Non-discrimination clause in tax treaties – Select issues and recent developments – Part 4
In part 3 of the series, I have discussed Article 24(2) which deals with the stateless person in detail. In this part, I will discuss Article 24(3) dealing with PE non-discrimination.
This paragraph deals with a ‘permanent establishment’ (PE) that an ‘enterprise of a Contracting State’ has in the other ‘Contracting State’. Thus, it deals with the non-discrimination of a resident of a Contracting State in respect of the enterprise carried on through a PE by such a person in other contracting state.
Article 24(3) applies when the following conditions are satisfied –
There is a PE of an ‘enterprise’ of a contracting state in other contracting state
Such PE is subject to taxation in other contracting state
Such taxation is less favourably levied than taxation levied on enterprise of other contracting state
The enterprise of other contracting state carry on same activities as that of the PE
Understanding certain important terms –
Enterprise/ PE: This article applies only if the taxpayer has PE and not otherwise. It seeks to end discrimination on the actual residency of the overseas entity
Less favourably: PE of the Residence State shall not be treated ‘less favourably’ in taxation matters by the Source State as compared with an ‘enterprise’ of the Source State
Same activities: OECD commentary has explained the term through illustrations. It states that regulated and unregulated activities would generally not constitute the ‘same activities’
Levied: Levy means to access, raise, execute, exact, tax, collect, gather, take up, seize
In the same circumstances: The expression implies that a PE and a local enterprise that is the object of comparison with the PE should always be in the ‘same circumstances’
Application of Article 24(3) in certain situations
Computation of taxable income – PE must be given the same right as resident enterprises are given in relation to –
Claim of deduction of trading expenses
Deduction of depreciation
Deduction for provision for re-investment in fixed assets
Carry forward or backward a loss
Claim benefit of tax incentive provisions
Structure and rate of tax – The manner of levy of taxes may vary from country to country. Indian IT Act expressly permits differential rates of domestic and overseas companies. The relevant extract is reproduced below –
“For the removal of doubts, it is hereby declared that the charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as a less favourable charge or levy of tax in respect of such foreign company.”
Credit for WHT suffered by a PE – A PE in Source State may receive overseas income (e.g., dividend, interest, etc.) and such income may be taxed in the Source State. It appears that by invoking Article 24(3), a PE may be able to avail of a credit in the Source State for the foreign withholding tax on dividends, interest, etc. if such credit is granted to resident enterprises of the Source State
Miscellaneous situations – As article 24(3) applies to taxation of PE’s own business, hence, PE may not be able to invoke Article 24(3) in the following situations –
Rules relating to group consolidation
Rules relating to the distributing profits
Principle emanating from Indian judicial pronouncements in the context of Article 24(3) on Non-discrimination –
Section 44C of the Income-tax Act, 1961 limitation on the deduction of head office expenditure would not apply in the case of non-resident companies in light of the non-discrimination clause in the tax treaty (Metchem Canada Inc. v. Deputy Commissioner of Income-tax [2006] 100 ITD 251 (MUM.))
Benefit of certain Export linked deductions under Section 80HHE and Section 80HHC of the Income-tax Act, 1961 should be allowable to PE of the foreign company (Bhagwan T. Shivlani v Income-tax Officer (IT)-2(2), (Mumbai) [2012] 20 taxmann.com 821)
Distinction between Article 24(1) and Article 24(3) on Non-discrimination clause –
