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8/13/2019 Double+Taxation FINAL+Sunday+2

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Double Taxation


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Introduction to

DTAA


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Introduction to DTAA (1)

Double taxationis imposition of two or more taxeson the same income (in case of IT), assets (in caseof Capital Taxes) or any financial transaction (incase of sales taxes) in different countries

Double taxationoccurs mainly due to overlappingtax laws & regulations of countries where anindividual does business

When an Indian businessman makes a profit orsome taxable gain in another country, he may berequired to pay Tax on that income in India, as wellas in country in which Income was made !!


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Introduction to DTAA (2)

Double Taxation is also common in MNCs (oremployees deputed abroad) where it isnt fair for a

taxpayer to bear burden of tax in both countries on asingle income

To protect Indian tax payers from this unfairpractice, Indian government has entered into taxtreaties, known as Double Taxation AvoidanceAgreement (DTAA)with about 79 countries


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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

countryto 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)


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DTAA by India (2)

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

Sec-90 is for taxpayers who have paid tax toa 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 notsigned DTAA

Thus, India gives relief to both kind of taxpayers


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Double 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 fromMauritius 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, gainwill escape tax altogether.


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DTAA Comprehensive

agreements - Countries 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


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Causes of Double Taxation

One state claims to tax on the basis ofSource of Income & another on the basis of

Residence;

OR

Both states claim to tax incomes based onResidence

Hence need for elimination of Double

taxation!


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Double Taxation Convention -

ObjectivesVarious 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 toinvestors

Acceptable basis to share tax revenue between


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Treaty Override

In cross-border tax scenario:

Assessee can avail benefit of bilateral agreementsbetween contracting state;

OR

Assessee can choose to be governed by Indiantax laws

Whichever is more beneficial to tax-payer !!


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Overall Structure of DTAA

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


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Overall Structure of DTAA

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


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Check if the treaty is in effect!

Entry into forcecheck for each of thecountries,

The Date of Entry into force of theconvention

The Date of Effect of the convention


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Ensure that the Treaty has not

terminated! Treaty remains into force till terminated

Some treaties provide for a period during whichtreaty cannot be terminated

Termination requires notice through diplomaticchannels

Some treaties provide for period of notice & some

do not

Check if the treaty is in force before applying it!


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Approaches for Elimination

of Double Taxation

Bilateral Agreements between Contracting states

Section 90 provides for tax relief in accordancewith treaties executed by India

Unilateral Tax creditForeign tax credit system

Section 91 provides relief where no treaty exists


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Section-90

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

Bilateral Relief, Under Section 90

Indian government offers protection against double taxationby entering into a DTAA with another country, based on

mutually acceptable terms.

Such relief may be offered under two methods:

Exemption methodEnsures complete avoidance of taxoverlapping

Tax credit methodProvides relief by giving taxpayer adeduction from tax payable in India


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Section-91

Unilateral Relief, Under Section 91

Indian government can relieve an individual from doubletaxationwhether there is a DTAAbetween 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 yearIncome 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


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Methods of Granting Tax Credits

Exemption Method Credit Method

Full

Exemption

Exemptionwith

Progression

Full

Credit

Ordinary

Credit

The Income

earned

in the state of

source is fully

exempt in the

State

of residence

Income earned in

state of source is

considered in

state 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 instate of source

Restricted to that

part of income-tax

which is attributable

to income, taxable

in state of

residence


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An 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

100,00035%

Rate of tax in R on income of 80,000 30%

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


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Tax Incidence if No Double

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


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Tax Credits Full Exemption

(i) (ii)

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


Total Tax 28,000 32,000

Relief given by R 11,000 11,000

The income earned in State of source is fully

exempt in state of residence

Old Austria Treaty, Greece


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Tax Credits Exemption with

Progression

(i) (ii)

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


Total Tax 32,000 36,000


The income earned in State of source is considered in

state of residence only for rate purpose

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


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Tax 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 8,000Total tax paid in state of source is allowed as a credit

against any tax payable in state of residence

Germany, Canada, Singapore, Sweden


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Tax Credits- Ordinary Credit

(i) (ii)

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

Tax in State S (Credit for

source state tax restricted inscenario ii) (4,000) (7,000)

Total due 31,000 28,000


State of residence allows credit of tax paid in state of sourceRestricted to that Part of income-tax which is attributable toincome, taxable in state of residence

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

Mauritius


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Tax 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


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Amount of Tax Given Up by State

of Residence

A. 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


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Underlying Tax Credit (UTC)

Provides relief from tax on same income, which hasalready suffered tax in form of corporate profits tax

Pre condition: Certain percentage of share held byrecipient in capital of the payer company

DTAA entered into by India do provide for UTC by other

stateIllustratively USA, UK

DTAA with Mauritius & Singapore cover UTC in bothcountries

U d l i T C di


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Income before taxation of the Mauritius Co 100,000

Tax @ 40% 40,000

Income after Tax 60,000

Dividend Distributed by the Mauritius Co 30,000

Profit carried forward 30,000

50% of the equity of Mauritius Co. is held by Indian Co

Dividend paid to Indian Company 15,000

UTC (15,000 X 40,000 / 60,000) 10,000

Underlying Tax Credit

(Example)


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Unilateral Tax Credit

Requirements

Resident of India for relevant previous year

Income has accrued or arisen outside India and isdoubly taxed

Taxes have been paid in the source country

There is no DTAA with that country

Items of Income not covered under DTAA eligiblefor credit


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Unilateral Tax Credit (UTC)

Relief

Deduction from the Indian income-tax payable by him of a sumcalculated 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


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Thank

You

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