India signed global tax treaty with 6 reservations. But why an escape route for Portugal?

A resident company of Portugal paying a dividend to a resident of India has to pay India a 15% tax

India’s most hard-fought import from Portugal may have been gangster Abu Salem, but while signing the Multilateral Tax Convention, it kept Lisbon out of a rule that allows companies to escape tax on dividends in India easily.

While India inked the convention with six reservations, there is one that stands out from the rest. India indicated that its agreement with Portugal was more comprehensive than the new global rules formulated when it came to taxing dividends. Article 8 of the new convention meant that India could have taxed dividends paid by a foreign company to its shareholders abroad only if there was no change in ownership of the company over the last year.

India excluded its treaty with Portugal from these rules. That’s because, under the India-Portugal treaty, a resident company of Portugal paying a dividend to a resident of India has to pay India a 15 per cent tax. 

However, this tax is reduced to 10 per cent if the company’s owners who paid the dividend have held at least 25 per cent of the shares for the last two years. The same rules and rates apply to Indian companies taxed by Portugal.

The Multilateral Tax Convention; abbreviated as MLI; signed by India along with 66 other nations in Paris on June 7 functions as a buffet for thousands of bilateral double taxation avoidance treaties between countries. It formulates a common set of rules that countries can choose from to retrofit their existing treaties with the aim of bringing more uniformity in global taxation rules.    

“Renegotiating tax treaties has always been a significant hurdle. It’s time-consuming, resource-intensive, and cumbersome. And that’s what makes this Convention so remarkable. With the strokes of your pens, you will begin amending more than 1100 tax treaties. This would normally have taken decades. In moving so quickly, we have taken a big step towards levelling the global playing field.” said Angel Gurria, secretary-general of the Organisation for Economic Cooperation & Development (OECD) at the signing ceremony.

While India did not want new rules to apply to its treaty with Portugal, there were treaties with 21 other nations notified by Delhi with whom these new rules could apply. India’s agreements on dividend taxation with these countries do not prescribe a time frame for change in ownership. 

For instance, India’s agreements with Singapore and Belarus inked in 1994 and 1998 respectively and subsequently modified call for taxing “10 per cent of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 25 per cent of the shares of the company paying the dividends.”

Unlike the treaty with Portugal which provides for a lower 10% tax rate only when original ownership doesn’t fall below 25% for at least two years, the treaties with other nations notified by India don’t have rules governing ownership change. Among these nations include US, Canada, Lithuania and others.