Double Taxation

Submitted by: Pawan Chaudhary (31)

Ritesh Gupta(37) Sanjay (41)

Satendra Agarwal (45)

Tax Dude

Introduction to DTAA

Introduction to DTAA (1)Introduction to DTAA (1)

Double taxation is imposition of two or more taxes on the same income (in case of IT), assets (in case of Capital Taxes) or any financial transaction (in case of sales taxes) in different countries Double taxation occurs mainly due to overlapping tax laws & regulations of countries where an individual does business When an Indian businessman makes a profit or some taxable gain in another country, he may be required to pay Tax on that income in India, as well as in country in which Income was made !!

Introduction to DTAA (2)Introduction to DTAA (2)

Double Taxation is also common in MNC’s (or employees deputed abroad) where it isn’t fair for a taxpayer to bear burden of tax in both countries on a single income

To protect Indian tax payers from this unfair practice, Indian government has entered into tax treaties, known as Double Taxation Avoidance Agreement (DTAA) with about 79 countries

DTAA by India (1)DTAA by India (1)

India has comprehensive DTAA with 79 countries

This means there are agreed rates of tax &jurisdiction on specified types of income arising in a country to a tax resident of another country The objective is to encourage Foreign Investments in India & also make Foreign Markets available to Indian entities

The India- Mauritius DTAA is one of them. This agreement has contributed almost 37% of FDI in India in last 15 yrs (1991 to 2005)

DTAA by India (2)DTAA by India (2)

Under the IT Act 1961, there are 2 provisions, Sec-90 & 91, which provides specific relief to taxpayers to save them from DTAA

Sec-90 is for taxpayers who have paid tax to a country with which India has signed DTAA

Sec-91 provides relief to tax payers who have paid tax to a country with which India has not signed DTAA

Thus, India gives relief to both kind of taxpayers

Double Non-TaxationDouble Non-Taxation

Income escapes tax in one country on account of DTAA & in other country on account of its Local Tax laws• This gives rise to the income escaping tax altogether Examples: Mauritius, UAE

Large no. of FII trading on Indian markets operate from Mauritius• Acc to treaty between, Capital Gains are taxable in country of residence of shareholder & not in country of residence of company whose shares are sold. • Therefore, a company resident in Mauritius selling shares of an Indian company will not pay tax in India & since there is no capital gains tax in Mauritius, gain will escape tax altogether.

DTAA Comprehensive DTAA Comprehensive agreements - Countries agreements - Countries list list Armenia, Australia, Austria, Bangladesh, Belarus, Belgium, Botswana,

Brazil, Bulgaria, Canada, China, Cyprus, Czech Republic, Denmark, Egypt, Finland, France, Germany, Greece, Hashemit, Kingdom of Jordan, Hungary, Iceland, Indonesia, Ireland, Israel, Italy, Japan, Kazakstan, Kenya, Korea, Kuwait, Kyrgyz Republic Libya, Luxembourg, Malaysia, Malta, Mauritius, Mongolia, Montenegro, Morocco, Myanmar, Namibia, Nepal, Netherlands, New Zealand, Norway, Oman, Philippines, Poland, Portuguese Republic Qatar, Romania, Russia, Saudi Arabia, Serbia, Singapore, Slovenia, South Africa, Spain, Sri Lanka, Sudan, Sweden, Swiss Confederation, Syrian, Arab Republic, Tajikistan, Tanzania, Thailand, Trinidad and Tobago, Turkey, Turkmenistan, UAEUAR (Egypt), UGANDA, UK, Ukraine, USA, Uzbekistan, Vietnam, Zambia

Causes of Double Causes of Double TaxationTaxation

•One state claims to tax on the basis of “Source of Income” & another on the basis of “Residence”;

OR

•Both states claim to tax incomes based on “Residence”

Hence need for elimination of Double taxation!

Double Taxation Convention - Double Taxation Convention - ObjectivesObjectives

Various Conventions - UN, EU, OECD & between countries

• Protect tax payers from Double Taxation

• Free flow of International Trade & investment

• Encourage transfer of technology

• Prevent discrimination between tax payers

• Reasonable level of legal & fiscal certainty to investors

• Acceptable basis to share tax revenue between states

Treaty OverrideTreaty Override

In cross-border tax scenario:

• Assessee can avail benefit of bilateral agreements between contracting state;

OR

• Assessee can choose to be governed by Indian tax laws

Whichever is more beneficial to tax-payer !!

Overall Structure of Overall Structure of DTAADTAA

Article 1 Scope of convention

Article 2 Taxes Covered

Article 3 General Definitions,

Article 4 Resident

Article 5 Permanent establishment

Article 6 to 21

Taxation of various incomes- Business profits, Royalties, Fees for Technical services, Interest, Dividends, etc.

Article 7 Business Profits

Overall Structure of Overall Structure of DTAADTAA

Article 10, 11 Dividends & Interests

Article 12 Royalties & FTS

Article 14 Independent Personal Services

Article 15 Dependant Personal Services

Article 21 Other Income

Article 22 Taxation of capital

Article 23A and 23B Methods of elimination of double taxation

Article 24 and 29 Special provisions-Non discrimination

Article 30,31 Entry into force, Termination

Check if the treaty is in Check if the treaty is in effect!effect!

• Entry into force – check for each of the countries,

• The Date of Entry into force of the convention

• The Date of Effect of the convention

Ensure that the Treaty has not terminated!• Treaty remains into force till terminated

• Some treaties provide for a period during which treaty cannot be terminated

• Termination requires notice through diplomatic channels

• Some treaties provide for period of notice & some do not

• Check if the treaty is in force before applying it!

Approaches for Approaches for Elimination of Double Elimination of Double TaxationTaxation

•Bilateral Agreements between Contracting states

•Section 90 provides for tax relief in accordance with treaties executed by India

•Unilateral Tax credit – Foreign tax credit system

•Section 91 provides relief where no treaty exists

Section-90Section-90

›Under Section 90 & 91 of IT Act, relief against double taxation is provided in 2 ways:

Bilateral Relief, Under Section 90›Indian government offers protection against double taxation by entering into a DTAA with another country, based on mutually acceptable terms. ›Such relief may be offered under two methods: –Exemption method –Ensures complete avoidance of tax overlapping

–Tax credit method – Provides relief by giving taxpayer a deduction from tax payable in India

Section-91Section-91› Unilateral Relief, Under Section 91

› Indian government can relieve an individual from double taxation whether there is a DTAA between India & other country concerned. › Unilateral relief may be offered if: –The person /company has been a resident of India in previous year

–Same income must be accrued to & received by taxpayer outside India in previous year

–Income should have been taxed in India & in another country with which there is no tax treaty

–The person or company has paid tax under laws of foreign country in question

Methods of Granting Tax Methods of Granting Tax CreditsCredits

• Exemption Method • Credit Method

Full Exemption

Exemption with

Progression

Full Credit

OrdinaryCredit

The Income earned

in the state of source is fully exempt in the

State of residence

Income earned instate of source is

considered instate of

residence only for rate

purpose

Total tax paid in state of source is

allowed as a credit against

any tax payable in

stateof residence

State of residence allows

credit of tax paid in state of source

Restricted to that part of income-tax

which is attributable to income, taxable

in state of residence

An IllustrationAn Illustration

Total Income 100,000

Income in State of Residence ® 80,000

Income in State of Source (S) 20,000

Rate of tax in R on income of 100,000

35%

Rate of tax in R on income of 80,000

30%

Rate of tax in S (i) 20% (ii) 40%

Tax Incidence if No Tax Incidence if No Double Tax EliminationDouble Tax Elimination

(i) (ii)

Tax in State R (35% of 100,000) 35,000 35,000

Tax in State S 4,000 8,000

Total Tax 39,000 43,000

Tax Credits – Full Tax Credits – Full ExemptionExemption

(i) (ii)

Tax State R (30% of 80,000) 24,000 24,000

Tax in State S 4,000 8,000

Total Tax 28,000 32,000

Relief given by R 11,000 11,000

The income earned in State of source is fullyexempt in state of residence

Old Austria Treaty, Greece

Tax Credits – Exemption Tax Credits – Exemption with Progressionwith Progression

(i) (ii)

Tax in State R (35% of 80,000) 28,000 28,000

Tax in State S 4,000 8,000

Total Tax 32,000 36,000

Relief given by R 7,000 7,000

The income earned in State of source is considered in state of residence only for rate purpose

Australia, Cyprus, Germany (Indian Income), UK, Malta

Tax Credits – Full CreditTax Credits – Full Credit

(i) (ii)

Tax in State R (35% of 100,000)

35,000 35,000

Tax in State S (4,000) (8,000)

Total due 31,000 27,000

Relief given by R 4,000 8,000

Total tax paid in state of source is allowed as a credit against any tax payable in state of residence

Germany, Canada, Singapore, Sweden

Tax Credits- Ordinary Tax Credits- Ordinary CreditCredit

(i) (ii)

Tax in State R (35% of 100,000) 35,000 35,000

Tax in State S (Credit for source state tax restricted in

scenario ii)(4,000) (7,000)

Total due 31,000 28,000

Relief given by R 4,000 7,000State of residence allows credit of tax paid in state of source Restricted to that Part of income-tax which is attributable to income, taxable in state of residence

Most Indian Treaties i.e. Australia, Cyprus, Denmark, UK, USA, France, Japan, Mauritius

Tax Impact at a GlanceTax Impact at a Glance

A. All income arising in State R Total tax = 35,000

B. Income arising in two States, viz, 80,000 in State R &

20,000 in State S

Total tax if tax in State S is

4,000(case (i))

8,000 (case (ii))

No convention 39,000 43,000

Full exemption 28,000 32,000

Exemption with progression 32,000 36,000

Full credit 35,000 35,000

Ordinary credit 35,000 36,000

Amount of Tax Given Up by Amount of Tax Given Up by State of ResidenceState of ResidenceA. All income arising in State R If tax in State S is

4,000(case (i))

8,000(case (ii))

No convention Nil Nil

Full exemption 11,000 11,000

Exemption with progression 7,000 7,000

Full credit 4,000 8,000

Ordinary credit 4,000 7,000

Underlying Tax Credit Underlying Tax Credit (UTC)(UTC)• Provides relief from tax on same income, which

has already suffered tax in form of corporate profits tax

• Pre condition: Certain percentage of share held by recipient in capital of the payer company

• DTAA entered into by India do provide for UTC by other state – Illustratively USA, UK

• DTAA with Mauritius & Singapore cover UTC in both countries

Income before taxation of the Mauritius Co

100,000

Tax @ 40% 40,000Income after Tax 60,000

Dividend Distributed by the Mauritius Co

30,000

Profit carried forward 30,00050% of the equity of Mauritius Co. is held by

Indian CoDividend paid to Indian Company 15,000UTC (15,000 X 40,000 / 60,000) 10,000

Underlying Tax Credit Underlying Tax Credit (Example)(Example)

Unilateral Tax Credit Unilateral Tax Credit

• Requirements

• Resident of India for relevant previous year

• Income has accrued or arisen outside India and is doubly taxed

• Taxes have been paid in the source country

• There is no DTAA with that country

• Items of Income not covered under DTAA eligible for credit

Unilateral Tax Credit Unilateral Tax Credit (UTC)(UTC)• Relief

• Deduction from the Indian income-tax payable by him of a sum calculated on

• such doubly taxed income at the Indian rate of tax, OR

• the rate of tax of the said country,

• whichever is the lower, OR

• the Indian rate of tax if both the rates are equal

Thank You