Skip to content

CA Final · Direct Tax Laws & International Taxation · Application and Interpretation of Tax Treaties

An Indian company paid Rs. 50,00,000 as fees for technical services to a resident of Country P. Domestic law rate is 20% (ignore surcharge and cess). The India–P treaty taxes fees for included services at 10%, but a Protocol with a Most Favoured Nation clause says that if India later agrees to a lower rate with another OECD country, that lower rate applies to P as well. India's later treaty with OECD member Q provides 5%. Assume it is notified and the MFN conditions are satisfied under the Indian view as required. What is the tax deductible at source on the payment?

Tax to be deducted is Rs. 2,50,000. Because the MFN clause imports the lower 5% rate agreed with OECD member Q, and this is lower than both the 10% treaty rate and the 20% domestic rate, 5% applied to Rs. 50,00,000 gives Rs. 2,50,000.

  1. ARs. 2,50,000Correct
  2. BRs. 5,00,000
  3. CRs. 10,00,000
  4. DRs. 1,25,000

Explanation

If the MFN clause is satisfied and notified, the 5% rate from the Q treaty is imported into the P treaty. Tax = 5% × 50,00,000 = Rs. 2,50,000. Rs. 5,00,000 results from using the original 10% treaty rate, and Rs. 10,00,000 from the domestic 20% rate.

Did you get it right without looking?

One question tells you little. A timed set on Application and Interpretation of Tax Treaties shows your real accuracy, how long you take and where you lose marks.

Practise Application and Interpretation of Tax TreatiesFree diagnostic mock

More Application and Interpretation of Tax Treaties questions