TREASURY DEPARTMENT BETWEEN THE UNITED …

1 TREASURY DEPARTMENTTECHNICAL EXPLANATION OF THE CONVENTION AND PROTOCOLBETWEEN THE UNITED states OF AMERICAAND THE REPUBLIC OF INDIAFOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTIONOF FISCAL EVASION WITH RESPECT TO TAXES ON INCOMESIGNED AT NEW DELHI ON SEPTEMBER 12, 1989 GENERAL EFFECTIVE DATE UNDER ARTICLE 30: 1 JANUARY 1991 INTRODUCTIONThis is a technical explanation of the Convention and Protocol BETWEEN the UNITED Statesof America and the Republic of India signed on September 12, 1989 ("the Convention").Negotiations took as their starting point the TREASURY DEPARTMENT 's draft Model Income TaxConvention, published on June 16, 1981 ("the Model"), the Model Double TaxationConvention published by the UNITED Nations in 1980 ("the Model") and other treaties ofboth Technical Explanation is an official guide to the Convention.

2 It reflects the policiesbehind particular Convention provisions, as well as understandings reached with respect to theapplication and interpretation of the explanations of each article will include explanations of any Protocol provisionsrelating to that OF ARTICLESA rticle 1---------------------------------Genera l ScopeArticle 2---------------------------------Taxes CoveredArticle 3---------------------------------Genera l DefinitionsArticle 4---------------------------------Reside nceArticle 5---------------------------------Perman ent EstablishmentArticle 6---------------------------------Income from Immovable Property (Real Property)

3 Article 7---------------------------------Busine ss ProfitsArticle 8---------------------------------Shippi ng and Air TransportArticle 9---------------------------------Associ ated EnterprisesArticle 10--------------------------------Divide ndsArticle 11--------------------------------Intere stArticle 12--------------------------------Royalt ies and Fees for Included ServicesArticle 13--------------------------------GainsA rticle 14--------------------------------Perman ent Establishment TaxArticle 15--------------------------------Indepe ndent Personal ServicesArticle 16--------------------------------Depend ent Personal ServicesArticle 17--------------------------------Direct ors' FeesArticle 18 -------------------------------Income Earned by Entertainers and AthletesArticle 19--------------------------------Remune ration and Pensions in Respect ofGovernment ServiceArticle 20--------------------------------Privat e Pensions, Annuities, Alimony and Child SupportArticle 21--------------------------------Paymen ts Received by Students and ApprenticesArticle 22--------------------------------Paymen ts Received by Professors, Teachers.

4 AndResearch ScholarsArticle 23--------------------------------Other IncomeArticle 24--------------------------------Limita tion on BenefitsArticle 25--------------------------------Relief from Double TaxationArticle 26--------------------------------Nondis criminationArticle 27--------------------------------Mutual Agreement ProcedureArticle 28--------------------------------Exchan ge or Information and Administrative AssistanceArticle 29--------------------------------Diplom atic Agents and Consular OfficersArticle 30--------------------------------Entry into ForceArticle 31--------------------------------Termin ationProtocol--------------------------- -------of 12 September, 1989 Diplomatic Notes-----------------------of 12 September, 1989 ARTICLE 1 General ScopeArticle 1 provides that the Convention is applicable to residents of the UNITED states orthe Republic of India ("India") except where the terms of the Convention provide Article 4 (Residence)

5 A person is treated as a resident of a Contracting State if that personis under the laws of that State liable to tax therein by reason of his domicile or other similarcriteria, subject to certain limitations, as described in Article 4. If, however, a person is, underthose criteria, a resident of both Contracting states , a single State of residence (or no state ofresidence) is assigned under Article 4. This definition governs for all provisions of theConvention. Certain provisions are applicable to persons who may not be residents of eitherContracting State. For example, Article 19 (Remuneration and Pensions in Respect ofGovernment Service) may apply to a citizen of a Contracting State who is resident in 1 of Article 26 (Nondiscrimination) applies to nationals of the Contracting Article 28 (Exchange of Information and Administrative Assistance), information may beexchanged with respect to residents of third 2 of Article 1 describes the relationship BETWEEN the rules of the Convention,on the one hand, and the laws of the Contracting states and other agreements BETWEEN theContracting states , on the other.

6 This paragraph makes explicit, on a reciprocal basis, thegenerally accepted principle that no provision in the Convention may restrict any exclusion,exemption, deduction, credit or other allowance accorded by the tax laws of the ContractingStates. Thus, for example, if a deduction would be allowed under the Internal Revenue Code("the Code") in Computing the taxable income of a resident of India, the deduction will beavailable to that person in computing income under the treaty. In no event may the treatyincrease the tax burden on residents of the Contracting states . Thus, a right to tax given by thetreaty cannot be exercised by the UNITED states unless that right also exists under the taxpayer may always rely on the more favorable Code treatment.

7 This does not mean,however, that a taxpayer may pick and choose BETWEEN Code and treaty provisions in aninconsistent manner in order to minimize tax. For example, assume a resident of India has threeseparate businesses in the UNITED states . One is a profitable permanent establishment and theother two are trades or businesses which would earn taxable income under the Code but whichdo not meet the permanent establishment threshold tests of the Convention. One is profitable andthe other incurs a loss. Under the Convention the income of the permanent establishment istaxable, and both the profit and loss of the other two businesses are ignored.

8 Under the Code, allthree would be taxable. The loss would be offset against the profits of the two profitableventures. The taxpayer may not invoke the Convention to exclude the profits of the profitabletrade or business and invoke the Code to claim the loss of the loss trade or business against theprofit of the permanent establishment. (See Rev. Rul. 84-17 1984-1, 10.) If the taxpayerinvokes the Code for the taxation of all three ventures, he would not be precluded from invokingthe Convention with respect, for example, to any dividend income he may receive from theUnited states which is not effectively connected with any of his business activities in the , nothing in the Convention can be used to deny any benefit granted by anyother agreement BETWEEN the UNITED states and India.

9 For example, if certain benefits orprotections, not found in the Convention, are afforded under a Treaty of Commerce, Friendship,and Navigation, or similar agreement, those benefits or protections will be available to residentsof the Contracting states regardless of any provisions to the contrary (or silence) in 3 and 4 of Article 1 contain the traditional '"saving clause'" of the Under paragraph 3, the UNITED states and India reserve their right, except as provided inparagraph 4, to tax their residents and citizens as provided in their internal laws, notwithstandingany Convention provisions to the Contrary.

10 If, for example, an Indian resident performsindependent personal services in the UNITED states , he is present in the UNITED states for feverthan 90 days in the taxable year and the income from the services is not attributable to a fixedbase in the UNITED states , Article 15 (Independent Personal Services) would normally prevent theUnited states from taxing the income. If, however, the Indian resident is also a citizen of theUnited states , the saving clause permits the UNITED states to include the remuneration in theworldwide income of the citizen and subject it to tax under the normal rules.