international taxation in present global...
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INTERNATIONAL TAXATION in Present Global Scenario
US Model Convention
Nine times of Increase in past 15 years
In Million US$
0
50
100
150
200
250
300
350
400
450
2000 2008 2015
India Exports
India Imports
Growth in International Trade
INTERNATIONAL TAXATION - MEANING
It is a body of legal provisions embedded in the tax laws of each country to cover the tax aspects of cross
border transactions. It is concerned in with Direct Taxes and Indirect Taxes – Kevin Holmes.
International Law
International Tax
Tax Treaties
INTERNATIONAL TAXATION - OBJECTIVES
Balance Capital Export & Import Neutrality
Tax Equity
Economic Efficiency
National Wealth Maximization
INTERNATIONAL TAXATION – Blue Print
Model Conventions
Tax Treaties
Meaning
Objectives
Formation
Types
Coverage
Treaty Position in India
Structure
Limitations of Benefits
Interpretation of Treaties
Model Conventions
Model conventions –
Provide the broad frame work for treaty formulation
Serve as useful interpretation material
The popular model conventions are:
1. UN Model Convention
2. OECD Model Convention
3. US Model Convention
Tax Treaty - Objectives
OBJECTIVES
Avoid Double
Taxation Prevent
Tax Evasion
Allocate Tax
Jurisdiction
Exchange of Information
Promote Investment and Mutual
relation
Tax credit and Relief
Certainty of Tax
treatment to Investors
TAX TREATY - Formation
A DTA develops in six stages, which follow a fairly well established procedure
1. Negotiation
2. Initialling
3. Signature
4. Ratification
5. Entry into force
6. Effective Date
Tax Treaty - Types
Limited Treaties – which has limited scope and covers
a)income from operation of aircrafts and ships,
b) estates,
c)inheritance and
d) gifts
Comprehensive Treaties – This is wider in scope addressing all sources of income.
Tax Treaty - Coverage
Bilateral Treaties –The Treaty is entered into between two countries
Multilateral Treaties – The Treaty is entered into between two or more countries.
Tax Treaty - Position in India
Section 90(1) – The IT Act, 1961 empowers the Central government to enter into tax treaties with the government of any foreign country.
India has entered into tax treaties with more than 85 countries
Section 91 – Provides unilateral relief to taxpayers who paid tax to a country with which India has not signed DTAA.
Section 90&90(A) – Provides bilateral relief to the taxpayers who paid tax to a country with which India has signed DTAA.
Tax Treaty - Structure Application
Articles
Article 1: Applicability
Article 2: Taxes covered
Article 30 : Entry into
Force
Article 31: Termination
Definitive Provisions
Article 3-General
Definitions
Article 4- Residence
Article 5-Permanent
Establishment
Anti Avoidance provisions
Article 9: Associated Enterprises
Article 23: Elimination of
Double Tax
Article 26: Exchange of Information
Article 27: Assistance for
collection of Tax
Miscellaneous Provisions
Article 24: Non Discrimination
Article 28: Diplomat
Article 25: Mutual Agreement
Article 29-Territorial extension
DISTRIBUTIVE ARTICLES • Article 6 - Immovable Property
• Article 7 – Business Profits
• Article 8 – Shipping, etc.,
• Article 10 - Dividends
• Article 11 - Interest
• Article 12 – Royalties & Fee for Technical services
• Article 13- Capital gains
• Article 14 – Independent personal services
• Article 15 – Dependent personal services
• Article 16- Directors
• Article 17 – Artists & Sports persons
• Article 18 – Pension
• Article 19 – Government services
• Article 20 – Students
• Article 21 – Other income
• Article 22 - Capital
SCOPE OF ARTICLES IN DTAA-Distributive
ACTIVE & PASSIVE INCOME
Active Income is income derived from carrying on active cross border business operations or by personal effort and exertion as in case of employment
Passive income refers to income derived from investment in tangible/intangible assets
Equity/Debt
Right to use
assets
Disposal of
assets
Yields
Dividend/
Interest
Royalty/Rent
Capital gain
ACTIVE INCOMES – DISTRIBUTION OF TAXING RIGHTS
Article Ref.
Nature of Income
Taxing Right of Source state
Taxing Right of State of Residence
Remarks
7 Business Profits
Yes, if PE exists in the source state
Reserves the right
to tax
Income attributable to PE alone can be taxed in source state
8
Shipping & Air Transport
Cannot tax this income
14 Independent personal services
Yes, if the person has a fixed base or his stay extends beyond 90 days
Income attributable to fixed base alone can be taxed in source state
15 Dependent personal services (Employment)
Yes, if the employment is exercised in the source state. Cannot tax if stay is less than 183 days
If salary is paid on behalf of foreign employer and is not borne by PE, then source state cannot tax salary
ACTIVE INCOMES – DISTRIBUTION OF TAXING RIGHTS
Article Ref.
Nature of Income Taxing Right of Source state
Taxing Right of State of Residence
Remarks
16 Directors’ Fees
Yes, the source state can tax the same
Reserves the right
to tax
8
Artists & Athletes
Yes, the source state can tax the same
DTA may specify the extent to which the income may be exempt
19 Govt. Service remuneration
No, unless the person rendering service is the resident of and national of the source state
20 Students & Apprentices
No Taxing Rights
21 Other Income
Yes, the source state can tax the same
PASSIVE INCOMES – DISTRIBUTION OF TAXING RIGHTS
Article Ref.
Nature of Income Taxing Right of Source state
Taxing Right of State of Residence
Remarks
6 Income from Immovable property
Has the first right to tax
Reserves the right
to tax
Dividend is not taxable in India. DDT is levied upon the declaring dividend
10
Dividend Income Has the right to tax provided Does not exceed the agreed rate of tax as per DTAA
11 Interest Income
12 Royalty/ Fee for Technical services
Tax can be determined as per the domestic law
13 Capital gains Has the first right to tax
18 Pensions Cannot tax pension Can tax pension
ANTI AVOIDANCE PROVISIONS
Article Ref.
Name of Article Description
9 Associated Enterprises Adoption of Arms length Price in transactions between Associated Enterprises
26 Exchange of Information
Competent Authorities of states shall exchange the information for carrying out provisions of DTA
27 Assistance in collection of taxes
Both the contracting states shall assist each other in collection of revenue claims
23 Elimination of Double Taxation
• Exemption method • Foreign Tax credit method • Deduction method
MISCELLANEOUS PROVISIONS
Article Ref.
Name of Article Description
24 Non – Discrimination There should not be discrimination between Local and Foreign Assesses as far as taxation concerned.
25 Mutual Agreement Procedure
This procedure is generally in addition to the legal remedies available to the aggrieved tax-payer under the domestic legislation
28 Diplomats Special provision for not affecting fiscal benefits of Diplomats by the DTA
29 Territorial Extension Convention can be extended to other territories of contracting state by common agreement.
Limitations of Benefits
Permits only certain entities to enjoy treaty
benefits.
The use of a tax treaty by a person who is not a
resident in either of the treaty countries to
minimize tax costs is known as “Treaty
Shopping”
Quite complex define limitation of benefits as
they vary from treaty to treaty.
Interpretation of Treaties
MoU to an existing treaty can be considered for interpreting such treaty or an earlier treaty or another identically worded treaty enacted subsequently
A protocol is an indispensable and integral part of the treaty with the same binding force as the main clauses therein and can be relied upon
The preamble to a treaty could be used for interpretation
Case laws under other Indian treaties
Model Commentaries
DTAA between
India & Mauritius
nternational taxation Blue print
Why DTAA between India and Mauritius is Debatable Treaty ?
Mauritius Route - Channel used by Foreign investors to invest in India Mauritius is the main provider of FDI to India
In fact 39.6% of FDI to India came from Mauritius between 2001 to 2011.
FDI 39.6
69.4
India FDI
Mauritius Others
Exemption of Income in Mauritius Treaty
Equity/Debt
Right to use
assets
Disposal of
assets
Dividend /
Interest
Royalty/
Rent
Capital gain
International taxation Blue print
Other Income is taxable in the source state.
Capital Gains arising on sale of shares taxable from April 1st ,2017. Until it is exempt as earlier.
Interest income is liable to tax for Debt claims arising after 31st March 2017.
Article 12A inserted to cover Tax perspective on FTS but Tax rate should not more than 10%.
Amendments in INDO-Mauritius Treaty
International taxation Blue print
- Murali Krishna Yadav