Investment: India to renegotiate tax treaty with Malaysia

TIMES NEWS NETWORK | DECEMBER 24, 2004

India to renegotiate tax treaty with Malaysia

HEMA RAMAKRISHNAN & LUBNA KABLY

BANGALORE/DELHI: The ink has hardly dried on the recently-notified revised tax treaty with Malaysia. But, India is set to renegotiate it, mainly to prevent treaty shopping.

Treaty shopping arises when a resident of a third country takes unfair advantage of the beneficial provisions of a tax treaty between two other countries, in this case the Indo-Malaysian tax treaty.

Malaysia is one of India’s largest trading partners among Association of South East Nations (Asean), with bilateral trade recording $3.2 billion and projected to cross $4 billion by year end.

There have been instances of treaty shopping in the case of Indo-Mauritius tax treaty. Based on this experience, India is on a high alert.

Treaty shopping can be prevented, if there is a ‘limitation of benefit’ clause in the treaty. India is pushing for insertion of this clause in the Indo-Malaysian tax treaty. It has adopted a similar stand in other tax treaties that are currently under renegotiation.

“The Malaysian authorities have given their in-principle nod to the renegotiation,” according to revenue officials.

India will also hold discussions with the Malaysian authorities to strengthen the process of exchange of information between tax authorities of the two countries.

While the ‘exchange of information’ clause exists in the Indo-Malaysian tax treaty, it is the process for such exchange on a continual basis that requires strengthening.

Another crucial issue for discussion will revolve around co-operation for collection of taxes. At present, in cases of tax default by a foreign company, India can only attach the assets in India.

India hopes to negotiate for insertion of the ‘collection assistance’ clause in the Indo-Malaysian tax treaty. This would help in recovery of taxes from defaulting foreign companies that have assets outside India in Malaysia.

This would be a reciprocal arrangement. The discussions with Malaysia assume great importance, especially as they follow the visit of Malaysian premier Mr Abdullah Ahmad Badawi to India.

During this visit, Indian and Malaysian companies signed 12 MoUs to jointly bid for projects in telecom, infrastructure and biotechnology sectors.

The revised tax treaty with Malaysia was notified recently on October 12, 2004.

source: Times of India