Despite safeguards in tax treaties disputes recur
Most double tax avoidance treaties between two countries attempt to repel probable abuse of benefits under the pacts. Incorporating a clause for limitation of benefits (LOB) in the treaty is the usual practice adopted for checking such abuses. LOB provisions are for denying benefits of the tax treaty to those who set up a transaction only for the purpose of benefitting from provisions under the tax pact. While revenue authorities take a stand that the transaction was set up with an exclusive objective of avoiding tax, the other side does its best to explain the merit in the transaction that can make a justifiable claim for benefits. A recent ITAT decision in a case involving a UAE-based shipping company Mur Shipping DMC Co, which claimed benefits under the treaty, is a case in point.
While scrutinising the returns filed by the company, the tax department noticed that the company has claimed 100 per cent treaty benefit under the India-UAE tax treaty. According to department, the company is not a UAE resident and hence not entitled to treaty benefits. In support of its claim that it is a resident of UAE the company produced the “letter of commercial licence and tax residence certificate”. The tax official concerned rejected this claim of treaty protection and observed that “the tax residency certificate issued by Dubai had clearly mentioned that ‘Issued in Dubai, on Thursday the 15/011/2009 without any responsibility whatsoever on the Ministry of Finance.’
The official invoked article 29 of the India-UAE tax treaty which states that “an entity, which is a resident of contracting state shall not be entitled to the benefits of this agreement if the main purpose, or one of the main purposes of the creation of such an entity was to obtain benefits of this agreement which would otherwise not be available” The effective management of the company is outside the UAE and therefore the company cannot be construed resident of UAE. So, it is not entitled to India-UAE treaty benefits, the tax department contended. The tax officer gave a detailed information regarding the shareholders, the annual general meetings held by the company, the directors and the freight beneficiary and the evidences of actual taxes paid by the company.
Further, the commercial licence issued by the government of UAE is for three years from 2006 to 2009. The licence was issued in favour of manager Karsten Ambak who in turn is a Dutch national.
Directors of the company also are not 100 per cent UAE residents. According to the department, the companies 100 per cent share holders are not UAE residents. The two Switzerland-based companies are holding total five share of the company. The owner of the vessel is Emgiti Maritime is of Marshall Islands. But an ITAT bench found holes in the revenue department’s arguments. It held that the company which is incorporated in the UAE is managed and controlled wholly in the UAE. The supporting evidence for this is the Indian embassy certified documents like incorporation certificate, trading licence and tax residency certificate.
As regards the disclaimer on tax residency certificate, the bench held, “I have also considered the views of both sides. In my opinion, the disclaimer clause seems to be general and restricting the UAE government liability and has nothing exceptional for this company as these wordings are commonly found in all TRCs issued at UAE….”
The bench also ruled that tax residency in Switzerland or UAE is not relevant in this case because shipping income is not taxable in India either under the provisions of India-Switzerland treaty or India-UAE treaty. The bench further pointed out that when the treaty protection is available in the ordinary provisions, it cannot be construed that the company is attempting to create an artificial residency in UAE to claim treaty benefits.
It is not surprising that the LOB clause has been a major talking point in all discussion on modification of treaties, including the India-Mauritius tax treaty. LOB clauses have been incorporated in most DTAAs for avoiding treaty shopping. Despite the safeguards, the disputes keep popping up time and again between tax authorities and tax-paying companies, relentlessly.
The author is a Mumbai-based journalist who writes on personal finance and tax issues
