double taxation treaty.pptx

7/27/2019 Double Taxation Treaty.pptx

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Introduction

The current scenario of cross-border transactionacross the world and upsurge in internationaltrade and commerce and increasing interactionamong the nations, residents of one country

extend their sphere of business operations toother countries where income is earned.

One of the most significant results of globalizationis the noticeable impact of one countrys domestic

tax policies on the economy of another country. This has led to the need for incessantly assessing

the tax regimes of various countries and bringingabout indispensable reforms.


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What is Tax ?

A Tax is a financial charge or other levy imposed

upon a taxpayer (an individual or legal entity) by

a state or the functional equivalent of a state

such that failure to pay is punishable by law.

Taxes are also imposed by many administrative

division. Taxes consist of direct or indirecttaxes and may be paid in money or as its labour

equivalent.


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Double Taxation-Introduction

Where a taxpayer is resident in one country but

has a source of income situated in another

country, it gives rise to possible double taxation.

This arises from two basic rules that enable the

country of residence as well as the country

where the source of income exists to impose

tax, namely, (i) source rule and (ii) the residence

rule.


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Double Taxation- Introduction

The source rule holds that income is to be taxedin the country in which it originates irrespective

of whether the income accrues to a resident or a

nonresident whereas the residence rule

stipulates that the power to tax should rest with

the country in which the taxpayer resides.

If both rules apply simultaneously to a businessentity and it were to suffer tax at both ends, the

cost of operating in an international scale would

become prohibitive and deter the process of

globalization


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Double Taxation-Introduction

Double taxation is the levying of tax by two or

more jurisdictions on the same declared income

(in the case of income taxes), asset (in the case

of capital taxes), or financial transaction (in thecase of sales taxes).

Taxation of the same income by two or more

countries would constitute a prohibitive burden

on the tax-payer.


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Concept of -DTAAs

Liability to tax on the income arises in thecountry of source and the country of residence.

The Fiscal Committee of OECD in the ModelDouble Taxation Convention on Income andCapital, 1977, defines double taxation as the

imposition of comparable taxes in two or morestates on the same tax payer in respect of thesame subject matter and for identical periods


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Concept of -DTAAs

Nations are often forced to discuss and settle theclaims of other nations by means of double taxationavoidance agreements, in order to bring down thebarriers to international trade.

Such agreements are known as "Double TaxAvoidance Agreements" (DTAA) also termed as "TaxTreaties.

Double tax treaties are settlements between twocountries, which include the elimination ofinternational double taxation, promotion of exchange

of goods, persons, services and investment ofca ital.


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Concept of -DTAAs

The two countries have an Agreement for

Double Tax Avoidance, in which case the

possibilities are:

1. The income is taxed only in one country.

2. The income is exempt in both countries.

3. The income is taxed in both countries, butcredit for tax paid in one country is given

against tax payable in the other country.


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Objectives of DTAAs

1)They help in avoiding and alleviating the

adverse burden of international double

taxation, by

a) laying down rules for division of revenue

between two countries;

b)exempting certain incomes from tax in eithercountry;

c) reducing the applicable rates of tax on certain

incomes taxable in either countries.


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Objectives of DTTAs

2) Equally importantly tax treaties help a

taxpayer of one country to know with greater

certainty the potential limits of his tax liabilities

in the other country.3) benefit from the tax-payers point of view is

that, to a substantial extent, a tax treaty

provides against non-discrimination of foreign

tax payers or the permanent establishments in

the source countries vis--vis domestic tax

payers.


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India and DTAAs

India has comprehensive Double TaxationAvoidance Agreements (DTAA ) with84 countries. This means that there are agreedrates of tax and jurisdiction on specified typesof income arising in a country to a tax residentof another country.

Under the Income Tax Act 1961 of India, thereare two provisions, Section 90 and Section 91,which provide specific relief to taxpayers tosave them from double taxation


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Income Tax Act 1961

Section 90 is for taxpayers who have paid the

tax to a country with which India has signed

DTAA.

While Section 91 provides relief to tax payers

who have paid tax to a country with which

India has not signed a DTAA.

Thus, India gives relief to both kind of

taxpayers


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Example of DTAA

A large number of foreign institutional investorswho trade on the Indian stock markets operatefrom Mauritius and the second being Singapore.

According to the tax treaty between India and

Mauritius, capital gains arising from the sale ofshares are taxable in the country of residence ofthe shareholder and not in the country ofresidence of the company whose shares havebeen sold.

Therefore, a company resident in Mauritius sellingshares of an Indian company will not pay tax inIndia. Since there is no capital gains tax inMauritius, the gain will escape tax altogether.


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Income Tax Act 1961

Agreement with foreign countries or specified

territoriesBilateral Relief [Section 90]:

(i) Section 90(1) provides that the Central Government

may enter into an agreement with the Government ofany country outside India or specified territory

outside India-

(a) for granting of relief in respect of

(i) income on which income tax has been paid both inIndia and in that country or specified territory; or

(ii) income tax chargeable under this Act and under

the corresponding law in force in that country or

specified territory to promote mutual economic


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Income Tax Act 1961

(b) for the avoidance of double taxation of income under

this Act and under the corresponding law in force in

that country or specified territory; or

(c ) for the exchange of information for the prevention ofevasion or avoidance of income tax chargeable under

this Act or under the corresponding law in force in that

country or specified territory or investigation of cases

of such evasion or avoidance; or(d) for recovery of income tax under this Act and under

the corresponding law in force in that country or

specified territory.


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Income Tax Act 1961

Double taxation relief to be extended to agreements(between specified Associations) adopted by the CentralGovernment [Section 90A]:

(i) Section 90A provides that any specified association in

India may enter into an agreement with any specifiedassociation in specified territory outside India and theCentral Government may, by notification in the OfficialGazette, make the necessary provisions for adoptingand implementing such agreement for

(I) grant of double taxable relief,(II) avoidance of double taxation of income,

(III) exchange of information for the prevention of evasionor avoidance of income tax

(IV) recovery of income tax.


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Income Tax Act 1961

Countries with which no agreement exists-

Unilateral Agreements [Section 91]:

In case of income arising to an assessee in

countries with which India does not have anydouble taxation agreement, relief would be

granted under Section 91 provided all the

conditions are fulfilled:

(a) The assessee is a resident in India during theprevious year in respect of which the income is

taxable.

(b) The income arises or accrues to him outside

India.


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Income Tax Act 1961

(c) The income is not deemed to accrue or arise

in India during the previous year.

(d) The income has been subjected to income

tax in the foreign country in the hands of theassessee.

(e) The assessee has paid tax on the income in

the foreign country.(f) There is no agreement for relief from double

taxation between India and other country

where the income has accrued or arisen


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In such a case, the assessee shall be entitled

to a deduction from the Income tax payable by

him.

The deduction would be a sum calculated onsuch doubly taxed income at the Indian rate of

tax or the rate of tax in the said country,

whichever is lower, or at the Indian rate of tax

if the both rates are equal.


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double taxation treaty.pptx

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