 2009-10 Budget includes a little noticed clause authorising the government to enter into double-taxation avoidance agreements (DTAAs) with non-sovereign territories such as Hong Kong, Taiwan and the Cayman Islands. The Income-Tax Act, 1961, only allows negotiation of tax treaties with sovereign countries.

The Finance Bill, 2009-10 amends Section 90 of the Income Tax Act and Section 44A of the Wealth Tax Act, to enable the government to notify such specified territories outside India. 'The government now wishes to expand the scope of this cooperation by entering into a DTAA or TIEA (Tax Information Exchange Agreement) with non-sovereign jurisdictions,' the Bill explains. The provision will come into effect from October 1, 2009.

The absence of a tax treaty with Hong Kong and the Cayman Islands last year led to much controversy following a tax dispute in the case of the Vodaphone Essar/Hutchison sale. The sale created a capital gains tax liability of USD1.7bn in India, but Vodafone challenged its legal basis in the Supreme Court on the basis that the underlying contracts were subject to the jurisdictions of Hong Kong and the Cayman Islands, with whom India had no tax agreements.

Following the OECD’s drive against tax havens, there has been a spate of TIEAs with many of the jurisdictions with whom India had been barred from setting up treaties. These include Jersey, Guernsey, and the Isle of Man which are dependent on the British Crown. Taiwan also features in the list of non-sovereign nations as most countries consider it part of China. Hong Kong and Macau are Special Administrative Regions of the People’s Republic of China, while offshore centres such as the British Virgin Islands and Cayman Islands, are non-self governing territories even though they have attributes of sovereignty including control over monetary policy.

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