Nepal to Begin Talks with UAE on DTAA

Nepal is preparing to negotiate a double taxation avoidance agreement (DTAA) with the United Arab Emirates. A delegation of six officials led by Dr Bhishma Kumar Bhusal, director general of the Inland Revenue Department, will leave for the UAE on Monday to begin discussions.

Department officials said the negotiations aim to attract foreign investment and bring the tax treatment of such investment into line with international standards.

The initiative follows repeated approaches from the UAE, according to the officials. With Emirati investors expressing interest in Nepal’s infrastructure and other sectors, the government has decided to explore whether a tax treaty could help turn that interest into investment.

“The UAE has shown greater interest in this than we have and has approached us repeatedly,” said Prakash Paudel, a delegation member and director of the department’s Policy Analysis and Management Division. “The government’s view is that Nepal needs investment. If the UAE is interested in infrastructure, the absence of a DTAA alone should not hold that investment back.”

For Nepal, however, willingness to negotiate comes with a qualification: concessions must serve an investment objective while preserving as much of the country’s tax base as possible. Expressions of interest provide a reason to begin discussions but leave open the question of what investment an agreement would ultimately deliver.

Paudel said the delegation would use Nepal’s model DTAA draft, prepared under the leadership of then finance minister Rameshore Khanal, as its starting point. Its task will be to assess where Nepal can offer flexibility and what it might gain in return.

“Our objective is to bring in investment while limiting the erosion of our tax base as much as possible,” he said. “A DTAA inevitably involves some tax concessions. But the government’s mandate is to attract investment while preserving the tax base to the greatest extent possible.”

The scope of those concessions could become a central issue. According to Paudel, the UAE is seeking tax exemptions for its companies investing in Nepal’s hydropower, infrastructure, tourism and other sectors. It has also requested tax exemptions for its airlines.

“They want their investors to receive tax exemptions in Nepal on investment coming from the UAE into hydropower and other infrastructure,” he said.

These requests will be subject to negotiation. How far Nepal is prepared to accommodate them, and on what terms, remains to be settled.

Paudel’s reasoning rests partly on the distinction between existing revenue and potential revenue from investment that has yet to arrive. Nepal could consider greater flexibility, he suggested, where concessions would help bring in new capital.

“Our understanding is that we should consider how much flexibility we can offer on tax revenue we are not currently receiving,” he said. “We can be flexible if that brings in investment. Otherwise, we will negotiate the DTAA while protecting our tax base.”

That approach leaves negotiators with a difficult judgment: whether the investment encouraged by a concession would justify the revenue Nepal gives up. The answer will depend on the eventual terms and the investment that follows.

Paudel said Nepal would draw on the tax treaty models developed by the United Nations and the Organisation for Economic Cooperation and Development (OECD). The opening talks will last three days and explore possible adjustments to Nepal’s draft. At least two or three rounds of discussions are expected before an agreement is signed.

Business representatives see a reason to move quickly. Kiran Raghuvanshi, an advisory member of the Nepal UAE Chamber of Commerce and Industry, said UAE investors had shown particular interest in energy, infrastructure and tourism. He urged the government to conclude an agreement without delay.

The negotiations also form part of Nepal’s efforts to expand its relatively small tax treaty network. Nepal has signed double taxation avoidance agreements with 11 countries, although the termination of its agreement with Mauritius, effective from the current fiscal year, has reduced the number in force to 10. A treaty with the UAE would bring that total back to 11.

Paudel said Nepal had also proposed agreements with the United Kingdom, Hong Kong and Mauritius, while Australia had expressed informal interest.

Nepal’s negotiating position

Nepal aims to attract foreign investment while protecting its tax base. Negotiations will use Nepal’s model DTAA draft as a starting point and draw on UN and OECD treaty models. Nepal is willing to consider concessions that could bring in new investment, weighing flexibility against the expected benefits.

What the UAE wants

According to Paudel, the UAE seeks tax exemptions for its companies investing in Nepal’s hydropower, infrastructure, tourism and other sectors. The UAE has also requested tax exemptions for its airlines.