With India and Mexico signing the double taxation avoidance agreement on Monday, companies using Mexico to route investments into India will have to be ready for a differently structured tax regime.
The DTAA has provided for a limitation of benefits clause, which would mean that only genuine investors in the country would get a tax benefit. Tax consultants say such a clause usually means that companies must have a “physical economic presence in the country “ to avail its lower rate of tax. The income tax department have been increasingly concerned about the misuse of such treaties.
The agreement aims at avoiding double taxation, preventing tax evasion and increasing the economic cooperation and trade between the two countries. The incidence of double taxation will be avoided by one country giving credit for taxes paid by its residents in the other country. Trade between the two countries has increased rapidly over the last few years, touching $ 1.8 billion in 2006-07.
The DTAA will cover income tax, including surcharge in India and the federal income tax for Mexico. It also provides for taxation of dividend, interest, royalties and fees for technical services in both countries.
However, the tax rate in the source country should not exceed 10% of gross amount of payment if the beneficial owner of the payments is a resident of the other contracting state.
“It will stimulate the flow of capital, technology and personnel and contribute to tax stability,” a statement said.
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