Double Tax Avoidance Agreement (DTAA) Between India and Philippines

International trade today, though, is more of a crucial factor in today's economy, where exporting, importing, and investing in other countries have been considered vital in a country's economic enhancement. As a result of globalization, increasing numbers of companies and individuals are engaging in cross-border transactions, which raises the issue of double taxation. Recognizing this, countries have signed Double Tax Avoidance Agreements to reduce this challenge. Important among these is the DTAA between India and the Philippines.

The India-Philippines DTAA can rightly be called one of the basics of economic cooperation between two countries. It avoids double taxation, increases exports and investment between the two countries, and gives tax certainty to the citizens of both countries. In this article, the provisions of the India-Philippines DTAA are discussed along with their effects on different kinds of income and taxpayers.

DTAA Between India and Philippines

The India-Philippines DTAA is a bilateral taxation treaty to reduce the impact of double taxation on people and entities involved in business between the two countries. The Agreement, signed in 1994, lays down to some extent the mode of taxation for various types of income and how relief from double taxation can be sought.

This means that under the DTAA, income through dividends, interest, royalties, and capital gains will be governed by special rules so that tax is not levied on the same income in India and the Philippines. The Agreement promotes economic cooperation and investment and spells out clear guidelines on tax liabilities, preventing fiscal evasion and promoting a more stable tax environment. In stating the modalities for tax relief, DTAA has facilitated smoother cross-border trade and investment between India and the Philippines, boosting their economic relationship.

Significance of India-Philippines DTAA for Both Countries 

It is an extensive agreement that grants tax rights to every country, considering various sources of income.

• It helps promote bilateral trade and investment between the two countries from an economic point of view. By removing the burden of double taxation, the Agreement improves prospects for higher trade and encourages cross-border business activities. All these DTAA benefits also examine foreign direct investment flows since they offer related tax certainty and make the conditions more attractive for investors from India and the Philippines to invest in each other's markets. This two-way investment flow eventually leads to the economic development of both countries.
• This improves, the competitiveness of companies with reduced tax burden emanating from DTAA, thereby allowing them an equal opportunity to become more competitive in the international market. It provides for transferring technology and knowledge between Indian and Philippine enterprises by provisions on royalties and fees for technical services.
• It brings clarity and certainty concerning the rates for different types of incomes, therefore removing uncertainty in taxpayers' minds from a legal and administrative perspective. It facilitates standard methods of exchanging information and mutual help in tax matters, making procedures easier and contributing to administrative efficiency. In addition, the dispute resolution machinery provided under the Agreement permits the taxpayer to resolve tax-related disagreements between India and the Philippines.

Tax Covered Under DTAA

For India

Income Tax, including any surcharge on income tax.

For the Philippines

Income Tax on citizens and resident companies.

The other similar taxes, which either of the contracting states may introduce in the future after the date on which the DTAA was signed, are also covered. This clause thus makes certain that any changes in both countries' tax systems are covered under the agreement.

India-Philippines DTAA Tax Rate

• Dividends paid by a company that is a resident of a Contracting State to a resident of the other Contracting State may be taxed in both States, but the tax rate in the source State shall not exceed 20% of the gross amount of the dividends.
• Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in both States, but the tax rate in the source State shall not exceed 15% of the gross amount of the interest.
• Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in both States, but the tax rate in the source State shall not exceed 15% of the gross amount of the royalties.

Taxation on Capital Gains Under DTAA

The double taxation avoidance agreement between India and the Philippines lays down specific provisions regarding the taxation of different types of capital gains:

Income from Immovable property

• Gains from alienation of immovable property are taxed in which country where the property lies.
• This concerns land, buildings, fixtures, fittings, and rights to variable or fixed payments, whether for the working of mineral deposits and other natural resources.
• This, therefore, guarantees the country that hosts such property the first claim on levying tax on the profits accrued from the sale, irrespective of the seller's residence.

Gains from Shares

• If such shares derive more than 50% of their value directly or indirectly from immovable property situated in one of the contracting states, including, in that State, such gains may be taxed.
• In all other cases, gains shall normally be taxed in the company's country of residence, that is the issues of the shares.
• This provision is of special importance in investment in business real estate and prevents the using holding companies for tax avoidance.

Gains from Other Movable Property

• Profits from the alienation of movable property forming part of the business property of a permanent establishment are taxable in the country of the permanent establishment.
• Gains from the disposal of ships or aircraft operated in international traffic or personal movable property about it are taxable only in the country of effective enterprise management.

Other Property

Regarding any other property not otherwise covered by the preceding provisions, the capital gains are taxable only in the State of Residence of the alienator.

Taxation on Employment Income Under DTAA

The India-Philippines Double Tax Avoidance Agreement has certain provisions regarding taxation of employment income, which is very relevant to people working in the international arena. These provisions state when and where an employee's pay will be taxed.

The general rule under the DTAA is that if an Indian resident earns income from employment exercised in the Philippines, then the income is generally considered taxable in the Philippines. However, there is an exception to this rule. The employment above income remains taxable only in the country of residence of the employee (India) if the following conditions are satisfied:

• The employees in the Philippines are for an aggregate period not exceeding 183 days during any twelve months commencing or ending in the fiscal year.
• The remuneration received is for a service rendered by an individual or under contract with an individual who is a resident of India.
• The same is not borne by an employer who is a resident of the Philippines or has a permanent establishment or fixed base here in the Philippines.
• This "183-day rule" is particularly useful during short assignments and business trips; this way, the workers will be exempted from taxation by the host country, the Philippines, for temporary work. It lessens the compliance burden and tax liability for people engaging in cross-border employment between India and the Philippines.

Such an approach rules out the possibility of taxing the same income in both countries, facilitating cross-border mobility of talent and expertise.

Final Word

The India-Philippines Double Taxation Avoidance Agreement is among the biggest tools to facilitate economic cooperation and investments from one country to another. The DTAA would facilitate cross-border activities between the two countries and further promote capital, technology, and expertise inflows from India to the Philippines by reducing taxation incidence on double taxation and, apart from providing clarity regarding taxation for different types of income. Thus, the assessee should be aware of the provisions of the DTAA in these two countries and ensure compliance to take advantage of them.

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