Double taxation avoidance agreement: Analysis and its misuse in tax havens

Abstract

India has signed the double taxation avoidance agreement (DTAA) with 83 countriesi.This means that there are agreed rates of tax and jurisdiction on specified types of incomearising in a country to a tax resident of another country. It has been estimated that Indiahas lost close to $500bn to tax havensii. Due to favorable tax laws in some tax havenswith which India has signed the double taxation agreement, investors choose to investtheir funds from these havens. This has a phenomenal impact over the Indian economyand the problem is gaining more attention as more and more funds are being routed toIndia through these tax havens. India, being a developing country with prospects ofremarkable growth in the future, will attract more foreign investments in the future. Aflawed taxation agreement with a tax haven would just forego India of huge tax revenuesthat it could earn through these investments. India has come up with General AntiAvoidance Rules (GAAR) to counter tax avoidance and tax evasion. Government haspostponed the implementation of GAAR to April 1, 2013iii.Through this study, we intend to identify tax havens, which contribute a huge chunk ofFDI to the country, and understand the DTAA agreements between India and these taxhavens. We also want to understand how other major countries handle tax havens throughtheir GAAR rules and compare their rules with the Indian GAAR. Finally we proposesome changes that need to be made in GAAR to make it more investment friendly and toachieve the purpose of eliminating tax evasion and tax avoidance. Our motivation is tocome up with a long term solution, which will bring a positive change in the way foreigninvestments are being made in India.