Cabinet Approves amendment of Double Taxation Avoidance Agreement with Sri Lanka

On February 12, 2020 the Union Cabinet approved the protocol to amend the DTAA (Double Taxation Avoidance Agreement) that was signed between India and Sri Lanka. The DTAA with respect to prevention of fiscal evasion is to be amended.

Highlights

Under the amendment, an anti-abuse provision is to be included. Also, the amendment will include Principle Purpose Test. This will help in curbing strategies that exploit gaps in tax rules.

Significance

Both Indian and Sri Lanka are members of major multilateral organizations such as OECD, G20, BEPS. Therefore, it is essential for both the countries to implement standards based on Multilateral Convention to Implement Tax Treaty related measures.

Why Principle Purpose Test?

India is a signatory of MLI, whereas Sri Lanka is not. Therefore, it is essential for the countries to insert Principle Purpose Test to meet the minimum standards

What is MLI?

In 2016, around 100 countries signed Multilateral Convention to Implement Tax Treaty. The treaty includes features that help to prevent Base Erosion and Profit Shifting. This is called Multilateral Instrument or MLI.

If a country has signed MLI along with India, it is not important to include Principle Purpose Test in the DTAA. As Sri Lanka is not a signatory, DTAA has been included.

Month: Current Affairs - February, 2020