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Rediff.com  » Business » India-Iran tax pact meets hurdle

India-Iran tax pact meets hurdle

August 13, 2007 16:50 IST
The proposed India-Iran Double Taxation Avoidance Agreement, which the two countries included in their joint New Delhi declaration in 2003, has run into a hurdle over the knotty issue of what would constitute the definition of Indian companies' "permanent establishment" in Iran.

The DTAA would help, among others, oil companies avoid paying taxes in both countries. Iran has the second largest gas reserves in the world.

Last year, ONGC Videsh, the overseas investment arm of Oil and Natural Gas Corporation, and Oil India Ltd discovered both oil and gas in the prospective Farsi block in Iran. Other Indian companies, such as Essar Oil, are looking for oil and gas acreages in Iran.

Recently, official-level discussions between the two countries have picked up pace. A key matter in the discussion is the permanent establishment issue. On the one hand, Iran has proposed that the location where the oil companies carry out exploration activities be treated as permanent establishment for taxation purposes.

This basically means that oil exploration facilities of Indian companies will be treated as permanent establishment and thus liable to tax even if they do not have a branch, office or a factory there.

India, on the other hand, is of the view that a place of exploration should be treated as a permanent establishment only if the exploration work is carried out for more than 182 days in any 12-month period.

"The Indian view is based on the present rules in Iran where oil exploration contracts are awarded for a minimum period of four years, and would thus exceed the 182 days threshold we have proposed," official sources said.

Iran has, however, not agreed to India's proposal saying that most exploration contracts are given to sub-contractors and the minimum four-year period does not apply to them. "It is the income of the sub-contractors that Iran wants to tax," sources said.

India has entered into DTAA with 65 countries including the US, UK, Japan, France, Germany and investment routing destinations like Mauritius. These agreements provide for relief from the double taxation in respect of incomes by providing exemption and also by providing credits for taxes paid in one of the countries.

These treaties are based on the general principles laid down in the model draft of the Organisation for Economic Co-operation and Development, with suitable modifications as agreed to by the other contracting countries.

Rakteem Katakey & Siddharth Zarabi in New Delhi
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