Extract from Income Tax Directive 2066 (Upadated 2078) – Chapter 15: Provision related to avoidance of double taxation and the provision of fiscal evasion.
Unofficial concise translation for educational purpose only.
15.2 International Agreements
73(1) In case any individual is liable to pay tax under this act or current Nepal Law on any income earned by him, if any tax is payable on the same income in a foreign country, Government of Nepal may conclude an international agreement with the concerned foreign government to avoid such double taxation.
| Example 15.2.1: Suppose, Dr. Nagendra Jha is senior eye surgeon specialist in Nepal. In FY 2075/76, he has given service for four month as resource person in Madras Hospital in India and has received Rs. 10 lakhs as service fee. There has been double taxation avoidance agreement between Nepal and India and as per the agreement, if in a capacity of resource person provides services of surgery for less than 183 days at country where he is not resident, service fee received for that services shall not be taxed in source country. So, in this case, Dr. Nagenda Jha shall not pay taxes in India for the service fee received for surgery provided in India. If there were no double taxation avoidance agreement between Nepal Government and Indian Government then he has to pay tax in India on the basis of source and has to include his income in Nepal and pay taxes thereon. Thus, there will be double taxation in the same income. |
73(2) This subsection shall apply where the Department receives a request from the competent authority of another country pursuant to an international agreement with Nepal for the collection in Nepal of an amount payable by a person, the tax debtor under the tax laws of the other country.
| Example 15.2.2: Suppose, Amir Hussain has been operating hotel business in India in FY 2074/75 being a resident person in India. He has to pay taxes Rs. 10 lakhs for operating business in India. He left India without paying taxes and has been in Nepal being resident of Nepal in FY2075/76. He is also operating business in Nepal as resident person. In Double Taxation Avoidance and Financial Fraud Protection agreement between Nepal Government and Indian Government, there is an article with a provision that the authorized official of India writes to Director General of the department (authorized official in Nepal) to support in collection of taxes due in India from Amir Hussain then the Director General of the department has to support in tax collection under this section. |
73(3) Where subsection (2) applies, the Department may, by serving a notice in writing, require the tax debtor to pay the amount to the Department by the date specified in the notice for transmission to the competent authority.
73(4) This subsection shall apply where an international agreement provides that Nepal will exempt income or a payment or subject income or a payment to reduced tax.
| Example 15.2.3: Suppose, Dr. Lee from China has earned Rs. 10 lakhs by teaching in Bhrikutee Medical College in Nepal. In double taxation avoidance agreement signed between Nepal Government and Chinese Government, it has provision that if professor of one country teaches in another country, then the income earned shall not be taxed for two years in that country. Thus, the provision of Income Tax Act of Nepal shall not be effective but provision of the agreement shall be effective so Dr. Lee is not required to pay taxes in income received from Bhrikutee Medical College. |
| Example 15.2.4: Suppose, an agreement has been concluded between Nepal Government and Qatar Government in relation to Double Taxation Avoidance Agreement. In that agreement, 10% tax will be levied in interest income, if resident person of one country invests in loans in another country. Interest income earned by other than resident natural person shall be subject to 15% tax deduction at source as per Income Tax Act of Nepal and such 15% tax deducted on payment to non-resident person shall be final tax. Jakir Hussain from Qatar has earned Rs. 10 lakhs as interest by investing Rs. 1 crore in Karnali Hydropower Company in Nepal. The interest income received by Jakir Hussain will be taxed at the rate 15% (Rs. 1.5 lakh) as per Income Tax Act of Nepal but due to provision of Double Taxation Avoidance Agreement he shall be taxed at the rate of 10% i.e. only. Rs. 1 lakh. Due to Double Taxation Avoidance Agreement concluded between Nepal Government and Qatar Government, the 10% tax rate as provided in the agreement shall be applicable in case of Jakir Hussain. |
73(5) Where subsection (4) applies, the exemption or reduction shall not be available to any entity-
- Who, for the purposes of the agreement, is a resident of the other contracting state; and
- 50 percent or more of whose underlying ownership is held by individuals or entities in which no individual has an interest and who, for the purposes of the agreement, are not residents of that other contracting state or Nepal.
Clarification:- For the purpose of this section, international agreement means a treaty or other agreement with a foreign government that has entered into force in Nepal and providing for the following:-
- Relief of double taxation and the prevention of fiscal evasion; or
- Reciprocal administrative assistance in the enforcement of tax liabilities.
15.3 Double Taxation Avoidance Agreement
15.3.2 Common Opinion in respect of Double Taxation Avoidance Agreement
Double taxation avoidance agreement includes international transactions. International tax part of any country will be both inbound and outbound. Although, there are differing opinions in respect of double taxation avoidance agreement, similar opinions can be observed in few subjects. The similar opinions internationally found are pointed out below:
- The country where income is earned through trade, business, transactions or other causes, the first rights to collect tax on such income will lie to source country. If any resident person of any country operates branch in another country and earns income through effective management of office or industry operation then such income will be taxable in the country of its income.
- Resident person of any country, not transacting through permanent establishment but residing in resident country can generates income from deployment of capital, investing in debt or transfer of technology. Person, without being active in another country in this way can generates income where such income will be taxed in source country at certain rates.
- If any resident person receives any income in another country then tax shall be imposed in source country. After adjusting for foreign tax paid on source country, the right to impose tax will lie on country of residence.
- If resident person of any country generates income in another country then he/she can avail foreign tax credit of tax paid on source country. The provision of tax credit in resident country for tax paid on source country will avoid the situation of double taxation on the same income.
While concluding double taxation agreement, the discussion between two countries will decide in respect of imposition of tax. Although, tax on other headings will be decided on mutual discussion, the opinion in respect of above points are common between contracting state.
15.3.3 Objective of Double Taxation Avoidance Agreement
Avoidance of double taxation situation:
| Example 15.3.1: Suppose, Mr. Peter is resident person of United States (US). He is earning income by working as telephone operator in Nepalese Embassy of Britain in FY 2075/76. Although, Mr. Peter is resident of United States, he receives amount by working as telephone operator from Nepal Government so the amount received by him will be the source in Nepal as per section 67(6)(i) of the Act and such income will be taxed as per Income Tax Act of Nepal. If the Income Tax law of United States provides that if any resident person of US generates incomes from service of other country’s government, it will be taxed in US then in that case, Mr. Peter will be taxed in both country. If there were Double Taxation Avoidance Agreement between Nepal Government and US Government then the country of tax imposition will be clearly provided by such agreement so will be escaped from the situation of double taxation. |
Reduce tax burden:
| Example 15.3.2: Suppose, ABC is electricity production company in Nepal. The company has brought Rs. 1 crore from Mr Chang, a Chinese citizen at the rate of 10% interest to operate the business. In FY 2075/76, the company has paid Rs. 10 lakhs to Mr. Chang as interest. As per Income Tax Act, 15% tax deduction at source is applicable in Nepal on payment of such interest. There is a Double Taxation Avoidance Agreement between Nepal and Chinese Government and 10% tax is applicable on such payment as per the agreement so Mr. Chang will have tax burden lessor by 5%. |
Eradicate uncertainty of tax liability:
| Example 15.3.3: Suppose, Mr. Habib is resident of Pakistan. He has developed computer software to ease the banking business. ABC Bank in Nepal has taken right to use that computer software for consecutive 5 years by paying Rs. 1 crore royalty per annum. The royalty is subject to 15% tax deduction as per Income Tax Act in Nepal. There are frequent changes in tax rate applicable to royalty payment in Income Tax Act because of this the tax applicable to Mr. Habib will be uncertain all the time. As Mr. Habib is a resident person in Pakistan and there is Double Taxation Avoidance Agreement between Nepal and Pakistani Government so although tax rate will be increased in royalty income in Income Tax Act of Nepal, there will be no uncertainty for tax rate for him. The tax rate applicable to Mr. Habib will not be higher than 15% as per the provision of Double Taxation Avoidance Agreement between Nepal and Pakistani Government. |
Avoidance of tax leakage:
| Example 15.3.4: Suppose, a company in Mauritius does business of selling vehicles and it has permanent establishment in Nepal and Kuwait. Income Tax Act of Mauritius has provision of 20% tax rate in business income and Income Tax of Nepal has provision of levying tax at the rate of 25% in normal business. Similarly, in Kuwait, let us suppose the tax rate is 15%. The price of vehicle sent by that company in Nepal is Rs. 8 lakhs per vehicle and similar vehicle sent to Kuwait has price Rs. 7 lakhs only. In this way, the company is assumed to have made arrangement of transfer pricing from Nepal to Mauritius. As there is a Double Taxation Avoidance Agreement between Nepal and Mauritius Government, the competent authority of Nepal can demand information from competent authority in Mauritius relating to price charged to other permanent establishment there. The information so demanded shall be availed by the Mauritius Government. |
15.3.4 Double Taxation Avoidance Agreement Models
| Article | UN Model | OECD Model |
| 1 | Persons Covered | Persons Covered |
| 2 | Taxes Covered | Taxes Covered |
| 3 | General Definitions | General Definitions |
| 4 | Resident | Resident |
| 5 | Permanent Establishment | Permanent Establishment |
| 6 | Income from Immovable Property | Income from Immovable Property |
| 7 | Business Profits | Business Profits |
| 8 | Shipping Inland water ways transport and Air transport | Shipping Inland water ways transport and Air transport |
| 9 | Associated Enterprises | Associated Enterprises |
| 10 | Dividend | Dividend |
| 11 | Interest | Interest |
| 12 | Royalties | Royalties |
| 13 | Capital Gains | Capital Gains |
| 14 | Independent Personnel Services | Deleted |
| 15 | Dependent Personnel Services | Income from Employment |
| 16 | Director’s fees & Remuneration of Top Level Managerial Officials | Director’s Fees |
| 17 | Artists and Sportsperson | Artists and Sportsmen |
| 18 | Pensions and Social Security Payments | Pensions |
| 19 | Government Service | Government Service |
| 20 | Students | Students |
| 21 | Other Income | Other Income |
| 22 | Capital | Capital |
| 23 | Method for Elimination of Double Taxation | Method for Elimination of Double Taxation |
| 24 | Non-discrimination | Non-discrimination |
| 25 | Mutual Agreement Procedure | Mutual Agreement Procedure |
| 26 | Exchange of Information | Exchange of Information |
| 27 | Member of Diplomatic Mission and Consular Posts | Assistance in the Collection of Taxes |
| 28 | Entry in to Force | Members of Diplomatic Missions and Consular Posts |
| 29 | Termination | Territorial Extensions |
| 30 | Entry into Force | |
| 31 | Termination |
15.3.5 Double Taxation Avoidance Agreement Concluded by Nepal
Country with whom Double Taxation Avoidance Agreement concluded by Nepal Government
| SN | Country with Agreement | Subject of Agreement |
| 1 | India | In respect of Income |
| 2 | Norway | In respect of Income and/or Capital |
| 3 | Thailand | In respect of Income |
| 4 | Sri Lanka | In respect of Income |
| 5 | Mauritius | In respect of Income |
| 6 | Austria | In respect of Income |
| 7 | Pakistan | In respect of Income |
| 8 | China | In respect of Income |
| 9 | South Korea | In respect of Income |
| 10 | Qatar | In respect of Income |
| 11 | Bangladesh | In respect of Income |
Tax rate applicable to Dividend, Interest and Royalty Income with country with whom Double Taxation Avoidance Agreement are concluded by Nepal.
| SN | Country Name | Dividend tax | Interest tax | Royalty Tax |
| 1 | India | 5%, 10% | 10% | Maximum 15% |
| 2 | Norway | 5%, 10%, 15% | 10%, 15% | Maximum 15% |
| 3 | Thailand | Not more than 15% | 10%, 15% | Maximum 15% |
| 4 | Sri Lanka | Not more than 15% | 10%, 15% | Maximum 15% |
| 5 | Mauritius | 5%, 10%, 15% | 10%, 15% | Maximum 15% |
| 6 | Austria | 5%, 10%, 15% | 10%, 15% | Maximum 15% |
| 7 | Pakistan | 10%, 15% | 10%, 15% | Maximum 15% |
| 8 | China | Not more than 10% | 10% | Maximum 15% |
| 9 | South Korea | 5%, 10%, 15% | 10% | Maximum 15% |
| 10 | Qatar | Not more than 10% | 10% | Maximum 15% |
| 11 | Bangladesh | 10%, 15% | 10%, 15% | Maximum 15% |
Navigate to Other legal provision in Nepal in blog for more information.
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