Fiscal Nepal
First Business News Portal in English from Nepal
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KATHMANDU: The Government of Nepal has formally ramped up its efforts to combat international tax avoidance, announcing the official notification of a crucial anti-treaty shopping amendment to seven of its Double Taxation Avoidance Agreement (DTAA) partners.
The formal communication, issued by the Inland Revenue Department (IRD), serves to inform the treaty partners about a significant change in Nepal’s domestic tax legislation: the introduction of Article 73, Sub-article 5 of the Income Tax Act, 2002 (ITA 2002). This provision is a pivotal step designed to safeguard the integrity of Nepal’s tax treaties and prevent their unintended exploitation by third-country residents.
Key Details of the Anti-Abuse ProvisionThe core of the amendment, Article 73(5) of the ITA 2002, introduces a stringent anti-abuse rule with a direct focus on “treaty shopping.”
Denial of Treaty Benefits: The provision will deny treaty entitlements, such as tax exemptions or reduced tax rates, to entities where:
50% or more of the vested ownership is held by individuals or entities who are not residents of Nepal, or
Are not residents of the other contracting state for the purposes of the DTAA.
This measure ensures that only bona fide investors and taxpayers from the respective treaty partner countries can avail themselves of the tax benefits and concessions laid out in the DTAAs.
Seven Key Treaty Partners NotifiedThe formal notification, executed pursuant to Article 2(4) of the respective DTAAs, has been sent to the Competent Authorities of the following seven nations:
The Kingdom of Norway
The Kingdom of Thailand
The Democratic Socialist Republic of Sri Lanka
The Republic of Austria
The Islamic Republic of Pakistan
The People’s Republic of China
The Republic of Korea
The IRD emphasizes that this formal notification is imperative, as Article 73(5) of the domestic law would otherwise remain inapplicable vis-à-vis Nepal’s existing DTAA framework with these countries.
Policy Rationale and Global CommitmentThe Government of Nepal stressed that the policy rationale behind Article 73(5) is to reinforce the primary purpose of DTAAs: to promote legitimate trade and investment between the contracting states.
According to the press release issued by the IRD, “Nepal is firmly committed to maintaining the integrity of its bilateral tax agreements and ensuring that they benefit only bonafide investors and taxpayers of the respective countries.”
This move aligns Nepal with the growing international consensus, spearheaded by initiatives like the OECD’s Base Erosion and Profit Shifting (BEPS) project, which seeks to curb fiscal evasion and uphold a fair, stable, and transparent global tax environment.
The IRD is currently awaiting acknowledgments of this formal notification from the respective treaty partners and remains open to collaborative engagement for any required clarifications.
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