TAXATION LAW-I

Topic :- INTERNATIONAL DOUBLE TAXATION: CONCEPTS AND ISSUES

CHANAKYA NATIONAL LAW UNIVERSITY

NYAYA NAGAR, MITHAPUR, PATNA.

Subject:- Taxation Law I

Submitted to:- Dr. G.P Pandey

Submitted by:- xyz

Course:- B.B.A, LL.B.(Hons.)

Roll no:-xyz

Semester:- 7th

Academic year :

Session:-
 DECLARATION BY THE CANDIDATE

I hereby declare that the work reported in the B.B.A., LL.B (Hons.) Project Report entitled “
INTERNATIONAL DOUBLE TAXATION: CONCEPTS AND ISSUES” submitted at
Chanakya National Law University is an authentic record of my work carried out under the
supervision of Dr. G.P Pandey.

I have not submitted this work elsewhere for any other degree or diploma. I am fully
responsible for the contents of my Project Report.

SIGNATURE OF CANDIDATE

NAME OF CANDIDATE: xyz

CHANAKYA NATIONAL LAW UNIVERSITY, PATNA.

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 ACKNOWLEDGEMENT

I would like to thank my faculty Dr. G.P Pandey. , whose guidance helped me a lot with
structuring my project. I owe the present accomplishment of my project to my friends, who
helped me immensely with materials throughout the project and without whom I couldn‟t have
completed it in the present way. I would also like to extend my gratitude to my parents and all
those unseen hands that helped me out at every stage of my project.

THANK YOU,

NAME: XYZ
COURSE: BBA, LL.B. (Hons.)
ROLL NO: xyz
SEMESTER –

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 TABLE OF CONTENT :-

1. INTRODUCTION: INTERNATIONAL DOUBLE TAXATION…..pg:-6

2. CONCEPT OF SOURCE……………………………..pg:-7-10

3. THE CONCEPT OF INTERNATIONAL DOUBLE TAXATION………pg:-11-12

4. METHODS OF RELIEF FROM INTERNATIONAL DOUBLE

TAXATION………………………………………………………………………..pg:-13

5. MODES OF RELIEF:-…………………………………………….pg:-14

6. CONCLUSION& SUGGESTION………………………………pg:-16

BIBLIOGRAPHY………………………………………….pg:-17

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 RESEARCH METHODOLOGY:

In this project, the researcher has relied on the ‘Doctrinal Method’, which is primarily based upon books,
journals, news, articles etc.

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.

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

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 2. CONCEPT OF SOURCE

In the current era of cross-border transactions and constant growth of international trade and
commerce, more and more residents of a country are extending their sphere of business
operations into other countries. This has led to the need for assessing the tax regimes of
various countries and bringing about essential reforms. International double taxation has
adverse effects on trade, services, and on the movement of capital and people. Taxation of the
same income by two or more countries would constitute a prohibitive burden on the tax-payer.

Therefore, to avoid such hardship to individuals and also with a view to ensuring that national
economic growth does not suffer, the Central government under Section 90 of the Income Tax
Act has entered into Double Tax Avoidance Agreements with other countries. The double tax
treaties (also called Double Taxation Avoidance Agreements or “DTAA”) are negotiated
under the public international law and governed by the principles laid down under the Vienna
Convention on the Law of Treaties.

Objectives of DTAA:

 Protection against double taxation

 Prevention of discrimination in an international context

 Mutual exchange of information

 Legal and fiscal certainty

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What is Double Taxation?

The Fiscal Committee of OECD defines double taxation as ‘the imposition of comparable
taxes in two or more states on the same tax payer in respect of the same subject matter and for
identical periods’.

It is a fundamental rule of law of taxation that unless otherwise expressly provided, income
cannot be taxed twice. The possibility of double taxation occurs when the taxpayer is resident
in one country but has a source of income situated in another country. Two basic rules come
into play in such situations, the source rule, and the residence rule. The source rule holds that
income is to be taxed in the country in which it originates irrespective of whether the income
accrues to a resident or a non-resident, whereas the residence rule stipulates that the power to
tax should rest with the country in which the taxpayer resides. If both rules were to apply
simultaneously to a business and it was to suffer tax at both ends, the cost of operating on an
international scale would become exorbitant.

International double taxation arises when various sovereign countries exercise their sovereign
power to subject the same person to taxes of substantially similar character on the same
income. There are three distinct classes of cases in which international double taxation may
arise:

1. The first and most important class includes those cases where double taxation is ‘due
to co-existence of personal and impersonal tax liability’. Personal tax liability is based
on the personal status of taxpayer i.e. his nationality, domicile, and residence whereas
impersonal tax liability arises when a state claims tax on income earned or received
within its territory without having regard to the personal status of the recipient. A
person may be subjected to tax on the same income in one country on account of his
personal status and in another because the source of his income is situated within the
territory. Property may be taxed in the country where it is situated and also by the
country where its owner resides.
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2. The second class includes cases of simultaneous personal liability of a person in

various countries. This may arise when different countries apply different criteria to
personal liability to tax or where the conditions of the same criteria are differently
defined in different countries. One country may claim personal tax on account of
nationality, and the other because of domicile or residence of the person concerned
within its borders. A person who has his domicile in one and a residence in another
may be liable to tax in the country of his domicile and that of his residence as well. He
may reside in various countries and be liable to personal tax in each of them. Also, the
same person may be claimed as domiciled or residents by different countries in each of
which he fulfills the legal conditions of such personal status.

3. The third class of double taxation arises when various countries apply different tests of
impersonal liability. Double taxation of this kind may occur, for instance when the
assets or activities, that produce a given income are situated elsewhere than in the
country where the income is earned or from which it is due. Business transactions may
be subjected to tax both in the country of their origin and of their completion. Tax on
salaries and other remuneration for professional activities or employment may be
demanded by the country where the act is performed, or where it is paid for, or where
the employee or professional man resides or belong by nationality.

 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.

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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 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

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1 2010 OECD Model, Introduction, para.
2 OECD, Tackling Aggressive Tax Planning through Improved Transparency and Disclosure (2011)

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 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 JointCommittee 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
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reference to the particular relationship that the State may have with another State.
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
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different remedy, however, when the trade and investment flows favour one State or the other.

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

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 METHODS OF ELIMINATING DOUBLE TAXATION:

1. Exemption Method: One method of avoiding double taxation is for the residence
country to altogether exclude foreign income from its tax base. The country of the
source is then given exclusive right to tax such incomes. This is known as complete
exemption method and is sometimes followed in respect of profits attributable to
foreign permanent establishments or income from immovable property. Indian tax
treaties with Denmark, Norway, and Sweden embody with respect to certain incomes.

2. Credit Method: This method reflects the underlying concept that the resident remains
liable in the country of residence on its global income, however as far the quantum of
tax liabilities is concerned, credit for tax paid in the source country is given by the
residence country against its domestic tax as if the foreign tax were paid to the country
of residence itself.

3. Tax Sparing: One of the aims of the Indian DTAA is to stimulate foreign investment
flows in India from foreign developed countries. One way to achieve this aim is to let
the investor avail benefits of tax incentives available in India for such investments.
This is done through “Tax Sparing”. Here the tax credit is allowed by the country of its
residents, not only in respect of taxes actually paid by it in India but also in respect of
those taxes India forgoes due to its fiscal incentive provisions under the Indian Income
Tax Act. Thus, tax sparing credit is an extension of the normal and regular tax credit to
taxes that are spared by the source country i.e. forgiven or reduced due to rebates with
the intention of providing incentives for investments.

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 MODES OF RELIEF:

The solution to the problem of double taxation is to establish a method in which the
individual’s whole income is taxed, but is taxed only once, and the liability is divided amongst
the taxing territories according to relative interests of the taxpayer in each territory. This is
brought about by treaties between the governments of two territories, i.e., bilateral relief. When
relief is provided to one’s own national irrespective of reciprocity by the Government of the
other authority, it is called unilateral relief.

 Unilateral relief:

Under this system of taxation, relief is given by way of a tax credit for the taxes paid abroad.
The countries, which follow this method of the tax credit, are U.S, Greece, India, and Japan to
name a few.

For example - A resident in India who has paid income tax in any country, with which India
does not have a treaty for the relief or avoidance of double taxation, is entitled to credit against
his Indian Income tax for an amount equal to the Indian coverage rate or the foreign rate
whichever is lower applied to the double-taxed income. This is done as follows:

 Where the foreign tax is equal to Indian tax, the full amount of foreign tax will be given
credit.
 Where the foreign tax exceeds the tax payable in India, the liability to Indian tax will be
nil. However, no refund in respect of the excess amount is allowed, and
 Where the foreign tax paid is less than the Indian tax after deducting the foreign tax
would be payable by the taxpayer. The principle is that the credit allowable will never
exceed the amount of Indian income tax, which becomes due or payable in respect of
the doubly taxed income.

 Bilateral relief:

Bilateral relief is provided when the governments of two States enter into tax treaties which
may take any one of the following two forms:

 The treaty may apply the exempting method, wherein the country in question refrains
from exercising jurisdiction to tax a particular income.
 Alternatively, the treaty may provide relief from double taxation by reducing the tax
ordinarily due to one or both of the contracting parties on that income which is subject
to double taxation.

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India has entered into a wide network of tax treaties with various countries all over the world to
facilitate the free flow of capital into and from India. India has comprehensive DTAAs with 88
countries. Under the Income Tax Act 1961 of India, there are two provisions, Section 90 and
Section 91, which provide specific relief to taxpayers to save them from double taxation.
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 taxpayers who have paid tax to a country with which
India has not signed a DTAA. Thus, India gives relief to both kinds of taxpayers. One can find
the tax-sparing and credit methods for elimination of double taxation in most Indian treaties. A
typical DTAA between India and another country covers only residents of India and the other
contracting country who has entered into the agreement with India. A person who is not
resident either of India or of the other contracting country cannot claim any benefit under the
said DTA Agreement. Such agreement generally provides that the laws of the two contracting
states will govern the taxation of income in respective states except when an express provision
to the contrary is made in the agreement.

In India, Chapter IX of Income Tax Act, 1961 contains a provision relating to double taxation
relief. Section 90 empowers the Central government to enter into an agreement (DTAA) with
the Government of another country outside India for the specified objects. When such
agreement does not exist relief is provided in Section 91.

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 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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 BIBLIOGRAPHY

Books

1. Dr. Singhania Vinod, Direct Taxes law & practice, Taxmann Publications Pvt.
Ltd., 57th Edition, 2017
2. Taxation Law by B.K Goyal ( singhal law publication)

Official websites

1. www.icaiknowledgegateway.org
2. www.itlknowledge.income/
3. www.taxguru.in

Statute

1. Indian Income Tax Act, 1961

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