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CA Final · Direct Tax Laws & International Taxation · Fundamentals of BEPS

Sagar Pharma Ltd's foreign parent proposes to route royalty income through a shell company in a treaty country that has no staff or real activity, only to claim reduced withholding tax under the India treaty. Under BEPS Action 6 on preventing treaty abuse, which minimum standard approach is recommended to be included in tax treaties to counter such treaty shopping?

Treaties should state the intent of avoiding non-taxation through treaty shopping and adopt a principal purpose test, or a PPT with a limitation on benefits rule, or a detailed LOB with an anti-conduit mechanism. Transfer pricing documentation or royalty exemptions do not counter treaty shopping.

  1. AOnly a transfer pricing safe harbour for royalty
  2. BA statement of intent to eliminate double non-taxation plus either a principal purpose test, or a PPT with a limitation on benefits clause, or a detailed LOB with a mechanism for conduit arrangementsCorrect
  3. CAn exemption for all royalty payments between treaty countries
  4. DA requirement of a Master file filed in both countries

Explanation

Action 6 minimum standard requires treaties to include a statement that they are not meant to create non-taxation or reduced taxation through evasion or avoidance including treaty shopping, and to implement it through a PPT alone, a PPT plus LOB, or a detailed LOB plus a conduit-arrangement mechanism. Safe harbours and Master files are unrelated to treaty entitlement.

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