Introduction

A Double Taxation Avoidance Agreement (DTAA), commonly referred to as a Tax Treaty, is a bilateral legal agreement between two countries that aims to avoid or eliminate the double taxation of the same income. By providing tax certainty for cross-border transactions, a DTAA fosters foreign investment, facilitates the exchange of information between tax authorities, and prevents fiscal evasion. Nepal’s journey with DTAAs began with the signing of its first agreement with neighboring India in January 1987. This was followed by a second tax treaty with Norway in 1996. To date, Nepal has established bilateral tax treaties with a total of 11 countries, including Thailand, Sri Lanka, Mauritius, Austria, China, Qatar, Bangladesh, South Korea, and Pakistan.

DTAA Benefits for Taxpayers in Nepal

• Prevention of double taxation: The primary benefit is the elimination or reduction of double taxation on income earned in foreign countries.
• Reduced withholding tax rates: Many DTAAs provide for lower withholding tax rates on cross-border payments such as dividends, interest, and royalties.
• Tax certainty: DTAAs provide clarity on tax treatment of various types of income, reducing uncertainty for businesses and individuals engaged in cross-border activities.
• Dispute resolution mechanisms: Most DTAAs include provisions for resolving tax disputes between contracting states, protecting taxpayers from unfair treatment.
• Exchange of information: DTAAs facilitate information exchange between tax authorities, helping to prevent tax evasion and ensuring compliance.
• Promotion of foreign investment: By providing tax certainty and eliminating double taxation, DTAAs encourage foreign investment in Nepal.
• Enhanced competitiveness: Nepalese businesses can compete more effectively in international markets due to reduced tax burdens.

Policy and Legal Provisions of Nepal on DTAA

Constitution of Nepal

Under the Directive Principle and Policies, the state shall, for the purpose of national development, pursue a policy of attracting foreign capital and technology, giving priority to the national investment.

Periodic Plan of Nepal

Government Finance, Revenue Policy states that ‘Nepal will continue concluding DTAA’s with those countries from which it can get direct benefit and investment’.

Current Revenue Policy

The objective of the budget is to create an investment friendly environment. The revenue policy is to attract domestic and foreign capital through an investment friendly environment.

Income Tax Act, 2058 [Section 73 (1)]

International Agreements – If any income of any person is taxable according to this Act or the laws in force and the same income is also taxable in a foreign country, the Government of Nepal may conclude an international agreement with the foreign country for the avoidance of double taxation. Also, for purposes of this Section, “international agreement” means any treaty or agreement containing the following provisions, concluded with any foreign government and applicable to Nepal:
(a) to avoid double taxation and prevent fiscal evasion, or
(b) to render reciprocal administrative assistance in the implementation of tax liability.

Strategic Plan of IRD

As a tax policy reform strategy, the Inland Revenue Department (IRD) plans to Initiate negotiations with other governments to conclude DTAA which would be helpful in sharing information on taxpayers.

Recommendation by IMF

The International Monetary Fund (IMF) has recommended that Nepal should initiate DTAA negotiations with countries with which it has close economic ties but has not yet concluded an agreement. The IMF specifically identified the U.S., Canada, the U.K., Singapore, and Japan as key countries for these negotiations.

Therefore, it is also paramount to negotiate new DTAAs based on proper expertise in DTAA’s, transfer pricing and other international taxation rules.

Models of DTAA

DTAAs are based on models that help to ensure uniformity in how cross-border tax treaties are drafted and negotiated between two nations. These models assist in creating clear and effective agreements for avoiding double taxation. The most prominent models are the UN Model and OECD Model.

UN Model

The UN Model Double Taxation Convention or UN Model is designed to favor developing countries by giving more taxing rights to the source country, where income-generating activities occur. First established in 1980 with updates in 2001 and 2011, it is seen as a more equitable model for capital-importing nations. However, its effectiveness has been limited by factors like developing countries’ weaker tax laws and limited negotiating capacity in the UN Committee. power. According to several studies, this model has been criticized for becoming less relevant due to infrequent updates and being more complex to understand.

OECD Model

The OECD (Organization for Economic Co-operation and Development) Model Tax Convention is a prominent framework for drafting bilateral tax treaties. Published in 1963 and updated numerous times – including in 1977, 1992, 1995, 2010, and 2014 – it emphasizes the residence principle, granting more taxing rights to the taxpayer’s home country. While originally designed for developed nations, it has become a popular basis for treaties between both developed and developing countries. However, the concerns have often been raised about its potential to disproportionately benefit multinational corporations headquartered in developed countries and the fact that developing countries have limited influence over the OECD Model Tax Convention because they are not OECD members.

Both the UN and OECD tax models are widely used frameworks for international tax treaties. While they are similar in their article subjects – such as defining a person, types of income, and tax rates – they have different core focuses. The UN model primarily grants taxing rights to the source country, whereas the OECD model gives more power to the country of residence.

Types of Income Covered under DTAAs

DTAAs typically cover various types of income, including:

• Business profits
• Dividends
• Interest
• Royalties
• Capital gains
• Income from employment
• Director’s fees
• Income from immovable property
• Pensions and annuities
• Income from technical services
• Income from independent personal services
• Shipping and air transport income

The specific types of income covered and their tax treatment may vary between different DTAAs. It’s essential to refer to the relevant DTAA for detailed provisions.

Documents Required for DTAA Benefits

To claim DTAA benefits in Nepal, the following documents need to be submitted:

• Tax Residency Certificate (TRC) from the country of residence
• Permanent Account Number (PAN) or its equivalent from the country of residence
• Copy of the relevant pages of the passport
• Proof of income earned in the foreign country
• Bank statements showing receipt of income
• Copies of contracts or agreements related to the income
• Tax returns filed in the country of residence
• Form 13 (Application for Certificate of Residence for claiming DTAA benefits)
• Any specific forms required by the Inland Revenue Department of Nepal
• Affidavit declaring the purpose of claiming DTAA benefits
• Power of Attorney, if applicable

Processing Time for DTAA Claims

The processing time for DTAA claims in Nepal can vary depending on several factors:

• Complexity of the case
• Completeness of the submitted documents
• Current workload of the tax authorities
• Need for additional information or clarifications

On average, straightforward DTAA claims may be processed within 30 to 60 days. However, more complex cases or those requiring additional scrutiny may take longer, potentially up to several months.

To expedite the process:

• Ensure all required documents are submitted correctly and completely
• Respond promptly to any requests for additional information
• Follow up regularly with the tax authorities on the status of your claim

Conclusion

Nepal’s journey with DTAAs is a strategic effort to foster an investment-friendly environment. By preventing the double taxation of income and providing tax certainty, these agreements attract foreign capital and technology, aligning with the country’s national development goals. Nepal’s legal framework and the ongoing efforts of the IRD to negotiate more DTAAs demonstrate a clear commitment to leveraging these treaties for economic growth and global integration.

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