International Tax Regime and India's Compliance

In this post I shall put forth some questions in regard to India’s compliance with the international tax regime. However before I proceed with any analysis three important questions needs to be addressed; firstly Is there any International tax regime, arguendo, does this regime qualify as international customary law and lastly if there exists a regime then what is the nature of such a regime.


These questions have been a matter of intense debate and controversy over the years amongst leading scholars and tax practitioners. One of the leading scholars H. David Rosenbloom relies heavily on the archaic state of cross border transactions (anecdotal evidence) to argue that international tax regime is an “imaginary” and “utopian” idea. He argues that due to the varying socio-economic situation of states, it is impossible to imagine that all states will adopt the same rules of taxation (See H. David Rosenbloom, International Tax Arbitrage and the “International Tax System,” 53 TAX L. REV. 137, 166 (2000); See also Nancy H. Kaufman, Fairness and the Taxation of International Income, 29 LAW & POL’Y INT’L BUS. 145, 148 n.23 (1998)). Per Contra, Reuven Yonah relies on experiences of various countries but primarily the United States to argue that indeed an “international tax regime” does exist ( Reuven S. Avi Yonah INTERNATIONAL TAX AS INTERNATIONAL LAW (Cambridge, 2007)). Let us assume for the purposes of this post that Reuven is correct.

Now, I shall move to the second question that I had outlined above i.e. does this regime qualify as international customary law. Simply put, an international rule qualifies as customary international law if the states practice the rule (state practice) and they do so under the notion of a legal obligation (opinio juris). Reuven agrues that international tax regime does indeed qualify to be customary international law. Reuven reasons that though the international tax regime is spread over myriad of bilateral treaties, they incorporate harmonized rules as they are based on primarily the UN or the OECD model tax treaty. To illustrate this Reuven investigates the rules relating to Jurisdiction to tax, non discrimination (Mihir’s article on this blog on non discrimination) and transfer pricing and concludes that these rules are primarily the same or atleast have the same underlining principles across all the bilateral tax treaties. Reuven also discusses some of the legislative and policy changes in the US and how the US found it difficult to adopt certain rules which were against basic international principles; hence recognizing the presence of a harmonized international tax regime.

But merely putting forth an argument that an international tax regime exists and it qualifies as customary international law is not enough. Having established both these points it is imperative now discuss the nature of international tax law. Reuven points out that the nature of the international tax regime is broadly based on two principles namely single tax principle and the benefits principle. Single tax principle postulates that an income should be taxed only once (no less and no more). In other words both double taxation and double nontaxation is undesirable under the international tax regime. On the other hand the benefits principle stipulates that the active income (business income) should be taxed at source and the passive income (investment income) should be taxed at residence.

In light of this background we need to ponder upon the question, whether India has complied with the above discussed international tax regime. Let us take a contemporary example to further discuss this issue. The first draft of the DTC proposed that in case of a conflict between the tax treaty and domestic tax law whichever came latter in time shall prevail (“latter in time” doctrine). This was a massive divergence from the current position under the income tax act, 1961 wherein in case of a conflict between the tax treaty and domestic law whichever is beneficial prevails. Although, the revised direct code proposes to restore the current position of law, it also stipulates that treaty provisions can be overridden in cases when the provisions relating to GAAR and CFC are invoked. The exceptions to when a treaty can be overridden are too wide (see the discussion on GAAR provisions here and here) and it is submitted that if that be the case then India certainly does not recognize any international tax regime, leave alone complying with the principles embodied therein. One may argue that the correction in the revised tax code i.e. the restoration of the “beneficial” doctrine was a manifestation of India recognizing its international obligation, but in my view the correction in the code was made based on pragmatic economic consideration (after the release of the first code it was feared that there would be a heavy outflow of foreign capital) and not on any international legal obligation.

Concluding, whether India has complied with the international tax regime (if there exists one) needs closer scrutiny. Nevertheless I have attempted to argue in the course of this post that there exists a prima facie case that India does not recognize any so called “international customary tax law”.