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Double Taxation
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Introduction to
DTAA
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Introduction to DTAA (1)
Double taxationis imposition of two or more taxeson the same income (in case of IT), assets (in caseof Capital Taxes) or any financial transaction (incase of sales taxes) in different countries
Double taxationoccurs mainly due to overlappingtax laws & regulations of countries where anindividual does business
When an Indian businessman makes a profit orsome taxable gain in another country, he may berequired to pay Tax on that income in India, as wellas in country in which Income was made !!
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Introduction to DTAA (2)
Double Taxation is also common in MNCs (oremployees deputed abroad) where it isnt fair for a
taxpayer to bear burden of tax in both countries on asingle income
To protect Indian tax payers from this unfairpractice, Indian government has entered into taxtreaties, known as Double Taxation AvoidanceAgreement (DTAA)with about 79 countries
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DTAA by India (1)
India has comprehensive DTAA with 79 countries
This means there are agreed rates of tax &
jurisdiction on specified types of income arising in a
countryto a tax resident of another country
The objective is to encourage Foreign Investments in India
& also make Foreign Markets available to Indian entities
The India- Mauritius DTAA is one of them. This
agreement has contributed almost 37% of FDI in India
in last 15 yrs (1991 to 2005)
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DTAA by India (2)
Under the IT Act 1961, there are 2 provisions,Sec-90 & 91, which provides specific relief totaxpayers to save them from DTAA
Sec-90 is for taxpayers who have paid tax toa country with which India has signed DTAA
Sec-91 provides relief to tax payers who have
paid tax to a country with which India has notsigned DTAA
Thus, India gives relief to both kind of taxpayers
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Double Non-Taxation
Income escapes tax in one country on account of DTAA &in other country on account of its Local Tax laws This gives rise to the income escaping tax altogether
Examples: Mauritius, UAE
Large no. of FII trading on Indian markets operate fromMauritius Acc to treaty between, Capital Gains are taxable in
country of residence of shareholder & not in country of
residence of company whose shares are sold. Therefore, a company resident in Mauritius selling
shares of an Indian company will not pay tax in India& since there is no capital gains tax in Mauritius, gainwill escape tax altogether.
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DTAA Comprehensive
agreements - Countries list
Armenia, Australia, Austria, Bangladesh, Belarus, Belgium, Botswana,
Brazil, Bulgaria, Canada, China, Cyprus, Czech Republic, Denmark, Egypt,
Finland, France, Germany, Greece, Hashemit, Kingdom of Jordan,
Hungary, Iceland, Indonesia, Ireland, Israel, Italy, Japan, Kazakstan, Kenya,Korea, Kuwait, Kyrgyz Republic Libya, Luxembourg, Malaysia, Malta,
Mauritius, Mongolia, Montenegro, Morocco, Myanmar, Namibia, Nepal,
Netherlands, New Zealand, Norway, Oman, Philippines, Poland, Portuguese
Republic Qatar, Romania, Russia, Saudi Arabia, Serbia, Singapore,Slovenia, South Africa, Spain, Sri Lanka, Sudan, Sweden, Swiss
Confederation, Syrian, Arab Republic, Tajikistan, Tanzania, Thailand,
Trinidad and Tobago, Turkey, Turkmenistan, UAEUAR (Egypt),
UGANDA, UK, Ukraine, USA, Uzbekistan, Vietnam, Zambia
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Causes of Double Taxation
One state claims to tax on the basis ofSource of Income & another on the basis of
Residence;
OR
Both states claim to tax incomes based onResidence
Hence need for elimination of Double
taxation!
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Double Taxation Convention -
ObjectivesVarious Conventions - UN, EU, OECD & between
countries
Protect tax payers from Double Taxation
Free flow of International Trade & investment
Encourage transfer of technology
Prevent discrimination between tax payers
Reasonable level of legal & fiscal certainty toinvestors
Acceptable basis to share tax revenue between
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Treaty Override
In cross-border tax scenario:
Assessee can avail benefit of bilateral agreementsbetween contracting state;
OR
Assessee can choose to be governed by Indiantax laws
Whichever is more beneficial to tax-payer !!
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Overall Structure of DTAA
Article 1 Scope of convention
Article 2 Taxes Covered
Article 3 General Definitions,
Article 4 Resident
Article 5 Permanent establishment
Article 6 to 21
Taxation of various incomes-
Business profits, Royalties, Fees for
Technical services, Interest, Dividends,
etc.
Article 7 Business Profits
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Overall Structure of DTAA
Article 10, 11 Dividends & Interests
Article 12 Royalties & FTS
Article 14 Independent Personal Services
Article 15 Dependant Personal Services
Article 21 Other Income
Article 22 Taxation of capital
Article 23A and 23B Methods of elimination of double taxation
Article 24 and 29 Special provisions-Non discrimination
Article 30,31 Entry into force, Termination
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Check if the treaty is in effect!
Entry into forcecheck for each of thecountries,
The Date of Entry into force of theconvention
The Date of Effect of the convention
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Ensure that the Treaty has not
terminated! Treaty remains into force till terminated
Some treaties provide for a period during whichtreaty cannot be terminated
Termination requires notice through diplomaticchannels
Some treaties provide for period of notice & some
do not
Check if the treaty is in force before applying it!
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Approaches for Elimination
of Double Taxation
Bilateral Agreements between Contracting states
Section 90 provides for tax relief in accordancewith treaties executed by India
Unilateral Tax creditForeign tax credit system
Section 91 provides relief where no treaty exists
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Section-90
Under Section 90 & 91 of IT Act, relief against doubletaxation is provided in 2 ways:
Bilateral Relief, Under Section 90
Indian government offers protection against double taxationby entering into a DTAA with another country, based on
mutually acceptable terms.
Such relief may be offered under two methods:
Exemption methodEnsures complete avoidance of taxoverlapping
Tax credit methodProvides relief by giving taxpayer adeduction from tax payable in India
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Section-91
Unilateral Relief, Under Section 91
Indian government can relieve an individual from doubletaxationwhether there is a DTAAbetween India & other
country concerned.
Unilateral relief may be offered if:The person /company has been a resident of India in
previous year
Same income must be accrued to & received by taxpayer
outside India in previous yearIncome should have been taxed in India & in another
country with which there is no tax treaty
The person or company has paid tax under laws of foreign
country in question
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Methods of Granting Tax Credits
Exemption Method Credit Method
Full
Exemption
Exemptionwith
Progression
Full
Credit
Ordinary
Credit
The Income
earned
in the state of
source is fully
exempt in the
State
of residence
Income earned in
state of source is
considered in
state of
residence
only for rate
purpose
Total tax paid
in state of
source is
allowed as a
credit against
any tax
payable in
stateof residence
State of residence
allows
credit of tax paid instate of source
Restricted to that
part of income-tax
which is attributable
to income, taxable
in state of
residence
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An Illustration
Total Income 100,000
Income in State of Residence 80,000
Income in State of Source (S) 20,000
Rate of tax in R on income of
100,00035%
Rate of tax in R on income of 80,000 30%
Rate of tax in S (i) 20%(ii) 40%
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Tax Incidence if No Double
Tax Elimination
(i) (ii)
Tax in State R (35% of 100,000) 35,000 35,000
Tax in State S 4,000 8,000
Total Tax 39,000 43,000
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Tax Credits Full Exemption
(i) (ii)
Tax State R (30% of 80,000) 24,000 24,000
Tax in State S 4,000 8,000
Total Tax 28,000 32,000
Relief given by R 11,000 11,000
The income earned in State of source is fully
exempt in state of residence
Old Austria Treaty, Greece
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Tax Credits Exemption with
Progression
(i) (ii)
Tax in State R (35% of 80,000) 28,000 28,000
Tax in State S 4,000 8,000
Total Tax 32,000 36,000
Relief given by R 7,000 7,000
The income earned in State of source is considered in
state of residence only for rate purpose
Australia, Cyprus, Germany (Indian Income), UK, Malta
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Tax Credits Full Credit
(i) (ii)
Tax in State R (35% of
100,000)35,000 35,000
Tax in State S (4,000) (8,000)
Total due 31,000 27,000
Relief given by R 4,000 8,000Total tax paid in state of source is allowed as a credit
against any tax payable in state of residence
Germany, Canada, Singapore, Sweden
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Tax Credits- Ordinary Credit
(i) (ii)
Tax in State R (35% of 100,000) 35,000 35,000
Tax in State S (Credit for
source state tax restricted inscenario ii) (4,000) (7,000)
Total due 31,000 28,000
Relief given by R 4,000 7,000
State of residence allows credit of tax paid in state of sourceRestricted to that Part of income-tax which is attributable toincome, taxable in state of residence
Most Indian Treaties i.e. Australia, Cyprus, Denmark, UK, USA, France, Japan,
Mauritius
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Tax Impact at a Glance
A. All income arising in State R Total tax = 35,000
B. Income arising in two
States, viz, 80,000 in State R &
20,000 in State S
Total tax if tax in State
S is
4,000(case (i))
8,000(case (ii))
No convention 39,000 43,000
Full exemption 28,000 32,000
Exemption with progression 32,000 36,000
Full credit 35,000 35,000
Ordinary credit 35,000 36,000
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Amount of Tax Given Up by State
of Residence
A. All income arising in State R If tax in State S is
4,000
(case (i))
8,000
(case (ii))
No convention Nil Nil
Full exemption 11,000 11,000
Exemption with progression 7,000 7,000
Full credit 4,000 8,000
Ordinary credit 4,000 7,000
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Underlying Tax Credit (UTC)
Provides relief from tax on same income, which hasalready suffered tax in form of corporate profits tax
Pre condition: Certain percentage of share held byrecipient in capital of the payer company
DTAA entered into by India do provide for UTC by other
stateIllustratively USA, UK
DTAA with Mauritius & Singapore cover UTC in bothcountries
U d l i T C di
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Income before taxation of the Mauritius Co 100,000
Tax @ 40% 40,000
Income after Tax 60,000
Dividend Distributed by the Mauritius Co 30,000
Profit carried forward 30,000
50% of the equity of Mauritius Co. is held by Indian Co
Dividend paid to Indian Company 15,000
UTC (15,000 X 40,000 / 60,000) 10,000
Underlying Tax Credit
(Example)
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Unilateral Tax Credit
Requirements
Resident of India for relevant previous year
Income has accrued or arisen outside India and isdoubly taxed
Taxes have been paid in the source country
There is no DTAA with that country
Items of Income not covered under DTAA eligiblefor credit
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Unilateral Tax Credit (UTC)
Relief
Deduction from the Indian income-tax payable by him of a sumcalculated on
such doubly taxed income at the Indian rate of tax, OR
the rate of tax of the said country,
whichever is the lower, OR
the Indian rate of tax if both the rates are equal
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Thank
You