New DTAA with Malaysia to bring relief for Indian firms

Provides for corresponding transfer pricing adjustment

New Delhi, Feb. 2:

Come April 1, dividends paid by Indian companies to Malaysian investors or entities will attract a lower withholding tax of 5 per cent against 10 per cent earlier.

This has been provided in the new India-Malaysia double-taxation avoidance agreement (DTAA), which came into force on December 26.

The new agreement, which was signed in May, will be effective in India from April 1. In the case of Malaysia, it became effective from January 1.

Besides providing a mechanism for exchanging banking information for tax administration, the new agreement also contains a limitation of benefit clause, an anti-abuse provision.

One of the new features of the agreement is that it provides for corresponding transfer pricing adjustment in the other country, Amit Maheshwari, Partner, Ashok Maheshwary & Associates, a firm of chartered accountants, said.

Simply put, if an Indian transfer pricing officer makes a transfer pricing adjustment to an Indian affiliate of a Malaysian company, then a corresponding adjustment can be made by Malaysian authorities in the books of the Malaysian entity.

Earlier, this facility was not there, leading to double taxation.

The new agreement has also, in line with international practice, introduced a new article for taxing capital gains from alienation of property.

The concept of service permanent establishment has also been introduced with a threshold of 90 days within any 12-month period.