Double Taxation Relief (India) Order 1986

This commentary item was published in Public Information Bulletin Volume 112, Supplement No.16, February 1987

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Double Taxation Convention With India

Part I - Introduction

The text of the Convention has been published as a schedule to an Order in Council (SR 1986/336) and is available from Government Bookshops.

The Convention came into force on 3 December 1986 with effect in New Zealand for any income year beginning on or after 1 April 1987.

In India it takes effect for any "previous year" (as defined in the Income Tax Act 1961) beginning on or after 1 April 1987.

The term "previous year" as used in the India Income Tax Act and in the Convention, in its practical application has the same meaning and effect as "income year" In other words in the case of India the Convention will first apply to income arising on or after 1 April 1987.

Part II - Notes on the Convention Article by Article

Article 1 - Personal Scope

The Convention applies to persons who are residents of New Zealand or India or of both States.

Article 2 - Taxes Covered

In India the Convention covers income tax including any surcharge thereon and the surtax.

In New Zealand the Convention covers income tax and excess retention tax.

Article 3 - General Definitions

1. Paragraph 1 groups together various general provisions required for the interpretation of terms used in the Convention.

"National": Paragraph 1(g)

The term "national" is used in paragraph 2(c) and 2(d) of Article 4 in determining residence status. It is also used in Article 19 Government Service and Article 24 Non-Discrimination.

In New Zealand the term covers any individual who is a New Zealand citizen and any legal person or other entity deriving its status as such from the law in force in New Zealand.

In India the term covers any individual possessing the nationality of India and any legal person, partnership or association deriving its status as such from the law in force in India.

2. Paragraph 2 is a standard provision. Where a term is not defined it has the meaning applicable under the domestic law of the country applying the Convention.

Article 4 - Residence

1. Paragraph 1 defines the meaning of the term "resident of a Contracting State". In effect the defined term is a reference to the domestic law of each country. Whenever the term is used in the Convention, the residence of the taxpayer must first be determined in accordance with this Article.

2. Paragraph 2 sets out the tests to be applied to solve the problem of a dual resident individual. Dual residence arises when a taxpayer is resident in both countries by virtue of the domestic law of each country.

3. Paragraph 3 provides that where a company or other legal person is resident in both countries, residence will be where the place of effective management of the enterprise is situated. In this context, New Zealand views the term "effective management" as meaning the practical day to day management, irrespective of where the overriding control is exercised.

In applying the tests to dual residents, as set out in paragraphs 2 and 3, it should be remembered that these tests apply only for the purposes of the Convention. If the person resident in New Zealand (domestic law test) becomes for the purposes of the Convention a "resident of India" after the tests have been applied, this does not mean that he is regarded as a non-resident for all purposes of New Zealand tax law. For example, he can never be subject to non-resident withholding tax, the reason being that although he is treated as a non-resident for certain purposes of the Convention, he is still regarded as being resident in New Zealand under the Income Tax Act. However, it does mean that he is entitled to any benefits granted by the Convention as a "resident of India". For example, although New Zealand dividend income derived by him is not subject to non-resident withholding tax, he is liable for New Zealand income tax on the dividend income but qualifies for the 20 percent limitation in the Convention.

Article 5 - Permanent Establishment

The Article defines the term "permanent establishment". This concept determines the right of a Contracting State to tax the profits of an "enterprise of the other Contracting State". Due to the inclusion of the words "includes especially" in paragraph 2, the examples cited as constituting a permanent establishment are by no means exhaustive.

The definition of "permanent establishment" is fairly standard, however the following points should be noted:

Article 6 - Income from Immovable property

This Article recognises the internationally accepted practice in relation to income from land or landed property. The Article also applies to such items as rents, natural resource royalties, farming and forestry profits, etc. The principle of the Article is that income derived by a resident of one State from immovable property situated in the other State may be taxed in the State where the immovable property is situated. "Immovable property" is not defined in our general law but the Article provides extensive definition. Ships and aircraft are excluded from the term "immovable property".

The Article involves no change in current practice in relation to the income covered, ie, our domestic law applies.

Article 7 - Business Profits

This Article is in many respects a continuation of, and a corollary to, Article 5 on the definition of the concept of permanent establishment. Under Article 7 a Contracting State cannot tax the business profits of an enterprise of the other Contracting State unless it carries on its business through a permanent establishment situated therein. If a permanent establishment exists the Article goes on to lay down a set of rules by which the profits of the permanent establishment are to be calculated.

Before dealing with the salient features of the Article some comment is warranted on the importance of paragraph 8. This is because reference to this Article and Article 5 will not always be necessary to determine the liability of specific types of income. In effect paragraph 8 gives first preference to the other Articles in the Convention. It follows that this Article will only be applicable to business profits which do not belong to the categories of income specifically covered in other Articles of the Convention and, in addition, to interest and royalties which specifically come within the circumstances detailed in paragraph 5 of Article 11, and paragraph 5 of Articles 12, and consequently fall within Article 7.

1. Paragraph 1 expresses the general rule that profits are taxable only in the country of residence unless the enterprise is engaged in business in the other State through a permanent establishment, in which case the other State may tax:

• the business profits of the Permanent Establishment; and
• profits arising from sales made direct in the other State by the enterprise of goods or merchandise of the same or similar kind as those sold through its Permanent Establishment.

2. Paragraph 2 contains the normal provision enabling arm's length profits to be attributed to the permanent establishment if necessary. It also provides for the profits to be estimated on a reasonable basis where the correct amount of the profits are incapable of determination or the determination thereof presents exceptional difficulties.

3. Paragraph 3 expresses the taxpayer's right to deduct from the profits of the permanent establishment the expenses incurred for the purposes of the permanent establishment even if those expenses are incurred outside the country where the permanent establishment is situated.

4. Paragraph 4 provides that where the profits to be attributed to a permanent establishment are determined, not on the basis of separate accounts or by making an estimate of arm's length profit, but simply by apportioning the total profits of the enterprise by reference to various formulae, then such a method may continue to be employed provided it has been customary to adopt such a practice. Such a method differs from those envisaged in paragraph 2 of Article 7, since it contemplates not an attribution of profits on a separate enterprise footing, but an apportionment of total profits. However, in general the profits to be attributed to a permanent establishment should be determined by reference to the establishment's accounts if these reflect the real facts. A method of allocation which is based on apportioning total profits is generally not as appropriate as a method which has regard only to the activities of the permanent establishment and should be used only where it has as a matter of history been customary in the past and is accepted by the Department and taxpayer as being satisfactory.

5. Paragraph 5 precludes the attribution of profits to a permanent establishment by reason of mere purchasing activities carried on by the permanent establishment for the enterprise.

6. Paragraph 6 provides that unless there are good and sufficient reasons to the contrary the profits attributed to a permanent establishment must be determined by the same method each year.

7. Paragraph 7 provides that income from the business of any form of insurance is not subject to the provisions of this Article. Such income may be taxed in accordance with the domestic law of each country.

8. Paragraph 8: refer to initial comments above on this Article.

Article 8 - Air transport

1. Under this Article profits from the operation of aircraft in "international traffic" - defined in Article 3 1(h) are to be taxed only in the country of residence of the enterprise. International aircraft profits include income from:

• carriage of passengers and cargo;
• sale of passenger tickets on behalf of other enterprises;
• commercial advertising;
• charter fees when the fees represent an occasional source of income for the enterprise engaged in the international operation of aircraft.

2. Due to the definition of "international traffic" exemption does not extend to profits derived from internal traffic. Further, investment income of air transport enterprises is subject to the treatment ordinarily applied to that class of income, eg, dividends derived would be subject to Article 10.

3. Paragraph 2 extends the provisions of paragraph 1 to profits derived by an enterprise as a member of a pooling agreement or similar kind of arrangement with other enterprises.

4. Paragraph 3 defines the term "operation of aircraft".

Article 8A - Shipping

1. Under paragraph 1 profits from the operation of ships in "international traffic" - defined in Article 3(1)(h) - are to be taxed only in the country of residence of the enterprise. However, under paragraph 2 if the profits are derived from business conducted in the other country, ie, not the country of residence but the country of source, that other country may impose tax not exceeding 50 percent of the tax that would have been chargeable on the profits had there not been a Convention. In that event the country of residence would have to give credit for tax paid in the country of source. International shipping profits include income from:

• Carriage of passengers and cargo;
• sale of Passenger tickets on behalf of other enterprises;
• commercial advertising;
• charter fees (but refer paragraph 3 below).

Due to the definition of "international traffic" exemption does not extend to profits derived from coastal traffic. Further, investment income of a shipping enterprise is subject to the treatment ordinarily applied to that class of income, eg, dividends derived would be subject to Article 10.

2. Paragraph 3 extends the Provisions of paragraph 1 to profits derived by an enterprise as a member of a pooling agreement or similar kind of arrangement with other enterprises.

3. Paragraph 3 specifically brings within the scope of this Article profits arising from the rental of ships or from the use, maintenance, or rental of containers and ancillary equipment provided:

• The ships, or containers are used in international traffic; and
• Tbe enterprise receiving the Profits is in the business of operating ships in international traffic; and
• The rental income is incidental to the profits derived from those activities.

In the case of container leasing where the conditions in subparas (a) to (c) are not met, the lease payments would come within the scope of Article 12 Royalties, ie, Payments for the use of commercial or scientific equipment.

In relation to profits from leasing ships on charter fully equipped, manned and used in international traffic, such profits come within the scope of paragraph 1 of the Article.

Article 9 - Associated enterprises

This Article enables arm's length profits to be attributed to associated enterprises.

Article 10 - Dividends

1. Paragraph 1 of the Article simply states that dividends may be taxed in the State of residence of the recipient.

2. Paragraph 2 provides that the Contracting State from which the dividends are paid also has the right to tax, but the maximum rate of tax that can be imposed is not to exceed 20 percent of the gross amount of the dividends. Therefore, in terms of the convention New Zealand's taxing rights will be restricted to 20 percent of the gross dividend even though the rate under our domestic law is 30 percent. This paragraph also allows the competent authorities to settle the mode of application of paragraph 2.

3. Paragraph 3 defines "dividends" for the purposes of the Article. The effect is that "dividends" has the meaning given to it by section 4 of the Income Tax Act 1976.

4. Paragraph 4 deals with dividends arising from shares which are attributable to a permanent establishment. It provides that in the State of source the dividends are taxable as part of the profits of the permanent establishment, provided they are paid in respect of holdings forming part of the assets of the permanent establishment or are otherwise attributable to that establishment. In effect this relieves the State of source of the dividends from the 20 percent limitation under the Article.

The rules set out above also apply where the recipient of the dividends has in the other State, for the purpose of performing any of the kind of independent personal services mentioned in Article 14, a fixed base with which the holding in respect of which the dividends are paid is effectively connected.

Prior to 1 April 1982 these qualifications would have had no effect on the New Zealand tax position because our domestic law provided for a 15 percent final withholding tax in all cases on the gross payment and no Convention can extend the taxing rights applicable under the domestic law. However, in view of the change in the New Zealand domestic law from 1 April 1982 the New Zealand tax on dividends paid in respect of shares attributable to a permanent establishment will be 30 percent

5. The main effect of paragraph 5 is that it restricts the application of taxes on undistributed profits. For example, New Zealand cannot impose excess retention tax on a privately controlled company which is a "resident of India".

Article 11 - Interests

1. Paragraph 1 affirms the taxing right of the State in which the recipient of the interest is a resident.

2. Paragraph 2 also affirms the taxing right of the State in which the interest arises but the maximum tax that can be imposed is not to exceed 15 percent of the gross amount of the interest. This paragraph also allows the competent authorities to settle the mode of application of paragraph 2.

3. Paragraph 3 exempts from tax interest if it is paid:

• to the Government or a local authority of a Contracting State; or
• to the Central Bank of the other Contracting State;
• to the Export Import Bank of India;
• in the case of New Zealand to any financial institution agreed to be of a similar nature to the Export Import Bank of India by the Competent Authorities of both Contracting States.

In New Zealand the "central bank" is the Reserve Bank of New Zealand.

4. Paragraph 4 defines "interest" for the purposes of the Article. Penalty charges are excluded from the term as is income which would, because of a State's domestic law, be classified as a dividend. Therefore, in New Zealand, for example, interest received by debenture holders under debentures to which section 192 or 195 of the Income Tax Act 1976 applies would be dealt with under the dividend Article.

5. Paragraph 5 provides that in the State of source interest is taxable as part of the profits of the permanent establishment there owned by a resident of the other State, provided the interest is paid in respect of debt-claims forming part of the assets of the permanent establishment or otherwise attributable to that establishment. In effect this paragraph relieves the State of source of the interest from any limitation under the Article.

The rules set out above also apply where the recipient of the interest has in the other State, for the purpose of performing any of the kinds of independent personal services mentioned in Article 14, a fixed base to which the debt-claim in respect of which the interest is paid is attributable.

These qualifications tie in with the New Zealand domestic law which provides that if a non-resident has a fixed establishment in New Zealand, then interest derived is not subject to non-resident withholding tax but is to be assessed on an annual basis.(Section 310 of the Income Tax Act 1976.)

6. Paragraph 6 is a source rule and precludes argument as to the source of the interest.

The paragraph deals with interest arising through a permanent establishment or fixed base. Where a loan is contracted for the requirements of that establishment and the interest is borne by that establishment, the paragraph determines that the source of the interest is in the Contracting State in which the permanent establishment is situated, leaving aside the place of residence of the owner of that establishment or base.

7. Paragraph 7 is an anti-avoidance provision to ensure that only a reasonable interest payment (eg, arms-length) is taxed at the reduced rate specified in the convention.

Article 12 - Royalties and Fees for Technical Services

1. Paragraph 1 affirms the taxing right of the State in which the recipient of the royalties or fees for technical services is a resident.

2. Paragraph 2 also affirms the taxing right of the State in which the royalties or fees for technical services arise, but the maximum tax that can be imposed is not to exceed 30 percent of the gross amount of the royalties or fees for technical services. New Zealand's tax is limited to 15 percent on gross royalties or fees for technical services paid to residents of India as this is the maximum that can be applied under section 311 of the Income Tax Act 1976. In New Zealand the limitation will be achieved by the payer of the royalties and fees for technical services to the extent that such fees represent royalties as defined in the Income Tax Act 1976 deducting withholding tax of 15 percent at the time of payment. In the case of royalties and fees for technical services which are subject to annual assessment the tax will be limited to 30 percent of the gross payment.

3. Paragraph 3 defines "royalties" for the purposes of the Article. The term includes lump sum payments and certain rents. However, variable or fixed payments for the working of mineral deposits or other natural resources do not fall within the defined term as they are governed by Article 6.

It should be noted that if a payment is made in the form of rent rather than on a royalty basis and the payment comes within the term "royalties", as defined in the Convention, then the 30 percent maximum on gross applies. However, rental payments do not constitute royalties under our domestic law and there is therefore, no non-resident withholding tax applicable. Payments of this nature will be subject to an annual assessment on the net amount after expenses and if the tax so levied exceeds 30 percent of the gross rental, a rebate will be given by virtue of the Convention to bring the tax down to 30 percent of gross.

4. Paragraph 4 provides that "fees for technical services" for the purposes of this Article does not include payments made to an employee or any individual for independent personal services mentioned in Article 14 in consideration for services of a managerial, technical or consultancy nature, including the provision of services of technical or other personnel.

5. Paragraph 5 provides that in the State of source, royalties or fees for technical services are taxable as part of the profits of the permanent establishment there owned by the recipient which is a resident of the other State, provided the royalties or fees for technical services are attributable to that establishment. In effect this relieves the State of source of the royalties or fees for technical services from the 30 percent limitation under the Article.

The rules set out above also apply where the recipient of the royalties or fees for technical services has in the other State, for the purpose of performing independent personal services, a fixed base to which royalties or fees for technical services are attributable.

New Zealand's domestic law in relation to royalties provides for a withholding tax rate of 15 percent final on copyright (cultural) royalties or where the aggregate annual royalty payments do not exceed $1,000, while a minimum final tax applies in all other cases.

6. Paragraphs 6 and 7 - the comments to paragraphs 6 and 7 of the Interest Article apply equally here.

Article 13 - Alienation of Property

1. Paragraph 1 concerns income or gains derived from the alienation of immovable property. Income from such alienation may be taxed in the State where the property is situated. For example, if a resident of India sells at a profit immovable property situated in New Zealand the profit can be taxed in New Zealand if the New Zealand domestic law permits that taxation.

2. Paragraph 2 deals with income or gains from the alienation of personal property forming part of the business property of a permanent establishment or pertaining to a fixed base used for performing independent personal services. Such income or gains may be taxed in the State where the permanent establishment or fixed base is situated.

3. Paragraph 3 provides that income or gains from the alienation of ships or aircraft operated in international traffic are taxable solely in the State of residence of the enterprise.

4. Paragraph 4 provides that income from the alienation of shares of the capital stock of a company where that company's assets primarily consist of immovable property may be taxed in the state where the property is situated.

5. Paragraph 5 allows income or gains from the alienation of shares in a company other than those mentioned in paragraph 4 to be taxed in the country of residence of the company.

6. Paragraph 6 stipulates that any income or gains from any property not covered by the Article is to be taxable solely in the State of which the alienator is a resident.

Article 14 - Independent personal services

1 This Article concerns income from personal services (ie, independent personal services) as distinct from income from dependent personal services (eg, remuneration such as salary or wages) which is dealt with separately under Article 15. Income from independent personal services is taxable only in the State of residence unless the services are performed in the other State and the recipient of the income:

• has a fixed base regularly available to him in the other State for the purpose of performing his activities; or
• is present in the other State for a period or periods exceeding in the aggregate 183 days in any consecutive twelve month period.

If either of the above exceptions applies the State in which the services are performed also has the right to tax the income therefrom.

The term "fixed base" is intended to cover a centre of activity of a fixed or permanent character, for instance a doctor's consulting room or the office of an architect or lawyer.

2 The Article does not apply to artistes or athletes, who are dealt with under Article 17.

Article 15 - Dependent personal services

1 Paragraph 1 states the general rule that personal services performed by a resident of one of the Contracting States may be taxed in that other contracting state, only if the services are performed in that other Contracting State.

2 Paragraph 2 states the case where exemption will be given by the State visited. The main requirements are that:

• the recipient of the income is present in the State visited for a period or periods which do not exceed in the aggregate 183 days in any consecutive twelve month period; and
• the remuneration is paid by an employer not resident in that State; and
• the remuneration is not connected with the activities of a permanent establishment or fixed base which the employer has in that State.

Regarding the 183 day test the term "consecutive twelve month period" should be noted as the treatment effectively differs from the term "income year" which is used in other treaties.

Where the term "income year" is used for the purposes of the 183 days test each income year is looked at separately in determining the number of days present. Therefore the exemption could apply where a visit of more than 183 days straddles two income years provided the visit does not exceed 183 days in either year.

When applying the "consecutive twelve month" criterion it should be remembered that each day means the commencement of a period of 12 months from that particular day. Thus, although a visit may straddle two income years the exemption will not apply if the visit exceeds 183 days over a period of 12 months. For example, an Indian resident who visits New Zealand on 1 November and departs on the following 30 June will not be exempt as he will have been present in New Zealand for more than 183 days in a consecutive twelve month period.

In this example, if the criterion was an "income year" instead of "consecutive twelve month period" the visitor would be exempt as at no stage would he be present in New Zealand for more than 183 days in an income year.

When a visitor from India undertakes employment in New Zealand, New Zealand PAYE tax will be required to be deducted from the remuneration paid but will be refunded at the time of departure provided the requirements of the Article are fully met. In this respect a certificate must be obtained, by the person seeking exemption, from the Indian authorities which certifies that that person is resident in India for the purposes of Indian tax.

3 Paragraph 3 provides that remuneration derived from employment aboard a ship or aircraft operating in international traffic may be taxed in the State of residence of the shipping or airline enterprise. This means that if the enterprise is a resident of India then India has the right to tax the remuneration derived by the employee.

Article 16 - Directors' Fees

This Article allows the State of residence of the company paying the fees or other similar payments to have the right to tax such income. The income may also be taxed in the recipient's country of residence which would therefore have to allow credit for tax paid in the country of source.

Article 17 - Artistes and Athletes

1. Paragraph 1 enables the State in which the entertainer or athlete is performing the services to tax the income derived from these personal activities.

2. Paragraph 2 deals with the situation where income for the performance of an entertainer or athlete is not paid or paid in full to the entertainer or athlete himself but to an enterprise providing the services of the entertainer or athlete. The paragraph permits the State in which the performance is given to impose a tax on the profits diverted from the income of the entertainer or athlete to the enterprise where, for instance, the entertainer or athlete has control over or rights to the income thus diverted or has obtained or will obtain some benefit directly or indirectly from that income. Without this paragraph the State where the services are performed would, in such cases, be unable to tax:

• because it would not be personal service income to the entertainer, and
• in the absence of a permanent establishment the payments could not be taxed as business profits in the hands of the other person.

3. Paragraph 3 gives the sole right of taxation to the country of residence if the visit of the entertainer or athlete is supported substantially from the public funds of the other Contracting State or a political subdivision, local authority or a statutory body.

Article 18 - Pensions and Annuities

1. Paragraph 1 gives the State of residence of the recipient of the pension exclusive right to tax pensions where they are paid in consideration of past employment. However, this rule is subject to Article 19(2) wherein Government pensions paid in respect of services rendered are taxed exclusively in the State of source but if the recipient is a resident and a national of the other State the pensions are taxable on a residence basis. (See definition of "national" in Article 3.) This means that an Indian Government pension paid to a resident of New Zealand is taxed only in India and exempt in New Zealand unless the recipient is also a national of New Zealand in which case the pension is taxed only in New Zealand and exempt in India.

2. Paragraph 2 defines the term "annuities".

Article 19 - Government service

This Article deals with remuneration paid to an individual in respect of services rendered to a State or political subdivision or local authority thereof.

1. Paragraph 1 provides for two situations:

• Remuneration paid by a State in respect of services rendered to it by an individual is taxable solely by that State, ie, the country of origin of the payment.
• However, such remuneration is taxable solely in the State where the services are performed provided those services are performed:
  • by an individual who is a national of that State; or
  • by an individual who is a resident of that State and did not become a resident of that State solely for the purpose of performing those services.

For example, if an Indian Government employee is resident in New Zealand, under our domestic law, he is exempt from New Zealand tax on his government salary if he is resident here "solely for the purpose of rendering the services. However, a locally recruited employee of the Indian Government working in New Zealand is not exempt here irrespective of his citizenship if he is resident in New Zealand for a reason other than working for the Indian Government.

2. Paragraph 2 provides that Government pensions for services rendered are taxed exclusively in the State of source but, if the recipient is a resident and a national of the other State, the pensions are taxable on a residence basis. This means that an Indian Government pension paid to a resident of New Zealand is taxed only in India and exempt in New Zealand unless the recipient is also a national of New Zealand in which case the pension is taxed only in New Zealand and exempt in India (for definition of national see Article 3).

3. Paragraphs 1 and 2 do not apply. If the services are performed in connection with a business carried on by the State, or one of political subdivisions or local authorities, paying the remuneration.

Under paragraph 3 the ordinary rules apply, ie, Article 15 for wages and salaries, Article 16 for directors' fees and Article 18 for pensions. Article 17 is not mentioned because paragraphs 1 and 2 of Article 19 are to apply to remuneration paid to artistes employed by the State irrespective of whether such artistes could be said to be rendering services in connection with business carried on by the State.

Article 20 - Students and Apprentices

1. Paragraph 1 exempts from New Zealand tax maintenance, education or training payments received here from overseas by a student or business or technical apprentice from India. Note:

• The student must have been a resident of India immediately before he comes to New Zealand.
• He must be in New Zealand for the purpose of his education or training.
• There is no time limit on the period spent in New Zealand.
• The exemption is restricted to the payments mentioned, ie, for maintenance, education or training.

The converse applies to a New Zealand student or business or technical apprentice going to India.

2. Paragraph 2 exempts from New Zealand tax the amount received by a student or business or technical apprentice from a grant, allowance or award made under an arrangement or assistance programme entered into by the Government of New Zealand. The conditions under which the exemption is given are similar to those set out in paragraph 1. In applying this provision refer to section 60(1) and section 61(38) of the Income Tax Act 1976.

Article 21 - Professors and Teachers

1. Paragraph 1 provides for a professor or teacher visiting a Contracting State in order to teach at an educational institution for a period not exceeding two years will be exempt on his teaching remuneration in the country visited provided that he is taxed in his country of residence. Before granting exemption evidence is required in the form of a statement from the taxation authority that he will be subject to tax in his own country.

2. Paragraph 2 sets out the condition that for paragraph 1 to apply the research must be undertaken in the public interest and not for the private benefit of a specific person or persons.

Article 22 - Other Income

1. This Article provides a general rule relating to income not dealt with in other Articles of the Convention. The income concerned is not only income of a class not expressly dealt with but also income from sources not expressly mentioned. The effect of the Article is that income derived by a resident of New Zealand is taxed exclusively in New Zealand unless the income is derived from sources in India. If the income is derived from sources in India it may also be taxed there and a credit for the Indian tax is given in New Zealand, should that income be liable for New Zealand tax. The converse will apply in the case of a resident of India. Cases of conflict between two residences are to be determined by reference to Article 4.

2. A secondary effect of the Article is to clarify the situation of income derived from a third country by a person who could be "resident in" both India and New Zealand under the general laws of each country. Under the Convention that person can be a "resident of" only one country. In such a situation the taxing rights are allocated to the country "of" which he is a resident.

Article 23 - Methods of Elimination of Double Taxation

1. This Article contains the normal rules whereby each State gives credit for the other State's tax when assessing its residents on income derived from sources in the other State. It should be noted that the credit provisions in the Article are subject to the domestic law of each country.

2. Under the provision of paragraph 3, New Zealand will allow a notional credit for Indian tax that would have been payable on certain types of investment income but for a deduction or exemption granted under the Indian Tax law as specified.

Article 24 - Non-discrimination

The purpose of this Article is to prevent discrimination on the grounds of nationality.

1. Paragraph 1 establishes the principle that for taxation purposes discrimination on the grounds of nationality is forbidden. The paragraph prevents a State from imposing any more burdensome taxation or connected requirement on nationals of the other State than it imposes on its own nationals in the same circumstances.

2. Paragraph 2 requires non-residents trading through a permanent establishment to be taxed no less favourably than a resident who carries on the same activities.

3. Paragraph 3 prevents discrimination against enterprises the capital of which is wholly or partly owned by residents of the other State, eg, a New Zealand subsidiary of an Indian company.

4. Paragraph 4 states that each country may distinguish between residents and non-residents. The paragraph makes it clear that the Article does not prevent different tax treatment solely on the basis of residence. This is the New Zealand view in any case.

5. Paragraph 5 restricts the scope of the Article to those taxes covered by the Convention (see Article 2).

Article 25 - Mutual Agreement Procedure

Article 26 - Exchange of Information

These are standard Articles and require no further comment.

Article 27 - Diplomatic and Consular Officers

The aim of this Article is to ensure that diplomatic or consular officers shall, under the Convention, receive no less favourable treatment than that to which they are entitled under international law or under special international agreements.

Article 28 - Entry into Force

The Convention came into force on 3 December 1986 with effect in New Zealand for any income year beginning on or after 1 April 1987.

In India it takes effect for any "previous year" (as defined in the Income Tax Act 1961).

Article 29 - Termination

This Article sets out the procedure if either State wishes to terminate the Convention. Unless notice of termination is given in accordance with the Article the Convention continues indefinitely.