india singapore dtaa revised 2017

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What are the Implication for Singapore?

• The amendments are made to prevent tax avoidance attempt known as ‘round-tripping’.

• The renegotiation of tax treaties with partners concurs with its commitment to curb tax evasion and tax avoidance.

Capital Gains Tax

By virtue of the latest amendment the exemption of capital gains arising from alienation of share will be phased out from 1 April 2017, whereby• The Exemption will continue arising from the alienation of shares

acquired before 1 April 2017, subject to Limitation of Benefits (LoB) conditions.

• For capital gains arising from the alienation of shares acquired after 1 April 2017, 50% of the prevailing tax rate, in the country where the company whose shares are alienated is resident will be applicable.

Associated Enterprise and Transfer Pricing

Article 9 has been amended to provide for both countries to enter into bilateral discussions for the elimination of double taxation arising from transfer pricing. Accordingly, taxpayers can claim corresponding tax adjustments in the event of disputes arising in the cross-border transaction. Consequently, the tax on the enhanced income derived after transfer-pricing adjustment, if charged by one country then the other treaty partner would provide a corresponding relief.

Associated Enterprise and Transfer Pricing

Domestic Laws

The 2016 protocol introduce a new article which explicitly provides that the Indian-Singapore tax treaty shall not prevent either of the countries from applying its domestic laws and measures concerning the prevention of tax avoidance or tax evasion.

Domestic Laws

Impact of Amendment• There is no capital gains tax in Singapore, so Indian residents

investing in Singapore will remain unaffected by the changes. • The existing Singapore investors holding shares in India will remain

unaffected and will still be able to enjoy tax exemptions on capital gains from the alienation of shares during and after the transition period, i.e. 31 March 2019.

• The potential Singapore investors who invest in Indian equities after 31 March 2017 will have to factor in the potential tax liability on alienation.

Impact of Amendment• FPI have enjoyed tax exemptions on gains arising from the alienation

of shares held in listed companies, irrespective of trading frequency and holding period of such shares. Such investments made after 1 April 2017 will be affected by the revised terms.

• Likewise, gains from the alienation of unlisted shares is treated as short-term capital gains and they are subjected to 15% tax presently but they will benefit with the revised terms and will be subjected to 7.5% during the transition period and 15% after 31 March 2019.

Impact of Amendment• Gains arising for a Singapore resident, from the alienation of other

securities such as convertible debentures, will remain taxable in Singapore. The fulfilment of LoB, in such cases of exemptions, may not be required for such gains.

• Both Indian and Singapore-based companies have subsidiaries in located in each other’s territories; hence the volume of associated party transactions and the potential for disputes is significantly high. The latest protocol improves access to Mutual Agreement Procedure for dispute resolution and may even expedite resolution.

Mauritius Vs Singapore

Mauritius Vs SingaporeThe amendments made to both DTAs are broadly

congruent, except for the LOB clause, introduced in Mauritius only in the latest protocol as against Singapore, where it was introduced since the 2005 protocol. One significant difference that may create an arbitrage for Mauritius is the clause on tax on interest earned via debt instruments.

Debt Instruments

Debt Instruments

• It must be noted that unlike the revised India-Mauritius DTA, the third protocol of India–Singapore remains silent on the treatment of debt instruments. The Mauritius DTA states that the interest incomes gained on the debt instruments entered into after 31 March 2017, will be subjected to 7.5% tax rates in the source country. The same withholding tax on interest in the case of India-Singapore DTA is 15%, Mauritius scores over Singapore with the new revised rate. We have to wait and see how the situation pans out for Singapore.

Will the amendments affect Singapore as a preferred route to India?

Will the amendments affect Singapore as a preferred route to India?

• Mauritius’ position as a top source country started weakening post amendments to DTA and Singapore overtook Mauritius as the top source country with FDI investment of $13.6 billion in 2015-2016.

• Investors are not simply attracted to Singapore because of the tax advantage, but because of other strategic merits as well.

• India is on the renegotiation spree with all other treaty partners as well, so relative advantage, if any, possessed by India’s other treaty partners will eventually diminish. Singapore will continue to retain its dominance as a top FDI source for India.