SUBJECT: TAXATION LAW-I

INTERNATIONAL DOUBLE TAXATION- CONCEPT AND ISSUES

Submitted to: Dr. G.P. Pandey

Submitted by: Bhargavi Mishra

4th Year, 7th Semester

1524
 INTERNATIONAL DOUBLE TAXATION: CONCEPTS AND ISSUES

ACKNOWLEDGEMENT

Writing a project is one of the most significant academic challenges, I have ever faced. Though this
project has been presented by me but there are many people who remained in veil, who gave their all
support and helped me to complete this project.

First of all I am very grateful to my subject teacher Dr. G.P. Pandey without the kind support of
whom and help the completion of the project was a herculean task for me. He donated his valuable
time from his busy schedule to help me to complete this project and suggested me from where and
how to collect data.

I am very thankful to the librarian who provided me several books on this topic which proved
beneficial in completing this project.

I acknowledge my friends who gave their valuable and meticulous advice which was very useful and
could not be ignored in writing the project. I want to convey most sincere thanks to my friends, for
helping me throughout the project.

Last but not the least, I am very much thankful to my parents and family, who always stand aside me
and helped me a lot in accessing all sorts of resources.

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 INTERNATIONAL DOUBLE TAXATION: CONCEPTS AND ISSUES

TABLE OF CONTENTS

CHAPTER-1 ........................................................................................................................................... 5

INTRODUCTION: INTERNATIONAL DOUBLE TAXATION ......................................................... 5

CHAPTER-2 ........................................................................................................................................... 6

CONCEPT OF SOURCE ....................................................................................................................... 6

CHAPTER-3 ........................................................................................................................................... 8

THE CONCEPT OF INTERNATIONAL DOUBLE TAXATION ....................................................... 8

CHAPTER 4 ................................................................................................................................. 10

VODAPHONE HOLDING VS. U.O.I ......................................................................................... 10

Facts leading to the Dispute .......................................................................................................... 10

Issue before the Supreme Court .................................................................................................... 11

Observations made by the Supreme Court ...................................................................................... 11

Corporate structures ......................................................................................................................... 11

Decision of the Court ........................................................................................................................ 14

Sale of CGP share by HTIL to Vodafone or VIH does not amount to transfer of capital assets within
the meaning of Section 2 (14) of the Income Tax Act and thereby all the rights and entitlements
that flow from shareholder agreement etc. that form integral part of share of CGP do not attract
capital gains tax. The order of High Court of the demand of nearly Rs.12, 000 crores by way of
capital gains tax would amount to imposing capital punishment for capital investment and it lacks
authority of law and therefore is quashed. ...................................................................................... 14

Conclusion ......................................................................................................................................... 15

CHAPTER-4 ......................................................................................................................................... 16

METHODS OF RELIEF FROM INTERNATIONAL DOUBLE TAXATION .................................. 16

CHAPTER-5 ......................................................................................................................................... 18

CONCLUSION& SUGGESTION ........................................................................................................ 18

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 INTERNATIONAL DOUBLE TAXATION: CONCEPTS AND ISSUES

BIBLIOGRAPHY ................................................................................................................................. 19

RESEARCH METHODOLOGY:

In this project, the researcher has relied on the ‘Doctrinal Method’, which is primarily based upon
books, journals, news, articles etc..A comprehensive study is made in order to arrive at analytical &
critical support of the arguments. The segments are structured and written actively. The writing style
is descriptive as well as analytical. This project has been done after a thorough research based upon
intrinsic and extrinsic aspect of the assigned topic.

OBJECTIVE OF STUDY: -

This project enable us to study and get a clear understanding about the topic assigned :-

 To know about the concept of International Double Taxation.

 To get the detail knowledge of the procedure of double.
 To be acknowledged about the recent issues.

HYPOTHESIS:-

The hypothesis made by the researcher before doing the researcher work is that the double taxation is
non conducive to International Economic Relations.

RESEARCH METHODOLOGY:-

The research methodology on which the researcher has relied upon is the doctrinal mode of research
which includes books, articles and other materials available on the internet.

LIMITATION OF THE STUDY:-

The researcher has limitation that he cannot go for the non-doctrinal mode of research
methodology and also that there is a limited period of time available to complete the research
work which restricts the scope of research.

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 INTERNATIONAL DOUBLE TAXATION: CONCEPTS AND ISSUES

CHAPTER-1

INTRODUCTION: INTERNATIONAL DOUBLE TAXATION

International double taxation is subjecting direct to the same tax and taxable materials for the same
period of time, by the public authorities from different countries. The advent of double taxation is due
to the manner in which criteria are applied to the taxation of income or wealth. Generally, the
situations in which double taxation (economic or legal) appears, are determined by the fact that the
Governments of various States apply to taxes on income made in the Territories concerned by subjects
of taxation local and foreign, and on the other subject to taxes and the income from its own citizens
abroad. Since double taxation affects the efficiency and competitiveness of exports of foreign goods,
the removal of international double taxation is a necessity in order to ensure an economic
developments of relations at the international level. Why international elimination of double taxation
is a concern of all States, and amid its legal abolition is the development of international tax
conventions called Conventions for avoidance of double taxation. In international practice, for the
avoidance of double taxation were enshrined certain principles on which the conventions concluded
lays down the methods of settlement and collection of taxes. Double taxation tax may constitute an
obstacle to optimal allocation of capital investments and productive activities and precisely why it is
believed that removing them is a fundamental economic policy side and the tax of Governments. In
international practice, for the avoidance of double taxation have been devoted to certain principles, on
the basis of which shall be determined by conventions concluded by settlement and methods of tax
collection.

International taxation issues revolve around two main concepts that are also fundamental
reasons/causes of international juridical double taxation. These two concepts are known as the
concept of source and the concept of residence. Both concepts arise from domestic tax law provisions,
which distinguish between two types of taxpayers – non- residents and residents. The first category of
taxpayers would generally have limited nexus(connection) with the country in question, however the
income received by these taxpayers will have an economic link – will originate in the particular
country. This country wishes to levy tax on this taxpayer, however only in respect of the income
originated therein (having source in this country) – referred to as source taxation and sometimes
known also as limited tax liability. The second category of taxpayers – residents – would have a close
personal and economic connection (nexus) with the country in question and the country chooses to tax

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this taxpayer on his/her worldwide income – referred to as worldwide taxation and sometimes known
also as unlimited tax liability.1

CHAPTER-2

CONCEPT OF SOURCE

The jurisdiction to impose income tax is based either on the relationship of the income (tax object) to
the taxing state (commonly known as the source or situ principle) or the relationship of the taxpayer
(tax subject) to the taxing state based on residence or nationality. Under the source principle, a State’s
claim to tax income is based on the State’s relationship to that income. For example, a State would
invoke the source principle to tax income derived from the extraction of mineral deposits located
within its territorial boundaries. Source taxation is generally justified on the ground that the State has
contributed to the creation of the economic opportunities that allow the taxpayer to derive income
generated within the territorial borders of the State2. Of course, jurisdiction to tax is also about power,
and a State generally has the power to tax income if the assets and activities that generated it are
located within its borders. Income itself does not have a geographical location. It is a quantity,
calculated by adding and subtracting various other quantities in accordance with certain accounting
rules. By long standing convention, however, income is assigned a geographical location by reference
to the location of the assets and activities that are used to generate the income. When all of those
assets and activities are located in one State, that State may be considered to be the unambiguous
source of the income. For example, wages paid to an employee stationed in a State that represent
compensation exclusively for work performed in that State would have a source exclusively in that
State. When some of the assets or activities generating income are located in more than one State, the
source of the income is less clear. For example, business profits derived from the manufacture of
goods in State A and their sale in State B have a significant relationship to State A and to State B. In
these circumstances, some rules for determining source are needed. Those source rules might
apportion the income between the two claimant States, or they may assign it to one State exclusively.
In some cases, States may adopt inconsistent source rules that result in both States exercising source
jurisdiction over the same item of income. Income derived from sources in the country and received
by taxpayers classified as non-residents would most often be defined as “income from sources in the
country”. This definition would be quite an important part of international tax rules, since in absence
of such definition, one could argue that the tax liability on non- resident may not arise. The list of

1 2010 OECD Model, Introduction, para.

2 OECD, Tackling Aggressive Tax Planning through Improved Transparency and Disclosure (2011)

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 INTERNATIONAL DOUBLE TAXATION: CONCEPTS AND ISSUES

items of income having source in the country can be both exhaustive or only indicative. Generally
such definition would mention: “Income from sources in Country Z includes the following items of
income: (an exhaustive or indicative list would follow)”. The sourcing rules may also indicate that the
income from sources would also include income, which was not physically paid from the country in
question, but earned there in a way of provision of services, corresponding expense was claimed as a
deduction in this country or otherwise connected to the taxing jurisdiction.3

3 https://www.sciencedirect.com/science/article/pii/S1877042812035069

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 INTERNATIONAL DOUBLE TAXATION: CONCEPTS AND ISSUES

CHAPTER-3

THE CONCEPT OF INTERNATIONAL DOUBLE TAXATION

Double taxation can take different forms and occur in different situations. Sometimes double taxation
is being distinguished based on the number of taxpayers involved. Cases where the same income is
being taxed twice in the hands of the same taxpayer are being referred to as juridical double taxation.
For example, the dividend is being taxed in the country of source by a way of withholding tax and
then one more time in the country of residence of the shareholder by a way of tax assessment. Cases
where the same income is being taxed twice in the hands of two different taxpayers are being referred
to as economic double taxation. Continuing with previous example, the profit earned by the company,
which paid the dividend may be subject to corporate income tax.4
Economically, the corporate profits and the dividends are the same income, however taxed in the
hands of two different taxpayers – company paying the corporate income tax and the shareholder –
subject to the taxation on the distributed profits. Double taxation may happen both in the domestic and
cross- border situations. The tax treaties prevailing seek to eliminate the cross-border/international
juridical double taxation. However in some instances, the tax treaties may also eliminate or reduce the
international economic double taxation – e.g. by providing a reduced withholding tax rate on inter-
company cross- border dividends or by providing the obligatory corresponding adjustment in case of
transfer pricing situations .Double tax conventions are an established way for States to agree at the
international level on a method for reducing or eliminating the risk of double taxation. Double
taxation may occur for any of the following reasons:5

(a) Residence – Residence Conflict: Two States may tax a person (individual or company) on his
world- wide income or capital because they have inconsistent definitions for determining
residence. For example, a corporation may be treated by State A as its resident because it is
incorporated therein, whereas State B may treat that corporation as its resident because it is
managed therein. As another example, State A may treat an individual as its resident for a
taxable year under its domestic tax rules because that individual was present in the State for
183 days during that year. That same individual may be treated as a resident of State B under
its domestic laws because the individual has lived in that State for many years and maintains
close financial and social ties to that State. Residence- residence conflicts can occur rather
frequently with respect to corporations, unless a corporation has intentionally made itself a

4 Joint Committee on Taxation, Description and Analysis of Present-law Tax Rules and Recent Proposals
Relating to Corporate Tax Shelters, JCX-84-99 (10 Nov. 1999)
5
OECD, Corporate Loss Utilisation through Aggressive Tax Planning (2011)

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dual resident to obtain the benefit of a loss in more than one State. This type of double
taxation can be eliminated on the basis of tax treaties using the tie- breaker rules contained in
Article 4 paragraphs 2- 3 of the tax treaties, which determine the states, which would qualify
as the only country of residence of the person in question.

Although a State may address the issue of double taxation unilaterally through domestic tax laws, it
typically cannot achieve unilaterally many of the goals of a bilateral tax treaty. Domestic legislation is
a unilateral act by a State. Such a unilateral act can reduce or eliminate double taxation only if the
State is prepared to bear all of the financial cost of granting that relief. A bilateral tax treaty, by
definition, is a joint act of two Contracting States, typically resulting from some negotiations. In that
context, the financial costs of relieving double taxation can be shared in a manner acceptable to the
parties. In particular, the domestic legislation of a State typically addresses tax issues without
reference to the particular relationship that the State may have with another State. 6
In a bilateral tax treaty, that relationship can be taken into account explicitly and appropriately. For
example, a State may use a bilateral tax treaty to fashion a particular remedy for double taxation when
the flows of trade and investment with the other Contracting State are in balance. It may adopt a
different remedy, however, when the trade and investment flows favour one State or the other. 7

6
OECD Model Agreement on Exchange of Information on Tax Matters (2002).
7
http://www.un.org/esa/ffd/tax/seventhsession/CRP11_Introduction_2011.pdf

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 INTERNATIONAL DOUBLE TAXATION: CONCEPTS AND ISSUES

CHAPTER 4

VODAPHONE HOLDING VS. U.O.I

The Supreme Court of India pronounced the landmark judgment in Vodafone International Holding
(VIH) v. Union of India (UOI). The Bench consisting of Chief Justice S.H Kapadia, K. S. Radha
krishnan and Swatanter Kumar quashed the order of High Court of demand of Rs 12000 crores as
capital gain tax and absolved VIH from liability of payment of Rs 12000 crores as capital gain tax in
the transaction dated 11.2.2007 between VIH and Hutchinson Telecommunication International
Limited or HTIL (non-resident company for tax purposes).

The court held that in Indian revenue authorities do not have jurisdiction to impose tax on an offshore
transaction between two non-residents companies where in controlling interest in a (Indian) resident
company is acquired by the non-resident company in the transaction.

Facts leading to the Dispute

Vodafone International Holding (VIH) and Hutchison telecommunication international limited or

HTIL are two non-resident companies. These companies entered into transaction by which HTIL
transferred the share capital of its subsidiary company based in Cayman Island i.e. CGP international
or CGP to VIH.

VIH or Vodafone by virtue of this transaction acquired a controlling interest of 67 percent in Hutch is
on Essar Limited or HEL that was an Indian Joint venture company (between Hutchinson and Essar)
because CGP was holding the above 67 percent interest prior to the above deal.

The Indian Revenue authorities issued a show cause notice to VIH as to why it should not be
considered as “assesse in default” and thereby sought an explanation as to why the tax was not
deducted on the sale consideration of this transaction.

The Indian revenue authorities thereby through this sought to tax capital gain arising from sale of
share capital of CGP on the ground that CGP had underlying Indian Assets.

VIH filed a writ petition in the High Court challenging the jurisdiction of Indian revenue authorities.

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This writ petition was dismissed by the High Court and VIH appealed to the Supreme Court which
sent the matter to Revenue authorities to decide whether the revenue had the jurisdiction over the
matter. The revenue authorities decided that it had the jurisdiction over the matter and then matter
went to High Court which was also decided in favour of Revenue and then finally Special Leave
petition was filed in the Supreme Court.8

Issue before the Supreme Court

The issue before the Apex court was whether the Indian revenue authorities had the jurisdiction to tax
an offshore transaction of transfer of shares between two non-resident companies whereby the
controlling interest of an Indian resident company is acquired by virtue of this transaction.

Arguments of Revenue

The revenue submitted that this entire transaction of sale of CGP by HTIL to VIH was in substance
transfer of capital assets in India and thus attracted capital gain taxes transaction led to transferring of
all direct/indirect rights in HEL to VIH and this entire sale of CGP was a tax avoidance scheme and
the court must use a dissecting approach and look into the substance and not at “look at” form of
transaction as a whole.

Observations made by the Supreme Court

Corporate structures

o Multinational companies often establish corporate structures or affiliate subsidiaries

or joint ventures for various business and commercial purposes and these are
primarily aimed to yield better returns to the investors and help in progress of the
company.
o And therefore the burden is entirely upon the revenue to show that such
incorporation, consolidation, restructuring has been affected for fraudulent purpose so
as to defeat the law or evade the taxes.
o Even Ministry of Corporate affairs recognize such structures that consist of Holding
and subsidiary companies wherein Holding company may include enough voting

8 2004(4) BOM CR 258

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stock in the subsidiary to control the management and also hinted that many
transnational investments are made in tax neutral /investor friendly nations primarily
so as to avoid double taxation or plan activities in manner to yield best returns to
investors.
2. Overseas companies
o Many overseas companies invest in countries like Mauritius, Cayman Island due to
better opportunities of investment and these are undertaken for sound commercial and
sound legitimate tax planning and not to conceal their income or assets from home
country tax jurisdiction and India have recognised such structures.
o These offshore transactions or these offshore financial centres do not necessarily lead
to the conclusion that these are involved in tax evasion.
3. Holding and Subsidiary Companies
o The companies act have recognized that subsidiary company is a separate legal entity
and though holding company control the subsidiary companies and respective
business of the company within a group but it is settled principle that business of
subsidiary is separate from the Holding company.
o The assets of subsidiary companies can be kept as collateral by the parent company
but still these two are distinct entities and the holding company is not legally liable
for the acts of subsidiaries except in few circumstances where the subsidiary
company is a sham.
o The Holding company and subsidiary companies may form pyramid of structures
whereby the subsidiary company may hold controlling interest in other companies
forming parent company.
4. Shares and controlling interest
o The transfer of shares and shifting of controlling interest cannot be seen as two
separate transactions of transfer of shares and transfer of controlling interest.
o The controlling interest is not an identifiable or a distinct capital asset independent of
holding of shares and is inherently a contractual right and not property right and
cannot be considered as transfer of property and capital assets unless the Statue
stipulates otherwise.
o The acquisition of shares may carry acquisition of controlling interest which is purely
commercial concept and tax is levied on transaction and not on its effect.
5. Corporate veil
o The principle of lifting of corporate veil can also be applied in relationship of
Holding and subsidiary company in spite of their separate legal personalities if facts
reveal that dubious methods were adopted to evade tax.

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o The revenue authorities should look at transaction in a holistic manner and should not
start with the question that the impugned transaction is tax deferment/saving device.
o The revenue authorities may invoke the principle of piecing of the corporate veil only
after it is able to establish on the facts and circumstances surrounding the transaction
that the impugned transaction is a sham or tax avoidant.
6. Tax planning/ tax evasion/tax avoidance
o It is cornerstone law that a tax payer is enabled to arrange his affairs so as to reduce
the liability of tax and the fact that the motive for the transaction is to avoid tax does
not invalidate it unless a particular enactment so provided.
o It is essential that the transaction should have some economic or commercial
substance in order to be effective.
o The revenue cannot tax a subject without a statute to support and every tax payer is
entitled to arrange his affairs so that his taxes shall be as low as possible and he is not
bound to choose that pattern which will replenish the treasury.
o All tax planning is not illegitimate and observed that the majority in McDowell case
held that tax planning is legitimate provided it is within the framework of law and
colourable devices cannot be part of tax planning.
7. Role of CGP
o CGP was already part of HTIL corporate structure and sale of CGP share was a
genuine business transaction and commercial decision taken interest of investors and
corporate entity and not a dubious one.
8. The site of shares of CGP
o Shares of CGP were registered in Cayman Island and law of Cayman also does not
recognize multiplicity of registers and hence site of shares and transfer of shares is
situated in Cayman and shall not shift to India.
9. Extinguishment of rights of HTIL in HEL
o The transfer of CGP share automatically resulted in host of consequences that
included transfer of controlling interest.
o And controlling interest cannot be dissected from CGP share without legislative
intervention.
o Upon transfer of shares of the holding Company, the controlling interest may also
pass on to the purchaser along with the shares and this Controlling interest might
have percolated down the line to the operating companies but that controlling interest
is still inherently remains contractual and not a property right unless otherwise is
provided by the statue.
o The acquisition of shares may carry the acquisition of controlling interest and this is
purely a commercial concept and the tax can be levied only on the transaction and not

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on its effect and hence, consequently, on transfer of CGP share to Vodafone,

Vodafone got control over eight Mauritian Company and this does not mean that the
site of CGP share has shifted to India for the purpose of charging capital gains tax.
10. Section 9 of the income tax act
o The tax is imposed on the basis of source and this source in relation to income is the
place where the transaction of sale takes place and not where the item of value which
was subject of the transaction is derived or acquired from.
o HTIL and VIH are both offshore companies and the sale also took place outside India
thereby source of income is outside India unless legislation ropes in this transaction.
o The revenue statutes are to be reasonably construed and tax cannot be imposed
without clear words indicating the intention to lay the burden.
o The charging section is to be strictly construed and section 9 (1) (i) cannot be
extended to cover indirect transfer of capital assets in India by interpretation.
o A specific nexus is required to exist between the earning of the income and the
territory that seeks to impose tax for the imposition of tax.
o Section 9 has no inbuilt “look in” mechanism and “look through” principle shall not
shift the site of assets. This can be done only by express provision in this regard.
o The Legislature in case wanted to tax “income” which arises indirectly from the
assets; the same must have been specifically provided so. The court cited the example
of Section 64.
11. Section 195
o The tax presence has to be viewed in context of the transaction in question and not
with reference to unrelated matter.
o The section 195 shall apply in case payments are made by resident to non-resident
and not between two non-resident companies.
o The legal nature of transaction is to be examined.
o The present transaction was between two non-residents entities through a contract
executed outside India where the consideration was also passed outside India and
hence VIH is not legally obliged to respond to the notice under section 163 which
relates to the treatment of purchaser as a representative assesses.

Decision of the Court

Sale of CGP share by HTIL to Vodafone or VIH does not amount to transfer of capital assets within
the meaning of Section 2 (14) of the Income Tax Act and thereby all the rights and entitlements that
flow from shareholder agreement etc. that form integral part of share of CGP do not attract capital
gains tax.

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 INTERNATIONAL DOUBLE TAXATION: CONCEPTS AND ISSUES

The order of High Court of the demand of nearly Rs.12, 000 crores by way of capital gains tax would
amount to imposing capital punishment for capital investment and it lacks authority of law and
therefore is quashed.9

Conclusion

The apex court pronounced a landmark judgment in Vodafone International Holding v. Union of India
and cleared the uncertainty with respect to imposition of taxes. The apex court through this judgment
recognized:

 The principles of tax planning.

 Business entities or individual may arrange the affairs of their business so as to reduce their
tax liability in absence of any statutory stipulation prohibiting the same.
 The multinational companies often establish corporate structures and all these structures
should be established for business and commercial purposes only.
 The corporate veil may be lifted in case facts and circumstances reveal that the transaction or
corporate structure is sham and intended to evade taxes.
 The transactions should be looked holistic manner and not in a dissecting manner and the
presence of corporate structures in tax neutral/investor friendly nations should not lead to the
conclusion that these are meant to avoid taxes.

In the end, it can be said that this judgment has helped in removing uncertainties with respect to
imposition of taxes and recognized the principle the if motive of the transaction is to avoid tax does
not necessarily lead to assumption of evasion of taxes and the supreme court has endorsed the view
of legitimate tax planning.

9 2009(4) BOM CR 258

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CHAPTER-4

METHODS OF RELIEF FROM INTERNATIONAL DOUBLE

TAXATION
International double taxation may be eliminated either by concession by one state, that is unilaterally
(on the basis of domestic law), or bilaterally (on the basis of tax treaties) in several ways:
(a) Bilaterally - Allocation of exclusive taxing right to one country only – this means that the tax
treaty will allow only one country to tax the particular item of income and the double taxation
will be thus eliminated, because only country will tax this income. This is usually the country
of residence, which will have the exclusive taxing right of a particular item of income, but it
may be also agreed that certain items of income will be taxed exclusively in the country of
residence – e.g. income from government employment. Bilaterally and Unilaterally – based
on the special method for elimination of double taxation – credit or exemption – described in
further detail below. Bilaterally – using the mechanism of Mutual Agreement Procedure. Two
main methods, the exemption method and the credit method, have commonly been used to
mitigate international double taxation. These methods may be applied on a unilateral basis, or
within the framework of bilateral tax treaties. There are significant implications from the
choice of the method for the domestic and tax treaty policy that a country should carefully
consider, depending on its economics and potential long term objectives that the country will
follow.

(A) Under the exemption method, a State exempts from taxation certain items of income derived by
its residents in another State. It may do so in accordance with its domestic legislation or by treaty.
Domestic legislation typically would grant the exemption without reference to the State where the
income is generated, whereas an exemption granted by treaty would be limited to treaty States. The
typical effect of the exemption method is that the State where an item of income is generated, that is,
the source State, has the exclusive right to tax that item of income. As a rule, exemptions granted to
residents for foreign- source income are confined by statute or treaty to profits derived through
foreign permanent establishments and income from real property situated abroad or wages earned
abroad. The policy goal of this limitation is to confine the exemption to income that the source State
would have jurisdiction to tax, although the source State may choose to exempt the
income as an investment incentive.

(B) The essential feature of the credit method, whether granted unilaterally or by bilateral tax treaty, is
that the residence State treats a foreign income tax paid to the source State by its residents, within
certain statutory limitations, as if it were an income tax paid to itself. When the foreign tax rate is

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lower than the domestic rate, only the excess of the domestic tax over the foreign tax is payable to the
residence State. When the foreign tax is the higher one, the residence State does not collect any tax.
The effective overall tax burden is the higher of the domestic tax or the foreign tax.

(C) Tax- sparing credit is the practice of a residence State using the credit method of adjusting the
taxation of its residents to permit those residents to receive the full benefits of tax concessions
provided to them by a source State. It often takes the form of a credit (notional credit) for taxes that
would have been paid but for a tax incentive. For example, assume that Company A, a corporation
resident in State A, is investing and earning income in State B. State A and State B have entered into a
tax- sparing agreement. Company A earns 100 in State B. Under their normal rules, State A and State
B impose taxes at a rate of 35 per cent. Thus, Company A normally would owe taxes of 35 to State B.
State B, however, has provided Company A with a tax holiday that reduces its taxes to zero. In the
absence of the tax- sparing agreement, State A would impose a tax of 35 on Company A, thereby
wiping out the benefit to Company A of the tax holiday. Under the tax- sparing agreement, State A
may grant Company A a credit for the taxes that would have been paid (that have been spared) but for
the tax holiday. In that way, Company A receives the intended benefits of the tax holiday. 10

10 http://www.un.org/esa/ffd/tax/seventhsession/CRP11_Introduction_2011.pdf

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CHAPTER-5

CONCLUSION& SUGGESTION

Tax- sparing credit is the practice of a residence State using the credit method of adjusting the
taxation of its residents to permit those residents to receive the full benefits of tax concessions
provided to them by a source State. It often takes the form of a credit (notional credit) for taxes that
would have been paid but for a tax incentive. For example, assume that Company A, a corporation
resident in State A, is investing and earning income in State B. State A and State B have entered into a
tax- sparing agreement. Company A earns 100 in State B. Under their normal rules, State A and State
B impose taxes at a rate of 35 per cent. Thus, Company A normally would owe taxes of 35 to State B.
State B, however, has providedCompany A with a tax holiday that reduces its taxes to zero. In the
absence of the tax- sparing agreement, State A would impose a tax of 35 on Company A, thereby
wiping out the benefit to Company A of the tax holiday. Under the tax- sparing agreement, State A
may grant Company A a credit for the taxes that would have been paid (that have been spared) but for
the tax holiday. In that way, Company A receives the intended benefits of the tax holiday. The
international efforts to deal with the problems of international double taxation, which were begun by
the League of Nations and have been pursued in the Organization for Economic Cooperation and
Development and regional forums, as well as in the United Nations, have in general found concrete
expression in a series of model bilateral tax conventions. In the historical evolution of these efforts,
there were various tendencies, which were driven by economic and political interests of the various
countries. One can clearly note the tendencies driven by the developed countries, which would focus
and emphasize residence based taxation – allocating more tax revenue to the country of residence,
which in case of the developed countries also happens to be the country, where the capital, know- how
and expertise is located. Such allocation of taxing rights makes sense, when the economic activity
takes place between two equally developed countries, because the fiscal effect should be mostly
neutral on both countries. 11

11 http://www.un.org/esa/ffd/tax/seventhsession/CRP11_Introduction_2011.pdf

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 INTERNATIONAL DOUBLE TAXATION: CONCEPTS AND ISSUES

BIBLIOGRAPHY

Books

1. Dr. Singhania Vinod, Direct Taxes law & practice, Taxmann Publications Pvt. Ltd., 57th Edition, 2017
2. Vyas Dinesh, Kanga, Palkhivala and Vyas The Law and Practice of Income Tax Volume-II, Lexis
Nexis, Ninth Edition, 2004

Official websites

1. www.icaiknowledgegateway.org
2. www.itlknowledge.income/
3. www.taxguru.in
4. www.taxmanagementindia.com/
5. http://www.un.org

Statute

1. Indian Income Tax Act, 1961

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