Thesis: ” In this paper, I will discuss about one of the most contentious issue in international taxation for many years which focuses on the existence of the force of attraction rule in tax treaties and distinguish several types of the rule. This article will examine the principle of the rule and its application in developing countries such as India. Moreover, I will take a closer look at the interpretation issue behind the India-U.K. tax treaties in detailed together with showing the reason why the rule should be eliminated to bring about the uniformity in international tax context”.
For worldwide academics and tax practitioners, there has been a long debate on the force of attraction rule in income tax treaties. Even though the content has been of global relevance, until recently, India did not notice that taxpayers around the globe trying to avoid coming under the scope of this rule. Since the force of attraction rule can create an anomalous result that the other parties of the treaties would be better off under the domestic law, without the tax treaty. The pure source-based taxation of India has been proven by the amendment made to section 9(1) of the ITA, upon the amendment, the necessity of “rendition of services in India” for income deemed to arise or accrue in India has been removed. As upheld by the decision of the Mumbai tax tribunal in the most disputed case, Linklaters LLP1 which I will discuss later in this article, the language in some of the India’s treaties reaffirm the philosophy of India’s source-based taxation and seems to point toward the existence of the force of attraction rule. It is likely that the application of the rule will lead to some unintended incompatibility in basic principles of the interpretation of treaties.
Part 1 of this article will describe the concept of the force of attraction rule vis-à-vis the concept of permanent establishment in the OECD model tax convention together with distinguishing the categories of the rule. Part 2 I will discuss the decision in Linklaters case and explains how the decision commence the application of the force of attraction rule with respect to the India-U.K. treaty. Part 3 I will narrate the jurisprudential concept of the rule and how the rule is usually applied. Part 4 discusses the justification behind the rule in the Indian perspective, principally in the Linklaters order, Part 5 I will analyse the force of attraction rule in light of international tax jurisprudence. Part 6 I will give a conclusion to this topic.
1 Linklaters LLP v. ITO (Int’l Taxation), 2-10 6 Taxman 38 (Mumbai – ITAT).