KATHMANDU, Nov 13: The government has officially notified about the substantive change in its domestic taxation legislation to seven of its Double Taxation Avoidance Agreement (DTAA) partner countries.
This notification highlights Nepal's dedication to preventing fiscal evasion and upholding a fair, stable, and transparent international tax environment. According to the Inland Revenue Department (IRD), the notification has been formally sent to the Competent Authorities of the seven countries with which Nepal had inked DTAAs before the enactment of the Income Tax Act (ITA) 2002.
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The countries include Norway, Thailand, Sri Lanka, Austria, Pakistan, China and South Korea.
The new provision under the Article 73(5) of the ITA, emphasizes that the policy rationale behind is to reinforce the primary purpose of the DTAAs, which includes promoting legitimate trade and investment between the contracting states. The provision acts as a vital domestic mechanism to prevent the unintended exploitation of treaty benefits and concessions by third-country residents or entities solely seeking tax advantages, known as ‘treaty shopping.’
This anti-treaty shopping rule denies treaty entitlements, such as tax exemptions or reduced tax rates, to the entities where 50 percent or more of the vested ownership is held by individuals or entities who are not residents of Nepal or residents of both Nepal and the other contracting state for the purposes of the agreement.
The IRD has stated that the central focus of the notification is the introduction of a material anti-abuse provision in Article 73 (5). This domestic legislative provision is designed to safeguard the integrity of DTAAs.
"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," read the notification letters issued by the IRD Director General Madan Dahal, who is the Competent Authority for Nepal.
