Concerns over applying DTAA to shipping
Short take
Article 8 of the UN Model code DTAA grants taxing rights to the resident state only for incomes arising international shipping/airline business. Bereft this article, it would be a litigious issue as to who should be taxing income of ships/aircraft plying in international waters/air space.
The corollary of the article is that the source state does not have the right to tax such incomes. Pooling, chartering and allied feeder/liner movements in between domestic ports as part of the international voyage are also granted the benefit of Article 8.
The flag of the ship is deemed to be the country of registration/ownership for that ship. The same country however need not be the place of economic control of the shipping business/or its residency.
A number of ships in the international waters are registered in tax neutral jurisdictions/havens and if one was to “over apply” the flag theory, then income of all those vessels will never be taxed, which definitely cannot be the intent of Article 8 of the DTAA. Nonetheless flag theory still remains as one of the pointers to residency for taxation, but need not be the actual state of residency which definitely has to be the place of economic residency/control of the vessel/operator.
It is also not uncommon in international shipping business for freight collection to happen in a third jurisdiction apart from the country of residency/control or of the flag country. For instance, a Singapore registered shipping company may collect its ocean freight of its ship registered in Malta in a bank account in the UK/US for a voyage from India to Hong Kong.
INDIAN AGENT
Foreign shipping lines operate in India through an Indian agent who collects the freight on behalf of the non-resident shipping line and remits the same to the designated bank account of the principal.
In the case of Indo-Singapore DTAA the Limitation of Benefits (LoB) clause
Article 24 restricts benefit of the DTAA to only incomes which are brought into Singapore.
Manifesting residency with a TRC (Tax Residency Certificate) is a sine qua non to claim DTAA benefits in India.
In most of the earlier verdicts on shipping line taxation, the TRC of the Singapore tax authorities were accepted to be in order granting the benefit of Article 8 exemption to those shipping lines. The same issue arose in the case of Mauritian DTAA, wherein TRC issued by Mauritian tax authorities would confer DTAA benefits in India. A similar circular to the eect is perhaps required for Singapore DTAA.
The writer is a chartered accountant