Tax treaties under scanner as Australia court says Tech Mahindra to be taxed

The fundamental feature of tax treaty — a bilateral pact between two countries to resolve issues of double taxation — has come under question According to a ruling by the Federal Court of Australia, the payments received by an Indian company from its clients in Australia will be taxed in Australia. The Australian superior court has treated such payments as ‘royalty’ — which can be taxed, even though such proceeds cannot be taxed under local Australian laws. The verdict — relating to one of India’s leading companies Tech Mahindra — goes against the underlying tenet of tax treaties which, as is widely accepted, should be used as shield for the taxpayer and not as sword by the taxman A tax treaty is used to provide relief and not aimed at imposing tax. Since this stand by the court stems from provisions of the treaty (and not local laws), the *two countries may not be able to sit across the table to sort it out* as is possible under the ‘mutual agreement procedure’ of a tax treaty, said Lakhani.

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