Global Treaties and Agreements Related to Taxation

With increasing globalisation of trade, investment, and digital business, taxation has moved beyond national boundaries. Income is often earned in one country, booked in another, and controlled from a third. To deal with these complexities, countries rely on international tax treaties, multilateral frameworks, and anti-avoidance rules. This section brings together the most important global and domestic mechanisms relevant for India.

Double Taxation Avoidance Agreement (DTAA)

What is DTAA?

A Double Taxation Avoidance Agreement (DTAA) is a bilateral treaty between two countries to ensure that the same income is not taxed twice—once in the source country and again in the residence country.

Why is DTAA needed?

In international transactions:

• Income may be earned abroad
• The taxpayer may be resident in India
• Both countries may claim the right to tax

DTAA resolves this conflict.

How DTAA Works

• Tax paid in one country is either:
  • Exempted, or
  • Credited against tax liability in the other country

Example

If an Indian resident earns income in a foreign country:

• Tax paid abroad can be set off against Indian tax liability
• Prevents double taxation on the same income

India has signed DTAAs with many countries, including → United States, United Kingdom, Singapore

➡️ UPSC takeaway:
DTAA promotes cross-border investment certainty while protecting tax revenues.

Base Erosion and Profit Shifting (BEPS)

What is BEPS?

Base Erosion and Profit Shifting (BEPS) refers to tax avoidance strategies used by multinational companies to:

• Shift profits to low-tax jurisdictions
• Exploit gaps and mismatches in tax rules
• Reduce overall tax liability

The BEPS initiative is led by the Organisation for Economic Co-operation and Development (OECD)

Core Idea of BEPS

Profits should be taxed where economic activities are carried out and value is created.

Illustration

• A multinational operates substantially in India
• But books most of its profits in a low-tax country
• That foreign subsidiary has little real activity

Under BEPS:

• Indian tax authorities can challenge this arrangement
• Profits may be taxed in India, where actual economic activity occurred

India and BEPS

• India actively participates in BEPS discussions
• Has committed to implementing BEPS standards
• Uses BEPS principles to curb → Profit shifting, Treaty abuse, Aggressive tax planning

➡️ BEPS strengthens tax fairness and sovereignty, especially for developing countries.

Global Minimum Tax

The Global Minimum Tax is a proposed international tax framework to ensure that:

• Multinational companies pay at least a minimum level of tax
• Irrespective of where they locate their profits

Objective

• Prevent a “race to the bottom” in corporate tax rates
• Discourage profit shifting to tax havens

Status

• Discussed among → G20 countries, OECD members
• India is an active participant in these discussions

➡️ Conceptual significance:
Global Minimum Tax complements BEPS by closing remaining gaps in international taxation.

Advance Pricing Agreement (APA)

An Advance Pricing Agreement (APA) is an agreement between:

• A taxpayer, and
• One or more tax authorities

It pre-determines the transfer pricing methodology for transactions between related parties.

Why APA is Important

Transfer pricing disputes arise when tax authorities suspect that:

• Prices between related entities are not at arm’s length
• Profits are being shifted artificially

Illustration

• Indian company ABC Pvt Ltd buys goods from its US subsidiary XYZ Inc
• Tax authorities question the pricing

Under an APA:

• Pricing methodology is agreed in advance
• Reduces litigation and uncertainty
• Ensures compliance with arm’s length principle

➡️ APA supports certainty, ease of doing business, and dispute reduction.

General Anti-Avoidance Rule (GAAR)

GAAR is a provision in Indian tax law designed to counter aggressive tax avoidance through → Artificial, Contrived, Largely tax-driven arrangements

GAAR allows tax authorities to look beyond legal form and examine economic substance.

How GAAR Works

If a transaction is → Designed primarily to avoid tax or Lacks commercial substance, Tax authorities can → Recharacterize the transaction, Ignore artificial structures or, Tax income based on real economic activity

Illustration

• A company creates multiple subsidiaries in tax havens
• Objective: avoid tax on Indian profits

Under GAAR:

• Authorities may treat the entire structure as one entity
• Tax profits in India accordingly

➡️ Key principle → Substance over form.

Conceptual Integration for UPSC

Instrument	Purpose
DTAA	Avoid double taxation, promote investment
BEPS	Prevent profit shifting and base erosion
Global Minimum Tax	Ensure minimum global corporate taxation
APA	Reduce transfer pricing disputes
GAAR	Curb aggressive tax avoidance