DTAA between India and Philipines

Dear all Experts,

Please advice on the dtaa between India & Philipines.

Indian Resident Client who has business in India, wants to start a business in Philippines.

I wanted to know What relief he will get on taxes paid in Philippines on profits from the business in philippines.

Extract of DTAA

Article 24

ELIMINATION OF DOUBLE TAXATION

1. The laws in force in either of the Contracting States shall continue to govern the taxation of income in the respective Contracting States except where provisions to the contrary are made in this Convention.

2. The amount of Philippine tax payable, under the laws of the Philippines and in accordance with the provisions of this Convention, whether directly or by deduction, by a resident of India, in respect of profits or income arising in the Philippines, which have been subjected to tax both in India and in the Philippines, shall be allowed as a credit against the Indian tax payable in respect of such profits or income provided that such credit shall not exceed the Indian tax (as computed before allowing any such credit) which is appropriate to the profits or income arising in the Philippines. Further, where such resident is a company by which surtax is payable in India, the credit aforesaid shall be allowed in the first instance against income-tax payable by the company in India and as to the balance, if any, against surtax payable by it in India.

3. The term "Philippine tax payable" shall be deemed to include the amount of Philippine tax which would have been paid if the Philippine tax had not been exempted or reduced in accordance with this Convention and the special incentive laws designed to promote economic development in the Philippines, effective on the date of signature of this Convention, or which may be introduced in the future in the Philippine taxation laws in modification of, or in addition to, the existing laws.

4. The amount of Indian tax payable under the laws of India and in accordance with the provisions of this Convention, whether directly or by deduction, by a resident of the Philippines, in respect of profits or income arising in India, which has been subjected to tax both in India and the Philippines, shall be allowed as a credit against Philippine tax payable in respect of such profits or income provided that such credit shall not exceed the Philippine tax (as computed before allowing any such credit) which is appropriate to the profits or income arising in India.

5. For the purposes of the credit referred to in paragraph 4, the term "Indian tax payable" shall be deemed to include any amount which would have been payable as Indian tax for any assessment year but for an exemption or reduction of tax granted for that year or any part thereof by the special incentive measures under the provisions of the Income-tax Act, 1961 (43 of 1961), which are designed to promote economic development, or which may be introduced hereafter in modification of, or in addition to, the existing provisions for promoting economic development in India.

Hi Priya,

Thanks for sharing the excerpt of the DTAA between India and the Philippines! Here’s a clear explanation and tax planning insight for your Indian resident client planning to start business in the Philippines:

Key Points on Relief from Double Taxation under India-Philippines DTAA (Article 24):

Nature of Relief:
- The DTAA provides relief by way of tax credit.
- Taxes paid in the Philippines on business profits can be claimed as a credit against Indian tax payable on the same profits.
- The credit is limited to the amount of Indian tax applicable on that income — i.e., no excess credit beyond Indian tax liability.
Taxation in Both Countries:
- The Philippines will tax profits arising from business there as per its laws.
- India, as the residence country, will also tax global income, including profits from the Philippines.
- To avoid double taxation, India allows credit for taxes paid in the Philippines.
Special Incentives:
- The DTAA also accounts for any tax exemptions or reductions in the Philippines due to special incentive laws.
- Taxes “deemed to have been paid” include amounts that would have been paid but are exempt or reduced under such incentive schemes.
Order of Credit:
- For companies, credit is first adjusted against income-tax payable, then against surtax (if applicable).
Practical Tax Planning Tips:
- Maintain proper documentation of taxes paid in the Philippines (tax payment receipts, tax returns).
- Claim foreign tax credit (FTC) while filing Indian income tax returns, using Form 67 and supporting documents.
- Review the withholding tax rates under the DTAA for payments like dividends, interest, royalties from the Philippines.
- Explore if the business in the Philippines qualifies for any local tax incentives and understand how it affects FTC.
- Consider transfer pricing compliance if dealing with related entities in both countries.
- Monitor any changes or updates in the India-Philippines DTAA or respective domestic laws.

Summary:

Your client will get credit in India for Philippine taxes paid on business profits.
Credit is limited to the Indian tax payable on that income.
Proper documentation and compliance are key to effectively utilizing DTAA benefits.
Check for special incentives and withholding tax rates to optimize tax planning.