Relevance of double taxation avoidance agreement and its impact

RELEVANCE OF DOUBLE TAXATION AVOIDANCE AGREEMENT AND ITS

IMPACT IN INDIAPresented by

M. Amudha

INTRODUCTION

Era of cross border transactions

unique growth in international trade and commerce &

increasing interactions among

nations

residents of one country extend their sphere of

business operations to

other countries where income is

earned

Where a taxpayer is resident in one country but has a source of income situated in other country, it gives rise to possible double taxation

DOUBLE TAXATION – MEANING AND SCOPE

Double taxation is imposition of two or more taxes on the same income,

assets or any financial

transaction in different

countries.

Double taxation occurs mainly due to overlapping tax

laws and regulations of

countries where an individual does

business.

Eg. When an Indian

businessman makes a profit or

some taxable gain in another

country, he may be required to pay Tax on that income in India, as well as

in country in which Income was

made.

TWO BASIC RULES

• 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. [The source of income may be in some other country]

Source rule:

• The residence rule stipulates that the power to tax should rest with the country in which the taxpayer resides. [Tax payer’s own country]

Residence rule:

home country

host country

ISHIKAWAJIMA-HARIMA HEAVY INDUSTRIES LTD. VS. DIT

In this case, the assessee company provided services to persons resident in India. It is a non-resident company incorporated in Japan. A project for setting-up a liquefied natural gas (LNG) receiving, storage and re-gasification facility in Gujarat. The contract involved: (i) off-shore supply, (ii) off-shore services, (iii) on-shore supply, (iv) on-shore services and (v) construction and erection. Issue : WHETHER FEE FOR TECHNICAL SERVICES PAYABLE TO NON-RESIDENT IS TAXABLE?

HELD: Territorial nexus for the purpose of determining the tax liability is an internationally accepted principle. Whatever is payable by a resident to a non-resident by way of fees for technical services, thus, would not always come within the purview

CONCEPTS OF DOUBLE TAXATION

The same person is taxed twice on the same income by more than one state.

Juridical Double Taxation:

• Where a person is a resident of a Contracting State (R) and derives income from, or owns capital in, the other Contracting State (S or E) and both States impose tax on that income or capital.

If more than one person is taxed on the same item. Economical Double

Taxation:• Say for example, where the tax law of one state creates a nexus in respect of an item of

capital to its legal owners and the tax law of the other state links that item of capital to the person who controls possession or has an economic benefit.

DOUBLE TAXATION AVOIDANCE AGREEMENT

Referred as Tax Treaty

A bilateral economic agreement between two nations

Aims to avoid or eliminate double taxation of the same income in two countries . Negotiated under public international law

Governed by the principles laid down under the Vienna Convention on the Law of Treaties.

DTAA AND INDIA

comprehensive (DTAA) with 88 (signed 88 DTAAs out of which 85 have entered into force) countries.

This means that there are agreed rates of tax and jurisdiction on specified types of income arising in a country to a tax resident of another country.

There are two provisions under the Income Tax Act 1961, which provide specific relief to taxpayers to save them from double taxation. [Section 90 and Section 91]

TYPES OF RELIEF

Bilateral relief: • Bilateral relief is provided in section 90 and

90A of the Indian Income Tax Act. • Under this method, the Governments of two

countries can enter into an agreement to provide relief against double taxation by mutually working out the basis on which relief is to be granted.

• India has entered into agreement for relief against or avoidance of double taxation with 85 countries.

Unilateral relief : • Unilateral Relief is provided in section 91 of

the Income Tax Act. • No country will have such an agreement

with every country in the world. • In order to avoid double taxation in such

cases, country of residence itself may provide relief on unilateral basis

METHODS OF ELIMINATING DOUBLE TAXATION

EXEMPTION

METHOD

CREDIT METHOD

TAX SPARING METHOD

Tax is deductible at the rates prescribed under the Act or under the relevant DTAA, whichever is more beneficial for non-resident