International Taxes

Area: INTEGRATIVE MGMT

Course Category: Global Leadership

Course Title : Business Law

 Double Taxation
Double Taxation is a situation
 in which the same income becomes taxable
 in the hands of the same tax- payer (company or individuals)
 in more than one country.
It is a situation in which the taxpayer pays tax both in the country of
residence as well as in the other country from which he earns income.
The situation of Double Taxation arises due to different rules for taxation of
income in different countries.

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Rules due to which double taxation arises
 Source Rule – The income of a person is subjected to taxation in the
country where the source of such income exists
 i.e. where the business establishment is situated or where the assets/property
is located irrespective of whether the income earner is a resident in that
country or not;
and
 Residence Rule – The income earner is, taxed based on his/her
residential status in that country. Hence, if a person is resident of a
country, he/she may have to pay tax on any income earned outside that
country as well.

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 Main reasons for Double Taxation
Double Taxation comes into existence generally due to the following reasons :
A company or a person …
 1. … may be resident of one country but may derive income from other country
as well.
 2. … may be subjected to tax on his/ her world income in two or more countries,
which is known as concurrent full liability to tax.
 One country may tax on the basis of nationality of tax-payer and another on the
basis of his/ her residence within its border. Thus, a person domiciled in one country
and residing in another may become liable to tax in both the countries in respect of
his/ her world income.
 3. … who is non-resident in both the countries may be subjected to tax in each
one of them on income derived from one of them. For example, a non-resident
person has a permanent establishment in one country and through it he/ she
derive income from the other country.
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 Double Taxation - Relief
 To mitigate the double taxation of income the provisions of double
taxation relief have been created. The double taxation relief is accessible
in two ways

 Unilateral Relief
 Bilateral Relief

The Government of India has signed Double Tax Avoidance Agreement, a

bilateral treaty with over 150 countries to provide double taxation relief to
Indian citizens and residents. (Section 90)

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Double Taxation Avoidance Agreement (DTAA).
 A tax treaty between two or more countries to avoid taxing the same
income twice is known as DTAA.
 This means that there are agreed rates of tax and jurisdiction on specified
types of income arising in a country.
 When a tax-payer resides in one country and earns income in another
country, he is covered under DTAA, if those two countries have one in
place.
 DTAAs can be either comprehensive, i.e. covering all types of income or
specifically target certain types of income.
 Some of the common categories covered under DTAAs are services,
salary, property, capital gains, savings/fixed deposit accounts, etc.
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  Treaties are agreements between sovereign nations.
 Article 2 of the Vienna Convention on the Law of Treaties, which applies
to all treaties, provides:
 A treaty is an international agreement (in one or more instruments, whatever
called)
 concluded between States and governed by international law. 4. Tax treaties
are often called either “agreements” or “conventions.” As Article 2 of the
Vienna Convention indicates, the name used is not important.

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  India has Double Taxation Avoidance Agreements (DTAA) with 88
countries out of which 86 are in force. For transactions involving persons
having interest between countries with which India has a DTAA, there are
agreed rates of tax and jurisdiction on specified types of income.
Therefore, through Section 90, tax relief is provided for those person
residents of a country with which India has signed DTAA.
 In case the country in which the person is a resident has not signed a
DTAA agreement with India, then Section 91 of the Income Tax Act is
used to provide relief from double taxation. Thus, India provides double
taxation avoidance relief for both kinds of taxpayers.

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 Types of treaties
 There are two influential model tax conventions,
1. The OECD model (Organisation for Economic Co-operation and Development)
 The OECD has 37 members, consisting of many of the major industrialized
countries.
 The OECD Model Convention favours capital-exporting countries over
capital-importing countries. Often it eliminates or mitigates double taxation
by requiring the source country to give up some or all of its tax on certain
categories of income earned by residents of the other treaty country.
 the OECD Model Convention may not be appropriate for treaties entered into
by net capital-importing countries. As a result, developing countries devised
their own model treaty under the auspices of the United Nations.

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 2. The UN Model
The United Nations Model Convention draws heavily on the OECD Model
Convention
he work of the United Nations on a model treaty commenced in 1968 with the
establishment by the United Nations Economic and Social Council (ECOSOC)
United Nations Model Convention imposes fewer restrictions on the taxing
rights of the source country; source countries, therefore, have greater taxing
rights under it compared to the OECD Model
 The success of the United Nations and OECD Model Conventions has been
astounding. Virtually all existing bilateral tax treaties are based on them. Their
wide acceptance and the resulting standardization of many international tax
rules have been important factors in reducing international double taxation.
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 Unilateral Relief
 Sec 91 of the Income Tax act provides unilateral relief. Under this, relief is
being provided by the Central Government to an assessee irrespective of
whether there is any DTAA (Double Taxation Avoidance Agreement)
between India and the other country. No agreement is required b/w both
the countries for claiming relief, but certain conditions needs to be
satisfied which are as under:
 The person or Company has been a resident in India in the previous year.
 The same income should be gained and received by the taxpayer outside
India in the previous year.
 The person or the Company has paid taxes as per the foreign country Income
Tax Rules.
 The income should have been taxed in India and in a country with which
India has no tax treaty or agreement.

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 Unilateral Relief … cond
 When there is no mutual agreement between the countries, relief is
provided by the home country.
 In simple words:
 (I) In case there is DTAA with the Country, then Tax Relief can be claimed
u/s 90.
 (II) In case there is DTAA with the Specified Associations, then Tax Relief
can be claimed u/s 90A.
 (III) In case there is No DTAA, then Tax Relief can be claimed u/s 91.

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 In case there is DTAA with the Country, then Tax Relief can be claimed u/s 90.

 taxpayer is required to go abroad for any job assignment during any part of the year.
 In this case, he would receive salary in India as well as salary from that foreign country.
 Tax is deducted from both salaries in both countries.
 Since global income is taxable in India in the case of residents, relief U/s. 90 of Income Tax
Act can be claimed on the taxes paid on foreign income.
 Steps to compute Double Taxation relief:
1. Compute Global Income i.e. aggregate of Indian income and Foreign income;
2. Compute tax on such global income as per the slab rates applicable;
3. Compute average rate of tax (i.e. Global income divided by amount of tax);
4. Compute an amount by multiplying Foreign income with such average rate of tax;
5. Compute Tax paid in Foreign country
The amount of relief shall be lower of (4) and (5)..

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 Example on relief u/s 90
 Mr. A, a resident of India, earned income in India Rs. 5,00,000/- and
foreign income of Rs. 2,00,000 (Tax paid in foreign country Rs. 20,000).
How much is the eligible tax relief that ‘A’ could claim ?
 The relief shall be calculated as follows:
1. Global income is INR. 7,00,000/- (INR.5,00,000+ 2,00,000)
2. Tax on global income Rs. 40,000/-
3. Average rate of tax Rs. 5.71% (40,000/7,00,000*100)
4. Tax required to be paid Rs. 11,420/- (Rs.2,00,000*5.71/100)
5. Tax paid in foreign country is Rs. 20,000/-.
The amount of relief shall be lower of (4) and (5) i.e Rs. 11,420/-

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In case there is DTAA with the Specified Associations, then Tax Relief can be
claimed u/s 90A
 When a specified association in India enters into an agreement with a
specified association abroad, the Central Government, may by
notification adopt such agreement and provide relief under section 90A of
the Income Tax Act, 1961.
 The relief can be claimed only by the residents of the countries who have
entered into the agreement. If resident of other countries want to claim
the relief, then they have to obtain a Tax Residence Certificate (TRC) from
the government of that country.

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 In case there is No DTAA, then Tax Relief can be claimed u/s 91.

 When there is no DTAA, relief is granted under section 91.

 Steps to compute relief
1. Compute tax payable in India
2. Compute lower of Indian rate of tax and rate of tax in Foreign country
3. Multiply the rate obtained in Step 2 by the doubly taxed income
4. Relief will be the amount as computed in Step 3.

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 Example on relief u/s 91
Ms.B has a foreign income of Rs. 1,00,000/- which is doubly taxed, both in
India and in the Foreign country . Tax is payable in India at the rate of 30%.
Tax rate in Foreign country is 20%.

The relief shall be calculated as follows:

1. Tax payable in India will be Rs. 30,000/- (1,00,000*30%)
2. Lower of Indian rate of tax (30%) and rate of tax in Foreign country (20%) is
20%.
3. The relief will be Rs. 20,000/- (1,00,000*20%)
The amount of relief will be Rs. 20,000/- as computed in Step 3.

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 Bilateral Relief
 Under Secection 90 of the Income Tax Act. In bilateral relief, the
Government provides safeguard against double taxation by mutually
entering into DTAA with the other country. The assessees are being
provided relief in respect of tax based on agreement entered by both the
countries. This relief is granted on the basis of two methods
 Exemption method : By which a particular income is taxed in only one of
the two countries.
 Tax Relief method : Under this, an income is being taxable in both countries
in accordance with their respective tax laws read with DTAA. However, the
country of residence of the taxpayer allows him to avail the credit credit for
the tax charged by the source country.

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 Section 90 of the Income Tax Act
The Section is associated with relief measures for assesses involved in
paying taxes twice and is intended for granting relief with reference to any
of the following relevant situations that may occur:

 Income on which tax has been paid both under Income Tax Act, 1961 and
Income Tax prevailing in that country or definite territory.
 Income tax chargeable under Income Tax Act, 1961 and according to the
corresponding law in force in that country or specified territory to boost
mutual economic relations, trade and investment.
 For the prevention of double taxation of income under Income Tax Act,
1961 and under the equivalent law in force in that country or specified
territory.

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 Section 90 of the Income Tax Act … cond
 For exchange of information regarding the avoidance of evasion or avoidance of
income-tax chargeable as per Income Tax Act or under the equivalent law in
force in that country or specified territory, or investigation of cases of evasion or
avoidance.
 For recovery of income tax under the Income Tax legislation which is in force in
India and under the equivalent law in force in that country of the specified
territory.
 The double tax relief as per Section 90 can be claimed only by the residents of
the countries who have entered into the agreement. If a resident of other
countries wants to claim relief related to the phenomenon of double taxation,
then they have to obtain a Tax Residence Certificate (TRC) from the government
of a particular country.

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 Power to Choose
 Given a scenario where Bilateral Agreement has been entered into with
reference to Section 90 with a foreign country, then the assessee has an
opportunity either to be taxed according to the Double Taxation
Avoidance Agreement or according to the normal provisions of Income
Tax Act 1961, whichever is more favourable to the concerned assessee.

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 Most favoured nation
 A most-favored-nation (MFN) clause requires a country to provide any
concessions, privileges, or immunities granted to one nation in a trade
agreement to all other World Trade Organization member countries.
Although its name implies favoritism toward another nation, it denotes
the equal treatment of all countries.
 As per the obligation under the World Trade Organization (WTO), the
member countries of WTO shall extend Most Favored Nation (MFN)
status to each other automatically, unless otherwise specified in the
agreement or schedule notified to the WTO by the member country.

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  India has extended MFN status for goods to member countries of
WTO. For SAARC countries, Bangladesh, Maldives, Nepal, Pakistan
and Sri Lanka are members of WTO and have extended MFN status
to India, which has extended MFN status to all SAARC countries,
with exemption to Pakistan.

India, in March 2019, withdrew the Most Favoured Nation (MFN) status accorded to Pakistan in 1996,
following the terrorist attack in Pulwama in Jammu and Kashmir that killed 40 CRPF officers.

Following this, the government immediately hiked the basic customs duty on all goods originating from
Pakistan to 200 per cent with immediate effect.

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 Anti-avoidance
 Judicial Anti-avoidance Doctrines
 Deferment of tax liability to a future period
 RE-characterization of an item of income of expense to tax at nil or lower rate
 Permanent elimination of tax liabilities
 Shifting of income
 Controlled Foreign Corporation : A (CFC) is a corporate entity that is
registered and conducts business in a different jurisdiction or country
than the residency of the controlling owners.

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  Anti-treaty Shopping Measures
 Treaty shopping
 Creation of artificial intermediary companies in nil or low tax “havens”
 Excessive use of debt over equity – Thin Capitalisation
 Manipulation of Transfer pricing provisions
 Use of tax havens
 Transfer of residence

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 Some Anti-avoidance Measures
 Business purpose rule (Motive Test)

 Under the “business purpose rule”, the taxpayer is required to justify the
following : –
 What are the business reasons of entering a particular transaction, and
 Why such transactions can be said to be not entered into , only for tax
avoidance.

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 Some Anti-avoidance Measures
Substance over form rule (Artificial test)

 The principle of “substance over form”, requires that

 the economic, or social reality (that is substance),
 should prevail over the literal wording of legal provisions to determine the tax
consequences of a transaction.
The application of this doctrine produces tax result that are different from the tax
result that the form of transaction would present.
 Where a taxpayer has created certain documents , wherein a scheme of certain
transactional relationships is made to obtain certain tax advantages, although in
reality, there is no such economic linkage, as it appears from the documents,
substance of the transaction, and not the form presented in documents should
get precedence to decide the tax outcomes.

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 Substance over form …
 For example a non-resident seller of goods , has an Indian agent who sells
goods on behalf of non-resident and who may be an agency PE of the non-
resident in India. To avoid PE exposure , the non-resident shows the
agency relationship as that of Principal to Principal through an
agreement, and shows sale of goods outside India. The agent’s
commission is equivalent to the margin left by the non-resident seller
with the Indian party. In such a case, the substance of the transaction, and
not the form presented in documents should get precedence to decide the
tax outcomes

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  P.O.E.M : Place of effective management:
 even a foreign company can be said to be resident in India and its global
income can be subject to tax in India, if place of its effective management is
held to be in India. POEM has been further defined as a place where key
management and commercial decisions, that are necessary for conduct of
business of an entity, are in substance made.
 Base Erosion and Profit Shifting ("BEPS").
 BEPS refers to tax avoidance strategies by multinational companies that
exploit gaps and mismatches in tax rules to artificially shift profits to low or
no-tax locations. Under the inclusive framework, over 100 countries and
jurisdictions are collaborating to implement the BEPS measures and tackle
BEPS.
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  GAAR : general anti avoidance rules
 GAAR a tool for checking aggressive tax planning especially that transaction
or business arrangement which is/are entered into with the objective of
avoiding tax. It has been introduced in India due to VODAFONE case ruling
in favour of this company by the Supreme Court.

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