double taxation_international taxation

7/30/2019 Double Taxation_International Taxation

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Double TaxationAVOIDANCE AGREEMENT

Legal Environment of Business

Abhishek Jha

Akanksha NishatAkanksha TakyarAridman Mohan

Aswin VPSushmit Sinha


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Double Taxation

Double Taxationconcept and avoidance mechanism


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Double Taxation

What is Double Taxation?

Levying of tax by two or more jurisdictions on the

same declared income/asset/financial transaction

For example, in the US, there are corporate profits aswell as personal taxation of shareholders

dividends/profits

This double liability is often mitigated by tax

treaties between various countries, which is DTAA in

essence


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Double Taxation

Juridicial

Levying on one taxpayer in one

or more countries for one object

in the same period of time

One country is using residence

principal in levying taxes, and

the other country is using

territorial principal

Economic

Taxation of two and more taxes

from one tax basis

For Ex. - when the goods are

levied excise tax, and after this

VAT is imposed on the price of

the goods, including excise

Types of Double Taxation


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Double Taxation

ResidentPrincipal Territorial

Principal

Tax Deduction Options


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Double Taxation

Article 23A Exemption Method

Article 23B Credit method

Unilateral

Signing of international

conventions

Double Taxation

Avoidance Agreement

Multilateral

Methods of Double Taxation Avoidance


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Example

An artist earns ` 80,000 in the home country but INR Equivalent

` 20,000. Total worldwide income is ` 100,000.

In home country, there is a progressive tax rates of 35% and 30%

on an income of ` 80,000.

Assume tax rate is 20% in source country leading to ` 4000

source tax.


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Full Exemption Method

No ReliefFull Exemption (tax

only on domesticincome) at 30%

Home Country 35,000 24,000

Foreign Country 4,000 4,000

Total Tax Paid 39,000 28,000

Tax Relief Given byhome country

0 11,000


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Full Credit Method

No Relief

Full Credit (Deductforeign

tax from domestictax @35%)

Home Country 35,000 35,000-4000

Foreign Country 4,000 4,000

Total Tax Paid 39,000 35,000

Tax Relief given by homeCountry

0 4,000


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What is DTAA?

Essentially a bilateral agreement entered into

between two different countries.

Objectives

Avoid taxation of income in both countries

To promote and foster economic trade and investment



Underlying Tax Creditmechanism for avoiding double taxation



Underlying Tax Credit (UTC)

UTC refers to the credit that may be given in State R

for the tax paid on the underlying profits out of which

the dividend is paid by a subsidiary company in State

S

o Pre condition: Minimum threshold of shareholding

Applies only for companies

Eg: DTAA with Australia, Cyprus, Mauritius, Singapore

and USA



Example

S Ltd. is Singapore based company having an Indian

subsidiary. Tax rate in India is 35%



Tax Sparing

Benefits of fiscal incentives by way of exemptions accrue to the

country of investor rather than to the investor

Resident State allows credit on deemed basis at the rate

applicable in State S even though the income is exempt

Normally applicable to specific categories of income:

o Export income

o

Industrial profits

Indian Treaties with some countries providing for tax sparing

o Japan, Canada, Kenya, Malaysia, Cyprus, Singapore, etc.



Case Study

H Ltd., a Singapore based Company has an Indian

branch, the rate of tax in Singapore is 35% and rate of

tax in India 30%



Central Board of Direct Taxesbody to create policies and administer direct taxes in India



Central Board of Direct Taxes

Department of Revenue in the Ministry of Finance

Provides inputs for policy and planning of direct taxes

Administration of direct tax law through Income TaxDept.

Issued notification stating that prescribed documents

needed to be provided in addition to TRC from another

country



Chairman

Income TaxLegislation &Computerizat

ion

Personnel &Vigilance

Revenue InvestigationAudit &Judicial

Structure



Tax Computation

Announcement on 29th June, 2013

Modification in tax computation

Related to taxation of development centres and IT

sector

Profit-split method will no longer be preferred

Relief for the IT sector as compliance costs will come

down



Self-Declaration

Finance Act 2002 stated that the TRC should contain

all the information wanted by the Indian government

Amended by CBDT for double taxation relief purposes Announcement on 6th August, 2013

Foreign investors can declare additional info

themselves



General Anti-Avoidance Rulesestablished to prevent misuse of double taxation avoidance agreement


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Double Taxation

General Anti-Avoidance Rules

Framed to minimize tax avoidance.

Set of rules to limit tax avoidance.

Empowers the Revenue Authorities to deny the tax

benefits of transactions/arrangements without any

commercial substance or consideration other thanavailing a tax benefit.


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Double Taxation

Tax Disputesregarding double taxation


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Double Taxation

Introduction to Tax Disputes

Tax disputes are an inevitable by-product of

globalization

Tax disputes between government and tax-payers

o Transfer pricing disputes

o

Characterization of tax Tax disputes between governments


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Double Taxation

Resolution of Tax Disputes

Between government and tax-payers

Advances pricing arrangements (APA)

Mutual agreement procedures (MAP)

Between governments

Bilateral and multilateral tax treaties based on OECD

model


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Double Taxation

OECD Model Conventionsettling tax disputes in the European Union since 1995


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Double Taxation

The Convention

First published in 1958

Latest amendment in 2008

If competent authorities are unable to reach

agreement within 2 years, issues are sent to

arbitration if complainant requests


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Double Taxation

Key Features

Applicable to tax disputes with an underlying tax treaties

Complainant can make written submission and present his case orally

with the arbitrators assent

Not allowed if all issues are resolved by competent authorities

Arbitration decision is binding on competent authorities but complainants

can refuse and litigate through courts

Cost of arbitration borne by competent authorities

Arbitration decisions may be published if complainant agrees


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Double Taxation

EU vs. UNcomparative analysis


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The Convention

EU Arbitration Convention

Applies to EU member states

Not clear whether the competent authority refusal to accept the

complaint is subject to judicial review

UN Model Convention

Used in treaties between developed and developing nations

If the competent authorities cannot come to agreement within 3

years, arbitration can be initiated

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