Article 5 of the India-US Double Taxation Avoidance Agreement
The India-US Double Taxation Avoidance Agreement (DTAA) is an important agreement that aims to prevent the double taxation of income earned by individuals or companies from both India and the United States. This agreement came into effect in 1991 and has undergone several amendments over the years.
One of the crucial provisions of the DTAA is Article 5, which defines the term `Permanent Establishment` (PE). PE refers to a fixed place of business through which an enterprise carries out its business operations. It is significant because it determines the taxability of income earned by an enterprise in a foreign country.
According to Article 5 of the DTAA, a PE may include a place of management, a branch office, a factory, a workshop, or any other place where business is conducted. The provision also outlines that a building site, construction or installation project, or supervisory or consultancy activities in connection with such a project can also constitute a PE.
In the context of the DTAA, the significance of PE lies in determining the income that is taxable in a foreign country. If an enterprise has a PE in India, it will be taxed on the income that is attributable to that PE. On the other hand, if the enterprise does not have a PE in India, only the income that is sourced from India will be taxed in India.
The importance of Article 5 can be highlighted through an example. Suppose a US-based company has a branch office in India. The income earned by this branch office will be taxable in India, and the company will be required to file a tax return in India. However, if the company only has customers in India but no physical presence, then only the income derived from these customers will be taxable in India.
In conclusion, Article 5 of the India-US Double Taxation Avoidance Agreement is an essential provision that helps in the prevention of double taxation and ensures that the income is taxed at the appropriate jurisdiction. It provides clarity on the definition of Permanent Establishment, which is critical in determining the taxability of income in a foreign country. The provisions of the DTAA have played a significant role in promoting trade and investment between India and the United States.
