Important concepts in International Taxation.
Text research from ChatGPT. Compiled by Ashish.
1. BEPS (Base Erosion & Profit Shifting)
Base Erosion and Profit Shifting (BEPS) refers to tax planning strategies used by multinational enterprises (MNEs) to shift profits from high-tax jurisdictions to low- or no-tax jurisdictions, thereby eroding the tax base of the source country. BEPS exploits gaps and mismatches in domestic laws and tax treaties, often through practices like transfer of intangibles to tax havens, excessive intra-group debt (thin capitalization), or treaty shopping. To counter this, the OECD and G20 developed a 15-Action Plan on BEPS, covering areas such as preventing treaty abuse, curbing artificial avoidance of Permanent Establishment (PE), transfer pricing documentation, and creating the Multilateral Instrument (MLI). India has implemented several BEPS measures, including GAAR, thin capitalization rules (Sec. 94B), Equalisation Levy, CbCR, and adoption of the MLI, making BEPS a cornerstone concept in today’s international taxation landscape.
Causes of BEPS:
Tax treaties not aligned with modern business models.
Use of digital economy (earning without physical presence).
Differences in domestic tax laws (hybrid mismatches, double deductions).
OECD BEPS Project:
15 Action Plans – most important ones for India:
1. Action 4: Limiting interest deductions (thin cap).
2. Action 6: Preventing treaty abuse.
3. Action 7: Preventing artificial avoidance of PE status.
4. Action 13: Transfer Pricing documentation & CbCR.
5. Action 15: Development of MLI.
India’s Response:
GAAR (from AY 2018-19).
Thin capitalization rules (Sec. 94B) – limits interest deductions.
Equalisation levy – taxing digital transactions (Covered later)
2. MLI (Multilateral Instrument)
The Multilateral Instrument (MLI), developed under the OECD’s BEPS Action Plan 15, is a single international treaty that enables countries to quickly modify their existing Double Taxation Avoidance Agreements (DTAAs) without renegotiating each one separately. Its primary goal is to implement anti-BEPS measures such as the Principal Purpose Test (PPT) to prevent treaty abuse, expansion of Permanent Establishment (PE) rules to curb artificial avoidance, and strengthening of dispute resolution mechanisms like MAP. India signed the MLI in 2017, and it became effective from 2019–20, impacting several of India’s DTAAs (e.g., with the UK, France, Japan, and Australia). By overlaying existing treaties with minimum standards and optional provisions, the MLI ensures a consistent and faster global response to tax avoidance strategies, making it a cornerstone of modern international taxation.
Important provisions of MLI
PPT (Principal Purpose Test) – The Principal Purpose Test (PPT) is an anti-abuse rule introduced through the OECD’s BEPS project and implemented in India’s tax treaties via the Multilateral Instrument (MLI). It allows tax authorities to deny treaty benefits—such as reduced withholding tax rates on dividends, interest, or royalties—if it is reasonably concluded that one of the principal purposes of entering into a transaction or arrangement was simply to obtain those treaty benefits. For example, if a company routes investment into India through a shell entity in Mauritius only to take advantage of lower capital gains tax under the India–Mauritius DTAA, the PPT can be invoked to disallow that benefit. Thus, PPT ensures that tax treaties are used only for genuine commercial or business purposes, not for treaty shopping or aggressive tax planning.
PE provisions – A Permanent Establishment (PE) is a threshold concept in international taxation that determines when a non-resident becomes taxable in a source country by having a significant presence there. It essentially refers to a fixed place of business through which the foreign enterprise wholly or partly carries on its business. Common types of PE include: Fixed Place PE (like an office, factory, or warehouse with some permanence), Construction PE (a building site or project exceeding a specified duration, often 6–12 months depending on the treaty), Dependent Agent PE (where an agent habitually concludes contracts on behalf of the foreign company), and Service PE (when employees or personnel provide services in the source country for a specified period). For example, if a German engineering company has staff supervising a project in India for more than 9 months, it may create a Construction PE in India, making profits attributable to that project taxable here.
3. Dispute Resolution – MAP strengthened. Some countries opted for arbitration (India didn’t).
India & MLI:
Signed in June 2017, effective from Oct 2019.
Affects many DTAAs like with France, Japan, UK, Australia, Singapore, etc.
India adopted PPT but rejected mandatory arbitration.
3. APA (Advance Pricing Agreement)
An Advance Pricing Agreement (APA) is a mechanism under the Income-tax Act that allows taxpayers to agree in advance with the Central Board of Direct Taxes (CBDT) on the Arm’s Length Price (ALP) for their international transactions with associated enterprises. APAs can be unilateral (between taxpayer and CBDT), bilateral (involving CBDT and the foreign tax authority), or multilateral (involving more than two tax authorities). They generally cover a period of five future years, with the option of rollback for four prior years, giving up to nine years of certainty. APAs are particularly useful for captive service providers, R&D centers, or companies engaged in complex cross-border dealings, as they help reduce transfer pricing litigation, provide tax certainty, and improve investor confidence by locking in acceptable margins or pricing methodologies in advance.
Example:
XYZ India Pvt Ltd, a captive IT service provider for its US parent, entered into a Unilateral APA with CBDT in 2020 fixing its margin at 17% on cost for five years (FY 2020-21 to 2024-25). By opting for the rollback provision, the same margin was applied to its past four years (FY 2016-17 to 2019-20), where earlier the tax officer had proposed a 20% margin. This helped the company reduce adjustments, close pending litigation, and secure 9 years of tax certainty in one stroke.
4. DTAA (Double Taxation Avoidance Agreement)
A Double Taxation Avoidance Agreement (DTAA) is a tax treaty between two countries designed to ensure that the same income is not taxed twice, once in the source country where it arises and again in the resident country where the taxpayer is based. It allocates taxing rights between the two nations on various types of income like business profits, royalties, dividends, interest, and capital gains, and provides relief either through the exemption method (taxed in only one country) or the credit method (resident country gives credit for taxes paid abroad). DTAAs also include provisions on Permanent Establishment (PE), residency tie-breaker rules, Limitation of Benefits (LOB), and dispute resolution mechanisms like MAP. For example, under the India-USA DTAA, if an Indian company pays royalty to a US company, tax is deducted at a treaty rate (say 10%) instead of the higher domestic rate, preventing double taxation and encouraging cross-border trade and investment.
India has DTAAs with ~95 countries.
Methods of Relief:
1. Exemption Method – Taxed only in one country (rare).
2. Credit Method – Taxed in both, but resident country gives credit of foreign tax (common).
Important Clauses:
Residency clause (tie-breaker tests).
Permanent Establishment clause – decides taxation rights.
Article 12 – Royalty & FTS.
Article 13 – Capital Gains.
India Examples:
India-Mauritius DTAA: Earlier exempted capital gains (used for round-tripping), later amended.
India-Singapore DTAA: Capital gains relief linked to Mauritius treaty.
India-USA DTAA: Strong limitation of benefits (LOB) clause.
5. ALP (Arm’s Length Price)
The Arm’s Length Price (ALP) is the price charged in international transactions between associated enterprises (AEs) that should be equivalent to the price applied between independent parties under similar circumstances. In India, ALP is determined as per Section 92C of the Income-tax Act using prescribed methods—CUP, Resale Price, Cost Plus, Profit Split, TNMM, or any other appropriate method—ensuring that cross-border related party dealings like sale of goods, services, loans, or intangibles are not manipulated to shift profits. The most commonly applied method in India is TNMM, especially for captive service providers, since it benchmarks the net margins against comparable companies to arrive at a fair and compliant price.
Methods of ALP calculation under Sec. 92C & Rule 10B:
1. CUP (Comparable Uncontrolled Price) – direct comparison.
2. RPM (Resale Price Method) – resale margin deducted.
3. CPM (Cost Plus Method) – cost + arm’s length mark-up.
4. PSM (Profit Split Method) – split based on contribution.
5. TNMM (Transactional Net Margin Method) – compare operating margin vs comparables.
6. Other method – any method showing ALP better.
6. Treaty Shopping and Treaty Abuse.
Treaty Shopping
Treaty Shopping is a practice where a person or company routes investments or income through an intermediate country or entity solely to avail of favorable tax treaty benefits, such as reduced withholding tax rates, without having substantial business activities or economic presence in that country. For example, an investor may route capital gains from India through Mauritius just to claim the beneficial 0% capital gains tax under the India-Mauritius DTAA, even though the company has no real operations there.
Treaty Abuse
Treaty Abuse is a broader concept that covers all forms of exploiting tax treaties contrary to their intended purpose, including treaty shopping, artificial arrangements to avoid Permanent Establishment, or circular transactions to gain treaty benefits. Anti-abuse measures like the Principal Purpose Test (PPT) and Limitation of Benefits (LOB) clauses are designed to prevent treaty abuse, ensuring that treaties are used only for genuine commercial purposes and not for aggressive tax avoidance.
7. Form 3CEB
Form 3CEB is the report required to be filed under Section 92E of the Income-tax Act when an assessee has entered into international transactions or specified domestic transactions with associated enterprises. It must be certified by a Chartered Accountant and provides details like the nature of transactions, value, method used to determine Arm’s Length Price (ALP), and compliance with transfer pricing rules. Filing Form 3CEB is mandatory before the due date of ITR (currently 30th November for such assessees), and failure to furnish it attracts penalties under Section 271BA. In practice, this form is the backbone of Transfer Pricing compliance in India.
Penalties:
Failure to maintain TP documentation – 2% of transaction value.
Concealment – 100%–300% of tax avoided.
8. Captive Entity
A captive entity (or captive service provider) is a subsidiary set up by a multinational group in another country—often in India—primarily to provide back-office, IT, R&D, or shared services exclusively to its parent or group companies. Such entities usually operate on a cost-plus model, meaning they are reimbursed for all operating costs plus a fixed mark-up (e.g., 12–20%), ensuring a steady, low-risk return irrespective of the group’s overall profitability. Since they don’t deal with third parties and have limited risks (market, credit, or ownership of intangibles), tax authorities closely scrutinize their pricing under transfer pricing regulations to ensure the mark-up reflects an Arm’s Length Price. Captive entities are very common in India for outsourcing functions due to lower costs and skilled manpower.
9. Equalisation Levy
The Equalization Levy is a tax introduced by India to bring digital transactions into the tax net, targeting income earned by non-resident e-commerce and online advertising companies that operate without a physical presence in India. Initially launched in 2016 at 6% on online advertising services (like payments to Google or Facebook for ads), it was later expanded in 2020 to include a 2% levy on consideration received by non-resident e-commerce operators from Indian customers, covering goods or services sold online. For example, if an Indian business pays Google ₹10 lakh for online ads, it must deduct 6% (₹60,000) as Equalization Levy and deposit it with the government, ensuring foreign digital giants contribute to India’s tax revenue.
India lifted charging Equalization levy recently.
The 6% levy on online advertising services (commonly referred to as the “Google tax”) has been removed effective April 1, 2025, as per amendments to the Finance Act and the Finance Bill 2025–26 .
Prior to that, the 2% Equalisation Levy on e-commerce transactions was abolished earlier — effective August 1, 2024 .
Together, this means the entire digital tax regime (Equalisation Levy) is no longer in force in India.
Why this change?
It is seen as part of India's efforts to align with evolving international tax norms under the OECD’s Pillar Proposal framework and to placate trading partners—especially the U.S.—amid broader trade discussions.
10. GAAR (General Anti-Avoidance Rule)
The General Anti-Avoidance Rule (GAAR), introduced in India from AY 2018-19, is a set of provisions empowering the tax authorities to deny tax benefits arising from arrangements or transactions that are primarily designed for tax avoidance and lack genuine commercial substance. If an arrangement is found to be an Impermissible Avoidance Arrangement (IAA)—for example, round-tripping of funds, creating artificial losses, or routing investments through tax havens only to claim treaty benefits—GAAR allows authorities to disregard, recharacterize, or reallocate such transactions for tax purposes. It acts as a deterrent against aggressive tax planning and operates in conjunction with other anti-abuse measures like SAAR (Specific Anti-Avoidance Rules), ensuring that only legitimate business-driven structures enjoy tax benefits.
11. MAP (Mutual Agreement Procedure)
The Mutual Agreement Procedure (MAP) is a dispute resolution mechanism provided under the Double Taxation Avoidance Agreement (DTAA) to resolve cases where a taxpayer is taxed in both countries on the same income or faces taxation not in line with the treaty. Under MAP, the taxpayer can approach the Competent Authority (CA) of their resident country— in India, this is the Joint Secretary (Foreign Tax & Tax Research Division) in the CBDT, Ministry of Finance. The Competent Authorities of both treaty countries then consult and negotiate to eliminate double taxation, either by granting relief, reallocating taxing rights, or issuing clarifications. MAP is especially useful in transfer pricing disputes, permanent establishment issues, or treaty interpretation conflicts, offering a non-judicial route to resolve cross-border tax disputes.
12. CbCR (Country-by-Country Reporting)
The Country-by-Country Report (CbCR) is a compliance requirement under BEPS Action 13 and Section 286 of the Income-tax Act, 1961, applicable to multinational groups with consolidated revenue above ₹5,500 crore (≈ €750 million). It requires the parent entity (or designated alternate reporting entity) to furnish a detailed annual report giving a breakup of revenue, profit, income tax paid, capital, employees, and business activities in each country where the group operates. The aim is to provide tax authorities a global picture of how profits are allocated versus where business activities occur, helping identify profit shifting or base erosion. In India, CbCR is filed in Form 3CEAD with the prescribed due date, and related notifications are made in Form 3CEAC/3CEAB. This is primarily done by the ultimate parent company or its alternate reporting entity of the group.
13. Limitations of Benefits Clause
The Limitation of Benefits (LOB) clause is an anti-abuse provision in tax treaties designed to prevent treaty shopping, where a person sets up an entity in a treaty country solely to avail reduced withholding tax rates or other treaty benefits without substantial business activities there. The LOB clause sets eligibility criteria—such as minimum ownership, income, or activity requirements—for residents claiming treaty benefits. For example, under the India-Singapore DTAA, a company must meet certain ownership and active business tests; otherwise, it cannot claim the concessional 15% withholding tax on dividends or 10% on royalties, even if incorporated in Singapore. This ensures that only entities with genuine commercial presence benefit from the treaty, closing loopholes exploited by shell companies.
14. Dividend, Royalty and FTS
Dividend
A dividend is the distribution of profits by a company to its shareholders. In international taxation, dividends paid by an Indian company to a non-resident are subject to withholding tax under Section 195, which can be reduced under a DTAA. For example, under the India-USA DTAA, the withholding tax on dividends is capped at 25%, compared to the domestic rate of 20% plus surcharge and cess, provided treaty conditions are met. Taxpayers must ensure proper compliance to claim treaty benefits.
Royalty
Royalty refers to payments made for the use of intellectual property, trademarks, patents, copyrights, or know-how. Cross-border royalties paid to non-residents are subject to withholding tax under Section 195, with rates potentially reduced under a DTAA. For instance, India-Singapore DTAA allows a maximum 10% tax on royalties, instead of the domestic 10–15% rate, provided the recipient qualifies under the treaty and LOB provisions.
Fees for Technical Services (FTS)
FTS covers payments to non-residents for technical, managerial, or consultancy services, including installation and training services. These payments are taxable in India under Section 9 and subject to withholding under Section 195. Under certain DTAAs, such as India-USA, the tax rate is capped at 10%, lower than the domestic rate, provided the services are not used to create a Permanent Establishment in India. Proper documentation is crucial to claim treaty benefits.
15. Conduit Company
A “conduit” (or “treaty conduit”) means a company that is set up only as a middleman or pass-through entity, not as a real investor or business operator.
In other words: A conduit company is an intermediary created mainly to take advantage of DTAA benefits (like lower tax rate, capital gains exemption, or no withholding tax), without doing any substantial business of its own.
Example 1: Genuine structure
🇺🇸 US company → directly invests in India → pays 15% dividend tax (India–US DTAA)
Everything fine — direct investment, direct tax.
Example 2: Conduit structure
🇺🇸 US company sets up a small subsidiary in Mauritius
🇲🇺 Mauritius company invests in India → under India–Mauritius DTAA, dividend taxed only @5% or capital gains exempt
So the Mauritius company exists only on paper, has no office, no employees, no operations — it simply receives dividends and passes them back to the US parent.
That Mauritius company = Conduit company
→ It is used as a conduit to route the investment through a low-tax treaty country.
What the Courts Have Said
🏛 1️⃣ Azadi Bachao Andolan Case (2003, Supreme Court)
The government argued: Mauritius companies were conduits.
Supreme Court said:
If a company is legally incorporated in Mauritius, has a valid Tax Residency Certificate (TRC), then India must respect the treaty benefit.
The fact that it’s used to minimize tax does not make it illegal.
"Treaty shopping is not illegal unless specific anti-abuse clause exists.”