Double Tax Avoidance Agreement (DTAA) between India and Japan: All You Need to Know

India and Japan are the two rapidly developing economies in Asia. These two countries share a strong economic relationship, and the Double Tax Avoidance Agreement (DTAA) between India and Japan plays a significant role in it. The primary objective of the DTAA is to prevent double taxation on the same income in both countries, thereby ensuring that taxpayers are not taxed twice on the same income. In this article, we will discuss the salient features of the DTAA between India and Japan.

Overview of DTAA

The DTAA between India and Japan came into force on 29th October 1989, and it has been amended several times. The latest amendment was made on 17th September 2019. The agreement applies to income tax, corporation tax, and any other taxes that are related to these two taxes. The agreement covers residents of both countries, and it has a significant impact on the taxation of income and capital gains.

Key Provisions of DTAA

1. Permanent Establishment (PE)

The DTAA defines PE as a fixed place of business. It includes a branch, a factory, an office, a workshop, a mine, or any other place of extraction of natural resources. It also includes a building site, a construction, assembly, or installation project. The PE is subject to taxation in the country where it is situated.

2. Taxation of Business Profits

The DTAA provides that business profits of a resident of one country will be taxable in that country only if they arise from a PE situated in that country. If the business profits arise from outside the country, they will not be taxable in that country.

3. Taxation of Royalties and Fees for Technical Services

The DTAA provides that royalties and fees for technical services will be taxable in the country of residence of the recipient of income. However, if the recipient has a PE in the other country, the royalties and fees for technical services will also be taxable in that country.

4. Taxation of Capital Gains

The DTAA provides that capital gains arising from the sale of immovable property will be taxable in the country where the property is situated. However, if the capital gains arise from the sale of shares, they will be taxable in the country of residence of the seller.

5. Non-Discrimination

The DTAA provides that residents of one country will not be subject to any discrimination in the other country in respect of taxes.

Benefits of DTAA

The DTAA between India and Japan has several benefits. Some of them are as follows:

1. Avoidance of Double Taxation

The primary benefit of DTAA is the avoidance of double taxation. This agreement ensures that taxpayers are not taxed twice on the same income.

2. Encouragement of Trade and Investment

The DTAA provides greater certainty and transparency to investors, which encourages trade and investment between the two countries.

3. Prevention of Tax Avoidance

The DTAA also helps prevent tax avoidance by ensuring that taxpayers do not shift their profits from one country to another to take advantage of different tax rates.

Conclusion

The DTAA between India and Japan is an essential agreement that ensures the smooth flow of trade and investment between the two countries. The agreement provides several benefits to investors, including the avoidance of double taxation, greater certainty, and transparency. The DTAA also helps prevent tax avoidance by ensuring that taxpayers do not shift their profits from one country to another to take advantage of different tax rates. It is a win-win situation for both countries, and it is an agreement that has stood the test of time.