Unit 4 International Taxation: International Taxation – double taxation relief – bilateral relief – unilateral relief –

DTAA (Double Taxation Avoidance Agreements) – Tax implications in

International Joint Venture Special provisions relating to Avoidance of Tax – GAAR-
Advance Ruling - transfer pricing .
Meaning
International taxation is the study or determination of tax on a person or business subject to the tax laws of different
countries or the international aspects of an individual country’s tax laws as the case may be.
1) Indian income tax provisions related to Non Residents: Residential status of a person describes the taxability of
that person in a county but in the case of Non-resident only that Income which is received or deemed to have been
received in India by or on his behalf and income that accrues or arises or is deemed to accrue or arising in India is
Taxable in India. Section 9 of the Income Tax Act, 1961 also envisages certain deeming provisions. As per the deeming
provisions following Incomes will be deemed to accrue or arise in India, even though they may actually accrue or arise
out of India :- Income from Business Connection in India. Income from any Property, Asset or Source of Income in
India. Capital Gains from transfer of any Capital Asset situated in India. Income from Salary earned in India – i.e. if
Service is rendered in India. Where a rest period which is preceded or succeeded by services rendered in India forms
part of the service contract of employment, the same shall be considered to be income earned in India. Income from
salary (other than perquisite &/or allowance) paid by Government of India to an Indian Citizen of India even though the
service is rendered out of India. Dividend paid by Indian Company outside India. Income by way of Interest in some
situations. Income by way of Royalty in some situations. Income by way of Fees for Technical Services in some
situations.
2) NRI Tax Exemption NRI’s are taxed as per income tax slabs applicable to resident Indians below the age of 60
years irrespective of the age criteria of non-resident Indian. Simply means that if the NRI is above the age of 60 years
still he will be taxed a per tax rate applicable to resident Indian who is below the age of 60 years. But, in the following
two cases NRIs need not to file tax return: If taxable income consists of only investment income or long term capital
gains. When the tax has already been deducted at source, on such income. Besides the above benefits, NRI’s are also
granted with some tax free incomes which are notified by Income Tax department as follows: Interest earned on Saving
Certificates etc. Interest earned on Non Resident (Non Repatriable) [NRNR] Deposit. ** Note – w.e.f. 1st April,2002
banks cannot accept fresh nor renew NRNR deposits. Upon maturity Interest on NRNR deposits and principal amount
can be transferred to Non Resident (External) [ NRE] account at the option of account holder. Interest earned on
Foreign Currency Non Resident (Bank) [FCNR(B)] Deposit which technically is exempt under Section 10(4)(ii) too
being covered by the definition of an NRE deposit under the FERA 1973 in case of a ” Non Resident ” or “Resident but
Not Ordinarily Resident” as per the provisions of Income Tax Act, 1961. Interest earned on Foreign Currency Non
Resident (Bank) [FCNR(B)] Deposit continued until maturity by a Non Resident Indian (NRI) who has returned to
India for taking up employment , business, vocation i.e. for permanent settlement provided he is a ” Non Resident ” or
“Resident but Not Ordinarily Resident” as per the provisions of Income Tax Act, 1961. Overseas income of NRIs.
Dividend income from Indian Public/Private Company, Indian Mutual Fund and from Unit Trust of India is exempt
from tax in India at par with residents. Long-term capital gains arising on transfer of equity shares traded on recognized
Stock Exchange and units of equity schemes of Mutual Fund is exempt from tax at par with residents, provided
Security transaction tax is paid. Remuneration or fee received by non-resident / non-citizen / citizen but not ordinarily
resident ‘consultants’, for rending technical consultancy in India under approved programme including remuneration of
their employees, and income of their family members which accrue or arise outside India. Interest on notified bonds.
Tax Deducted at Source (TDS) provisions related to NRI’s:
3) TDS provisions Finance Act, 2008 inserted a new sub section (6) to section 195 effective from April 1, 2008, which
requires the person responsible for making payment to a non-resident to furnish information relating to such payments
in forms to be prescribed.
The Central Board of Direct Taxes (“CBDT”) has prescribed a new rule 37BB in the Income Tax Rules, 1962 (“the
rules”) prescribing Form 15CA and Form 15CB to be filed in relation to remittances to non-residents under section
195(6) of the Income Tax Act, 1961 (“the Act”).
There is a very common doubt which generally strike the minds of students that is Double Taxation of money.
Generally people thinks that if a NRI is paying a tax in the country in which he is a non resident then the country of his
residence will also demands tax from that person for that income. But if this happens this will leads to double taxation.
The thinking of students or other people is absolutely right as the law interprets the same but Law is always a step
ahead from our minds. Law already found a way so as to avoid double taxation of income in case of NRI’s and that
amazing thing is DOUBLE TAXATION AVOIDANCE AGREEMENT
4) Meaning of Treaty: In layman’s language, a treaty is a formally concluded agreement between two or more
independent nations. The Oxford Companion to Law defines a treaty as “an international agreement, normally in
written form, passing under various titles (treaty, convention, protocol, covenant, charter, pact, statute, act, declaration,
concordat, exchange of notes, agreed minute, memorandum of agreement) concluded between two or more states, on
subject of international law intended to create rights and obligations between them and governed by international law.
Examples of treaty include CTBT, Vienna Convention, and Tax Treaty such as DTAA etc.
5) What is DTAA?                     DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA) is an agreement
signed between two countries/nations for resolving the issues of taxability of income and increased transparency to
avoid tax evasion. Over 80 countries including the UAE, UK, US, New Zealand, Canada, etc. have signed the DTAA
with India.
6) Why DTAA? Every country has its own taxation structure according to which they determines the taxability of
people residing there and also taxability of the people who does not belongs to their country but with some means they
are related to their nation in their form of assesse or deemed assessee. So, for recoverability of tax from the income
generated in other nations by NRI’s DTAA was formed and secondly, to ensure that this taxability of income does not
lead to double taxation of Same income in both the countries.
6) Benefits of Double Taxation Avoidance Agreements
There are lots of benefits associated with DTAA for taxpayers. The basic benefit includes not having to pay double
taxes on the same income. Apart from this,
 According to these treaties, each country determines its own resident status in accordance with its domestic
laws. When a person qualifies for tax residency in both countries, the treaty may provide a tiebreaker. As an
example, a PIO could qualify as an Indian tax resident if his/her stay in India exceeds a specific threshold.
Additionally, they may be considered US tax residents by virtue of their citizenship. In this case, the tiebreak
rule under the India-USA DTAA comes into play, and it may occur that the person qualifies as a tax resident
of the United States.
 Those who are tax residents of countries with which India has DTAAs can claim tax exemptions under
these agreements and their tax liability in India will be limited to the extent of taxing rights permitted
by the DTAAs. Even if the scope of taxation under the Indian income tax law is wider, such individuals may
benefit from the treaty by virtue of section 90 of the Indian Income-tax Act, 1961, subject to certain
procedural requirements, such as submission of Tax Residency Certificates (TRC) of the other country.
 However, if a person qualifies as a tax resident of India both under the Indian law and the relevant treaty, then
India will have residual powers of taxation, subject to the limited rights granted to the other country under the
treaty.
 Foreign Tax Credit (FTC) in India - Once an NRI or PIO qualifies as an Indian tax resident, he/she will be
eligible to claim credit of taxes paid in other foreign countries in his/her income tax return filed in India,
subject to certain conditions and procedural compliances prescribed in rule 128 of the Income Tax Rules. FTC
is allowed in the year when the corresponding income is taxed in India. Form 67 along with documents
supporting payment or deduction of tax in other countries will be required to be submitted by the individual.

To claim FTC, one needs to provide a certificate or statement that specifies the nature of income and the amount of tax
deducted from or paid by the assessee. You can obtain one of the following:
 From the tax authority of the country or the specified territory outside India; or
 From the person responsible for deduction of such tax; or
 signed by the assessee (along with an acknowledgement of online payment or bank counterfoil of challan for
payment of tax where the payment has been made by the assessee or proof of deduction where the tax has
been deducted).
It may be noted that FTC is allowed only in respect of taxes paid in other countries in accordance with the applicable
DTAA and any excess foreign tax will be ignored. Also, FTC will be limited to the extent of taxes payable in India.
 Lower Withholding Tax (Tax Deduction at Source or TDS) - Lower withholding tax is a plus for taxpayers as
they can pay lower TDS on their interest, royalty or dividend incomes in India, while some agreements
provide for tax credits in the source or country of operations so that taxpayers don’t pay the same tax twice. In
some cases, such as agreements with Mauritius, Cyprus, Singapore, Egypt etc. capital gains tax is exempted
which can be a boon to taxpayers as they can use the DTAA agreement to minimise taxes
The overall process of FTC in India has been streamlined pursuant to introduction of the rules with effect from April
2017 and taxpayers can avail benefit of such credit to avoid the burden of double taxation to the extent legally
possible.
7) Need for DTAA
The need for Agreement for Double Tax Avoidance arises because of conflicting
rules in two different countries regarding chargeability of income based on receipt
and accrual, residential status etc. As there is no clear definition of income and
taxability thereof, which is accepted internationally, an income may become liable
to tax in two countries.
In such a case, the two countries have an Agreement for Double Tax Avoidance, in
which case the possibilities are:
1.      The income is taxed only in one country.
2.      The income is exempt in both countries.
3.      The income is taxed in both countries, but credit for tax paid in one country is
given against tax payable in the other country.
In India, The Central Government, acting under Section 90 of the Income Tax Act, has been authorized to enter into
double tax avoidance agreements (hereinafter referred to as tax treaties) with other countries.
8) Types of DTAA
DTAA can be of two types.
 Comprehensive DTAAs are those which cover almost all types of incomes covered by any model convention.
Many a time a treaty covers wealth tax, gift tax, surtax. Etc. too.
 Limited DTAAs are those which are limited to certain types of incomes only, e.g. DTAA between India and
Pakistan is limited to shipping and aircraft profits only.
9) Role of tax treaties in international tax planning
A tax treaty plays the following role:
1. Facilitates investment and trade flow, preventing discrimination between tax payers;
2. Adds fiscal certainty to cross border operations;
3. Prevents international evasion and avoidance of tax;
4. Facilitates collection of international tax;
5. Contributes attainment of international development goal, and
6. Avoids double taxation of income by allocating taxing rights between the source country where income arises and
the country of residence of the recipient; thereby promoting cooperation between or amongst States in carrying out
their obligations and guaranteeing the stability of tax burden.
10)How to Use Benefits Under DTAA (DTAA methods)
To claim benefits under DTAA, you can use the following methods:
 Exemption: With this method, tax relief may be claimed in either country (country where you reside or
India).
 Tax Credit: Under this method, tax relief can be claimed only in the country where you live.
DTAA Rates
The double taxation avoidance agreement carried out by India with other countries fixes a specified rate according to
which TDS must be deducted on the income paid to residents of that country. Which means if you are earning an
income in India, the TDA will be charged according to rates set under DTAA with that country.
The rates and rules of DTAA vary from country to country depending on the particular signature between both parties.
TDS rates on interests earned for most countries is either 10% or 15%, though rates range from 7.50% to 15%. List of
DTAA rates for particular countries is given in the next section.
How is Relief Against Double Taxation Provided under the Income Tax Act?
There are many cases in which residents have paid income tax to another country on their foreign income but are also
required to pay tax in India on that same income. Relief from double tax is available in such cases.
The Income Tax Act 1961 contains two Sections (Section 90 and Section 91) that provide relief from double taxation.
The following diagram illustrates the application of Sections 90 and 91:
1. Bilateral Relief Covered Under Section 90
Double Taxation Avoidance Agreements grant relief in two ways under Bilateral relief covered under Section 90. The
relief is offered in two ways.
A. Exemption Method
The exemption method ensures that you will not be taxed twice. That is, if an income earned outside India has been
taxed in the relevant foreign country, it is not subject to tax in India.
B. Tax Credit Method
According to this method, the individual or the corporation can claim a tax credit (deduction) for the taxes paid
outside India. This tax credit can be utilized to set-off the tax payable in India, thereby reducing the assessee’s overall
tax liability.
Double Taxation Relief Example - Tax Credit Method
According to the DTAA between India and Germany, interest is taxed at 10%, whereas under Income Tax Act 1961, it
is based on slab rates for individuals and HUFs, and flat rates (generally 30%) for other assessees (firms, companies,
etc). In this case, one can follow DTAA and pay tax at 10% only.
Despite the fact that there are few things an individual taxpayer can do to avoid double taxation, the Income Tax Act
itself contains provisions for individuals whose income is likely to be taxed twice. Double Taxation Avoidance
Agreements (DTAAs) are the basis for this relief measure.
2. Double Taxation Relief - Unilateral relief Covered Under Section 91
Section 91 of the Income Tax Act, 1961 provides for unilateral relief against double taxation. According to the
provisions of this section, an individual can be relieved of being taxed twice by the government, irrespective of
whether there is a DTAA between India and the foreign country in question or not. However, there are certain
conditions that have to be satisfied in order for an individual to be eligible for unilateral relief. These conditions are:
 The individual or corporation should have been a resident of India in the previous year.
 The income should have been accrued to the taxpayer and received by them outside India in the previous year.
 The income should have been taxed both in India and in the country with which there is no DTAA.
 The individual or corporation should have paid tax in that foreign country.
Thus, by utilising the provisions of DTAAs and the relief measures offered under the Income Tax Act, individuals
earning income from other countries can minimise their tax liabilities and avoid the burden of double taxation.
Incomes on Which DTAA Allows Tax Rebate
NRIs can take advantage of the Double Tax Avoidance Agreement or DTAA to deduct double taxes paid on income
earned from the following sources:
 The salary received in India
 Fixed deposits in India
 Capital gains earned on asset transfers in India
 House property situated in India
 Services offered in India
 Indian savings bank account
In the event that income from these sources is taxed in the country you currently reside in, then you can take
advantage of the DTAA benefits to avoid paying taxes in India.