The author argues that non-residents dread the ‘Force of Attraction’ rule in Double Taxation Avoidance Agreements because it permits the taxation of income arising outside the Contracting State. The ‘Force of Attraction’ rule can also create an anomalous situation where an assessee may be better off under the domestic law than under the tax-treaty law, says the author
The recent judgement of the Tribunal in ITO vs. Linklaters LLP has put the spotlight on the dreaded “Force of Attraction” principle.
In an earlier judgement in DCIT vs. Roxon OY 106 ITD 489 (Mum), the Tribunal explained that the basic philosophy underlying the ‘Force of Attraction’ rule is that when an enterprise sets up a PE in another country, it brings itself within the fiscal jurisdiction of that another country to such a degree that such another country can properly tax all profits that the enterprise derives from that country – whether through the PE or not. Therefore, under the ‘Force of Attraction’ rule, the mere existence of a PE in another country leads all profits which can be said to be derived from that another country being taxable in that another country.