Lack of Progress in Double Taxation Agreements Hinders Investment

The government has made little effort to address double taxation issues, despite their critical role in easing the tax burden on investors and fostering an investment-friendly environment. Since signing a Double Taxation Avoidance Agreement (DTAA) with Bangladesh on March 5, 2019, no new agreements have been finalized. While proposals were sent to countries like Malaysia, Canada, Brazil, and the UAE over a decade ago, the lack of consistent follow-up has stalled progress.

DTAAs are designed to prevent foreign investors from being taxed both in their home countries and in the countries where they operate. Nepal currently has agreements with about a dozen countries. Although the budget for the current fiscal year emphasized prioritizing DTAAs, implementation remains elusive. The Income Tax Act empowers the government to sign such international agreements, yet little has been done to leverage this authority.

In the past, significant efforts were made to negotiate a DTAA with Bangladesh, culminating in an agreement after four rounds of negotiations and strong leadership from the then prime minister and finance ministers. However, more recent attempts to secure similar agreements have faltered due to government inaction.

Sources reveal that drafts sent to other nations have not been pursued, as DTAAs are no longer considered a priority by officials. A finance ministry insider attributed the delays to insufficient follow-up on Nepal's part and a lack of response to interest expressed by other countries.

Despite groundwork laid over a decade ago for agreements with nations such as Singapore, the UK, the US, Japan, Canada, and Oman, no tangible outcomes have been achieved. “The government has not prioritized this issue, which is why no new agreements have been signed,” a senior finance ministry official told New Business Age.

Countries like Malaysia, Canada, Brazil, the UAE, and Singapore have reportedly shown interest in signing DTAAs with Nepal, but the lack of urgency from Nepalese authorities has hindered progress, according to officials.

Padam Kumar Shrestha, director of the Inland Revenue Department, acknowledged that while the policy for DTAAs was included in the budget, it has not gained momentum. He cited two key reasons: limited interest from foreign countries and Nepal's prohibition on outbound investment by Nepali citizens. Shrestha explained that foreign countries are more likely to sign DTAAs if Nepalese investors are permitted to invest abroad.

Efforts are reportedly being made to establish such agreements, but tangible progress remains to be seen.

Why Double Taxation Agreements Matter

Double taxation occurs when individuals or businesses are taxed in both their country of residence and the country where income is earned during the same fiscal year. To mitigate this burden, DTAAs provide a legal framework for exempting taxpayers from dual taxation, fostering foreign investment, and boosting international trade.

While domestic tax laws offer mechanisms to address double taxation, inconsistencies in tax definitions, residency rules, and taxation scopes often necessitate international agreements. Countries that recognize the economic benefits of foreign investment prioritize DTAAs to create a more favorable business environment.