CBDT Clarification on Rollback Provisions of India-Korea Revised DTAA

Revised ‘Double Taxation avoidance Agreement (DTAA)’ between India and Korea

A. CBDT Clarification on India-Korea Revised DTAA

The CBDT has reviewed the issue relating to rollback provision in the revised DTAA between India and Korea and has clarified that applications for bilateral Advance Pricing Agreement (APA) involving international transactions with Associated Enterprises in Korea for the APA period beginning Fiscal Year 2017-18 can be filed along with request for rollback provision in prescribed form.

Such requests for rollback provision shall be processed in accordance with the provisions of S. 92CC(9A) of the Income Tax Act 1961 and applicable IT rules, subject to the applicable regulations in Korea.

The CBDT has issued the present clarification in response to the queries received from taxpayers regarding availability of rollback provision in respect of bilateral APA applications for APA period beginning F.Y 2017-18.

It may be noted that the revised DTAA incorporates para 2 in Article 9 (Associated Enterprises), which provides recourse to the taxpayers of both countries to apply for Mutual Agreement Procedure (MAP) in transfer pricing disputes as well as tp apply for Bilateral APAs for APA period beginning F.Y. 2017-18.

CBDT Press Release dt. 17 Mar. 2017

B. CBDT Notification on India-Korea Revised DTAA

CBDT has notified Revised DTAA between India and Korea for the Avoidance of Double Taxation and the Prevention of Fiscal evasion with respect to taxes on income which has entered into force on 12 Sept. 2016. Provisions of this DTAA will have effect in India in respect of income derived in fiscal years beginning on or after 1st April, 2017. For more details, please refer below:

CBDT Press Release dt. 26 Oct. 2016 

CBDT Notification on Revised DTAA between India and Korea 

The existing Double Taxation Avoidance Convention between India and Korea was signed on 19th July, 1985 and was notified on 26th September 1986. A revised DTAA between India and Korea for the Avoidance of Double Taxation and the Prevention of Fiscal evasion with respect to taxes on income which was signed on 18th May 2015 during the visit of Hon’ble PM to Seoul has entered into force on 12th September 2016, on completion of procedural requirements by both countries. Provisions of new DTAA will have effect in India in respect of income derived in fiscal years beginning on or after 1st April, 2017.

CBDT Notification No. 96/2016 dt. 24 Oct. 2016

Salient features of Revised DTAA between India and Korea

(i) The existing DTAA provided for residence based taxation of capital gains on shares. In line with India’s policy of taxation of capital gains on shares, the revised DTAA provides for source based taxation of capital gains arising from alienation of shares comprising more than 5% of share capital.

(ii) In order to promote cross border flow of investments and technology, the revised DTAA provides for reduction in withholding tax rates from 15% to 10% on royalties or fees for technical services and from 15% to 10% on interest income.

(iii) The revised DTAA expands the scope of dependent agent Permanent Establishment provisions in line with India’s policy of source based taxation.

(iv) To facilitate movement of goods through shipping between two countries and in accordance with international principle of taxation of shipping income, the revised DTAA provides for exclusive residence based taxation of shipping income from international traffic under Article 8 of revised DTAA.

(v) The revised DTAA, with the introduction of Article 9(2), provides recourse to the taxpayers of both countries to apply for Mutual Agreement Procedure (MAP) in transfer pricing disputes as well as apply for bilateral Advance Pricing Agreements (APA). Further, as per understanding reached between the two sides, MAP requests in transfer pricing cases can be considered if the request is presented by the tax payer to its competent authority after entry into force of revised DTAA and within three years of the date of receipt of notice of action giving rise to taxation not in accordance with the DTAA.

It may be added that a Memorandum of Understanding (MoU) on suspension of collection of taxes during the pendency of Mutual Agreement Procedure (MAP) has already been signed by Competent Authorities of India and Korea on 9th December 2015. The MoU provides for suspension of collection of outstanding taxes during the pendency of MAP proceedings for a period of two years (extendable for a further maximum period of three years) subject to providing on demand security / bank guarantee.

(vi) The Article on Exchange of Information is updated to the latest international standard to provide for exchange of information to the widest possible extent. As per revised Article, the country from which information is requested cannot deny the information on the ground of domestic tax interest. Further, the revised DTAA contains express provisions to facilitate exchange of information held by banks. Information exchanged under the revised DTAA can now be used for other law enforcement purposes with authorization of information supplying country.

(vii) The revised DTAA inserts new Article for assistance in collection of taxes between tax authorities.

(viii) The revised DTAA inserts new Limitation of Benefits Article i.e. anti-abuse provisions to ensure that the benefits of the Agreement are availed only by the genuine residents of both the countries.

The revised DTAA aims to avoid the burden of double taxation for taxpayers of two countries in order to promote and thereby stimulate flow of investment, technology and services between India and Korea. The revised DTAA provides tax certainty to the residents of India and Korea.

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