Indo-Japanese Withholding Tax To Be Halved

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

03 May 2005

India and Japan have agreed to halve the withholding tax on royalty income form technical services under their DTAA to 10% in a move that is likely to be welcomed by India's software firms.

The withholding tax, presently levied at 20%, has become the focus of talks between the two governments on a new double taxation avoidance agreement, and Indian-based software firms exporting to Japan have lobbied for a reduction in the unusually punitive tax.

The withholding tax rate in the Indo-Japanese agreement is considerably higher than in other bilateral tax treaties, such as between India and Germany, in which it is 10%, and Japan and the US, which is tax free. Many companies would like to see it reduced or removed altogether.

It is believed that Japanese negotiators had pushed for the tax to be reduced to zero percent, but have been compelled to settle for a compromise of 10%.

The interpretation of existing tax arrangements between India and Japan by the latter country’s tax authorities is also a major source of concern for Indian firms, many of which have found themselves locked in tax disputes with the Japanese government.

“Interpretation of the Indo-Japan tax treaty by the Japanese tax authorities is a big challenge to the growing business in Japan. Thus, the intervention of the Indian government in renegotiating the treaty is most welcome,” TV Mohandas Pai, CFO at IT consulting firm Infosys told the Economic Times in January.

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