Home » Alerts » India’s protocol on amendment to the India Brazil Tax Treaty and Proposals for Innovative Elephant Bonds

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Pursuant to India’s increased focus on boosting foreign investment and cross-border businesses along with countering harmful tax practices, following developments have taken place recently:

Indian’s Union Cabinet approves the signing of the Protocol amending the India Brazil Tax Treaty for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income

The existing Tax Treaty between India and Brazil is being amended to bring it in line with international developments and also to implement the recommendations contained in the G20 OECD Base Erosion and Profit Shifting Project (BEPS) in view of the fact that Brazil has opted not to sign the Multilateral Convention to implement tax treaty related measures to prevent BEPS (MLI).

The existing Tax Treaty between India and Brazil was signed on 26th April, 1988 and was amended through a Protocol signed on 15th October 2013 in respect of exchange of information. According to the press release by the Government of India, significant amendments made vide this protocol are as under:

  • Tax rates in source state have been lowered on interest, royalties and fees for technical services in order to incentivise cross border business and investment.
  • Minimum standards and other recommendations of BEPS Project have been implemented.
  • A preamble text, Principal Purpose Test, a general anti abuse provision along with a simplified Limitation of Benefits clause have been included to curb tax planning strategies which exploit the gaps and mismatches in the law.
  • Taxing rights have been clearly allocated between both the countries to provide tax certainty to investors and businesses.
  • Other updations have been made with a view to facilitate elimination of double taxation.

The amending protocol would come into force upon official notification by the Central Government.

Recommendation made by Central Government’s High-Level Advisory Group for issuance of “Elephant Bonds” to bring back undisclosed foreign income and assets:

A High-Level Advisory Group (HLAG) was constituted by the Ministry of Commerce and Industry under the Central Government to make recommendations for boosting India’s global trade, bilateral trade relations and other economic activities. In its report issued in September 2019, HLAG has suggested, inter alia, the issuance of “Elephant Bonds” as an amnesty scheme to bring undisclosed foreign income and assets back to India and channelize such funds for investment in infrastructure. Salient features of the proposed “Elephant Bonds” scheme are as under:

  • Undisclosed foreign income and asset can be declared by paying tax at the rate of 15%.
  • 40% of the funds so disclosed shall be invested in Elephant Bonds for a period of 20-30 years. The proceeds from bonds would be invested in infrastructure in India. The balance funds would be available with the declarant for utilisation in India.
  • The scheme would provide immunity from any action under financial laws in respect of the undisclosed income or assets declared.
  • The coupon rate of interest on Elephant Bonds would be linked to LIBOR and the coupon rate would be 5%. The interest earned would be taxed at the rate of 75%.

Comments: The proposed amnesty scheme while being pragmatic would channelize the undisclosed income and assets staked abroad towards the pressing need of infrastructural development in India. While this is not the first time that an amnesty scheme has been proposed to bring the black money back in India, the proposed scheme on cracking down black money seems very attractive as it provides immunity from applicable laws.