When globalization brought the world closer, it also complicated how income was taxed across borders. A person might earn in one country but reside in another—and face the challenges of being taxed in both. To deal with such complexities, countries entered into what are known as Double Tax Avoidance Agreements or DTAAs.

At their core, these agreements are meant to ensure that taxpayers don't have to pay tax twice on the same income. They are essential for facilitating global trade and investment specially in India to increase the ease of doing business and with that investments. But somewhere along the way, what began as a well-intentioned framework has, in some instances, become a loophole—one that sophisticated investors and multinational corporations have learnt to exploit.

This article looks at how DTAAs, while designed to avoid double taxation, have often ended up enabling tax evasion, intentionally or not.

The Purpose Behind DTAA

Every DTAA is a bilateral agreement between two countries. The purpose is simple -  if a taxpayer is liable to pay tax in both the country where income is generated (the "source") and where the taxpayer lives (the "residence"), the DTAA decides which country gets to tax which part of the income. In some cases, one country forgoes its right to tax that income; in others, it offers a credit for taxes already paid abroad.

India has signed DTAAs with more than 90 countries. These include economic giants like the United States, United Kingdom, and Germany, as well as smaller countries such as Mauritius, Cyprus, and the Netherlands. These treaties typically cover a broad range of income types—business profits, capital gains, interest, royalties, and more.

Origin Of Double Tax Avoidance Agreement

The origin of Double Taxation Avoidance Agreements (DTAAs) can be traced back to the early 20th century, when growing international trade and cross-border investment led to the problem of the same income being taxed by two or more countries—typically the country where the income was earned (source country) and the country where the taxpayer resided (residence country).

This double taxation discouraged international economic activity and prompted global discussions on fair tax allocation. The first structured response came from the League of Nations in the 1920s, which commissioned studies and, by 1928, developed the first model tax treaties to guide bilateral agreements. These efforts laid the foundation for today's DTAAs by introducing concepts like tax credits, exemption methods, and defined taxing rights.

In 1963, the Organisation for Economic Co-operation and Development (OECD) released its Model Tax Convention, which became the global standard, especially among developed countries. In contrast, the United Nations introduced its own model in 1980 to reflect the interests of developing countries, granting them greater taxing rights. India signed its first DTAA with the UK in 1947 and later expanded its treaty network significantly post-liberalisation.

Over time, as treaty abuse like treaty shopping and tax base erosion became common, global reforms such as the OECD-G20 BEPS initiative and the Multilateral Instrument (MLI) were introduced to modernise treaties and curb misuse. Thus, DTAAs evolved from simple bilateral arrangements into complex instruments balancing the need for economic cooperation, tax fairness, and anti-abuse safeguards.

India signed its first DTAA with the United Kingdom in 1947, soon after independence. In the decades that followed, especially after the economic liberalisation of the 1990s, India rapidly expanded its treaty network to attract foreign direct investment and support outbound investment by Indian businesses.

When Avoidance Becomes Evasion

While DTAAs are not inherently problematic, the way they are structured has left room for misuse. Over the years, some of these agreements have offered such generous tax benefits that they've created incentives for tax planning, tax avoidance, and in some cases, outright tax evasion.

• Treaty Shopping: A Legal Backdoor One of the most common ways DTAAs are misused is through treaty shopping. This involves setting up companies in a third country—not because there's any real business activity there, but simply because it has a favourable tax treaty. Take the case of the India–Mauritius DTAA. For years, it allowed investors based in Mauritius to avoid paying capital gains tax in India on profits made by selling Indian shares. But Mauritius doesn't charge capital gains tax either. The result? Foreign investors, many of them not even based in Mauritius, routed their investments through shell companies there, effectively paying zero tax on their gains. The practice became so widespread that it earned a name round-tripping—where Indian money, too, was sent abroad and brought back disguised as foreign investment to exploit tax breaks. It's a clever use of the law, yes. But is it fair? Is it ethical? These are the questions that policymakers and courts have had to wrestle with.
   
• Profit Shifting by Multinational Corporations Multinational companies have taken DTAA misuse to another level. Through practices now widely known as Base Erosion and Profit Shifting (BEPS), these firms shift profits from high-tax countries like India to low- or no-tax jurisdictions. A company operating in India might pay royalties or interest to a subsidiary in a tax haven. That payment is treated as an expense in India, reducing its taxable income here. But the income received by the subsidiary is taxed either lightly or not at all, thanks to a DTAA. By using DTAAs and complex corporate structures, companies legally reduce their global tax bills—leaving the countries where the actual business happens struggling to collect fair tax revenue. This is especially unfair to domestic businesses that operate only in one country and cannot use such tools. It also leads to a significant erosion of the local tax base.
   
• The Indian Experience – Courts and Reforms India's tax authorities and courts have had a mixed approach to DTAA-related disputes. For a long time, the prevailing sentiment leaned in favour of respecting the legal structure—even if it led to tax avoidance. In the Azadi Bachao Andolan case (2003), the Supreme Court upheld the legality of the Mauritius route. The court ruled that as long as a company had a valid tax residency certificate from Mauritius, it was entitled to treaty benefits, regardless of its underlying intentions. That decision set the tone for the next decade. But gradually, with mounting evidence of abuse and mounting losses to the exchequer, the government took action. India started renegotiating its tax treaties to introduce stronger anti-abuse clauses. In 2016, the India–Mauritius DTAA was finally amended. From April 2017 onwards, capital gains from the sale of Indian shares by Mauritius-based investors would be taxed in India, bringing that loophole to a close. Similar changes were made to the Singapore and Cyprus treaties.
   
• The Global Pushback: OECD, BEPS, and the Multilateral Instrument India was not alone in facing such issues. Across the world, governments were losing billions in tax revenue due to treaty abuse. In response, the Organisation for Economic Co-operation and Development (OECD), in partnership with G20 countries, launched the BEPS project—an initiative aimed at preventing tax base erosion through global cooperation. One major outcome of the BEPS initiative is the Multilateral Instrument (MLI). Instead of renegotiating dozens of treaties one by one, the MLI allows countries to amend several DTAAs simultaneously with modern anti-abuse provisions. India became an early adopter of the MLI. Under its provisions, India's DTAAs with countries like Singapore, the Netherlands, and Luxembourg now include a Principal Purpose Test (PPT). This test denies tax benefits if one of the main purposes of an arrangement is to obtain treaty benefits. It may sound simple, but its impact is profound—it shifts the focus from form to substance.
   
• Domestic Measures – GAAR, POEM India has not relied solely on international cooperation. The government has introduced several domestic rules to tackle tax treaty abuse.
  • GAAR (General Anti-Avoidance Rules): These rules empower tax authorities to disregard transactions or arrangements that have been entered into primarily to gain tax benefits. GAAR came into force in 2017, after years of debate.
  • Place of Effective Management (POEM): This concept helps determine whether a foreign company is actually controlled from India. If it is, it can be taxed in India, regardless of where it is incorporated.
  • Limitation of Benefits (LOB) clauses: Many treaties now include LOB provisions to prevent entities without sufficient substance from claiming benefits.
  These steps indicate a clear shift in policy: tax benefits under DTAAs are no longer automatic. They must be earned by demonstrating real economic activity, not just clever paperwork.
   
• The Bigger Picture – Investment vs. Integrity Critics of the reforms argue that such changes could scare away foreign investors. After all, many genuine investors used the Mauritius route not for evasion, but because it was the most tax-efficient path available under the law. Sudden changes, retrospective taxes, or aggressive enforcement could lead to uncertainty—and India, like all developing economies, needs foreign capital to grow. This is a valid concern. The solution lies not in rolling back DTAA reforms, but in striking a balance. Tax laws should be fair, predictable, and applied consistently. Investors must be protected from arbitrary actions, but at the same time, tax treaties must not become a free ride for those seeking to game the system.
   
• Solutions Going Forward There's no doubt that DTAAs are still valuable. They offer certainty to businesses and individuals, encourage cross-border collaboration, and help avoid genuine cases of double taxation. But their architecture must be constantly updated to reflect modern economic realities. Going forward, countries will need to:
  • Regularly review and revise existing treaties;
  • Ensure that treaty benefits are tied to real substance and not artificial structures;
  • Share information across borders in real-time to identify abuse;
  • Continue participating in multilateral platforms like the OECD and G20.

Conclusion
The story of Double Tax Avoidance Agreements is a story of good intentions tested by complex realities. Designed to prevent unfair taxation, they have at times facilitated the very thing they sought to avoid: unjust tax avoidance and, in some cases, evasion.

The challenge lies in preserving the spirit of these agreements while closing the gaps that allow for their misuse. With thoughtful legislation, international cooperation, and a willingness to adapt, DTAAs can still serve their purpose—not as escape routes for the privileged few, but as genuine tools of economic partnership in a connected world.

References:

• https://incometaxindia.gov.in/pages/international-taxation/dtaa.aspx
• https://www.mea.gov.in/bilateral-documents.htm?dtl/6036/Agreement+for+avoidance+of+Double+Taxation
• Azadi Bachao Andolan case law – Indian Kanoon: https://indiankanoon.org/doc/539407/
• National Judicial Presentation: https://nja.gov.in/Concluded_Programmes/2020-21/P-1235_PPTs/2.Income%20Tax.pdf

Written By: Chinmay Kadam, III-II LLB Government Law College, Mumbai
Email: chinmaykadam61@gmail.com