India and Macau Sign Double Taxation Avoidance Agreement

To aid tax and banking-related information exchange and prevent tax evasion, India signed a double taxation avoidance agreement (DTAA) with Macau on January 1. The agreement will also help to generate a better investment climate for Indian businesses in Macau – a special administrative region of the People’s Republic of China and well-known offshore financial center and tax haven.

Double taxation has been dubbed “one of the most visible obstacles to cross border investment,” leaving room for a significant amount of money to be saved under the almost 3,000 double taxation agreements across the globe.

Simply put, DTAAs aim to prevent the same income from being taxed by two or more states, while also eliminating tax evasion and encouraging cross-border trade efficiency. Similar to bilateral investment agreements in that they are a “bargain” between two countries, DTAAs also act as a “badge of international economic respectability” for the signatory countries. DTAAs not only provide certainty to investors regarding their potential tax liabilities, but also serve as a tool to create tax efficient international investments.

Studies have suggested that foreign direct investment in developing countries with whom a “tax sparing” agreement exists is 1.4 to 2.4 times higher than what it would have been otherwise and that DTAAs are associated with higher cross-border M&A flows.

While about 75 percent of the actual words of any given DTAA are identical with the words of any other DTAA, the applicability and specific provisions of each treaty can vary substantially. The United Nations Conference on Trade and Development divides tax treaties into categories based on their applicability, primarily:

• Income
• Capital
• Protocol
• Transport (air, water, or both)

Approximately 100 DTAs are added each year across the globe. India’s existing DTAAs include those with Germany, Italy, the UK and the US. For a recent (but not fully updated) list, please click here.

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