Double Taxation

Submitted by: Pawan Chaudhary (31) Ritesh Gupta(37) Sanjay (41) Satendra Agarwal (45) Tax Dude

Introduction to DTAA

Introduction to DTAA (1) Double taxation is imposition of two or more taxes on the same income (in case of IT), assets (in case of Capital Taxes) or any financial transaction (in case of sales taxes) in different countries Double taxation occurs mainly due to overlapping tax laws & regulations of countries where an individual does business 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 !!

Introduction to DTAA (2) Double Taxation is also common in MNC’s (or employees deputed abroad) where it isn’t fair for a taxpayer to bear burden of tax in both countries on a single income To protect Indian tax payers from this unfair practice, Indian government has entered into tax treaties, known as Double Taxation Avoidance Agreement (DTAA) with about 79 countries

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 country to 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)

DTAA by India (2) Under the IT Act 1961, there are 2 provisions, Sec-90 & 91, which provides specific relief to taxpayers to save them from DTAA Sec-90 is for taxpayers who have paid tax to a 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 not signed DTAA Thus, India gives relief to both kind of taxpayers

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 from Mauritius 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, gain will escape tax altogether.

DTAA Comprehensive agreements - Countries list 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

Causes of Double Taxation One state claims to tax on the basis of “Source of Income” & another on the basis of “Residence”; OR Both states claim to tax incomes based on “Residence” Hence need for elimination of Double taxation!

Double Taxation Convention - Objectives Various 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 to investors Acceptable basis to share tax revenue between states

Treaty Override In cross-border tax scenario: Assessee can avail benefit of bilateral agreements between contracting state; OR Assessee can choose to be governed by Indian tax laws Whichever is more beneficial to tax-payer !!

Overall Structure of DTAA Article 1Scope of convention Article 2Taxes Covered Article 3General Definitions, Article 4Resident Article 5Permanent establishment Article 6 to 21 Taxation of various incomes- Business profits, Royalties, Fees for Technical services, Interest, Dividends, etc. Article 7Business Profits

Overall Structure of DTAA Article 10, 11Dividends & Interests Article 12Royalties & FTS Article 14Independent Personal Services Article 15Dependant Personal Services Article 21Other Income Article 22Taxation of capital Article 23A and 23BMethods of elimination of double taxation Article 24 and 29Special provisions-Non discrimination Article 30,31Entry into force, Termination

India- France Treaty ParticularsPayments for royalties / technical services made during Original treaty onwards Royalties for copyrights, patents, etc. - Rate2020/ ScopeBroad Change in Definition Use of equipment - rate 2010 Not taxable Technical services - Rate2020/15/1020/ ScopeBroadRestricted

India- Sweden Treaty ParticularsPayments for royalties / technical services made during Original treaty98 onwards Royalties for copyrights, patents, etc. - Rate10 - ScopeRestricted Use of equipment - rate Not taxable Technical services - Rate10 - ScopeBroadRestricted

Check if the treaty is in effect! Entry into force – check for each of the countries, The Date of Entry into force of the convention The Date of Effect of the convention

Ensure that the Treaty has not terminated! Treaty remains into force till terminated Some treaties provide for a period during which treaty cannot be terminated Termination requires notice through diplomatic channels Some treaties provide for period of notice & some do not Check if the treaty is in forcebefore applying it!

Approaches for Elimination of Double Taxation Bilateral Agreements between Contracting states Section 90 provides for tax relief in accordance with treaties executed by India Unilateral Tax credit – Foreign tax credit system Section 91 provides relief where no treaty exists

Section-90 › Under Section 90 & 91 of IT Act, relief against double taxation is provided in 2 ways: Bilateral Relief, Under Section 90 › Indian government offers protection against double taxation by entering into a DTAA with another country, based on mutually acceptable terms. › Such relief may be offered under two methods: – Exemption method –Ensures complete avoidance of tax overlapping – Tax credit method – Provides relief by giving taxpayer a deduction from tax payable in India

Section-91 › Unilateral Relief, Under Section 91 › Indian government can relieve an individual from double taxation whether there is a DTAA between 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 year – Income 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

Methods of Granting Tax Credits Exemption Method Credit Method Full Exemption with 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 state of residence State of residence allows credit of tax paid in state of source Restricted to that part of income-tax which is attributable to income, taxable in state of residence

An Illustration Total Income100,000 Income in State of Residence ®80,000 Income in State of Source (S)20,000 Rate of tax in R on income of 100,000 35% Rate of tax in R on income of 80,00030% Rate of tax in S(i) 20% (ii) 40%

Tax Incidence if No Double Tax Elimination (i)(ii) Tax in State R (35% of 100,000)35,000 Tax in State S4,0008,000 Total Tax39,00043,000

Tax Credits – Full Exemption (i)(ii) Tax State R (30% of 80,000)24,000 Tax in State S4,0008,000 Total Tax28,00032,000 Relief given by R11,000 The income earned in State of source is fully exempt in state of residence Old Austria Treaty, Greece

Tax Credits – Exemption with Progression (i)(ii) Tax in State R (35% of 80,000)28,000 Tax in State S4,0008,000 Total Tax32,00036,000 Relief given by R7,000 The income earned in State of source is considered in state of residence only for rate purpose Australia, Cyprus, Germany (Indian Income), UK, Malta

Tax Credits – Full Credit (i)(ii) Tax in State R (35% of 100,000) 35,000 Tax in State S(4,000)(8,000) Total due31,00027,000 Relief given by R4,0008,000 Total tax paid in state of source is allowed as a credit against any tax payable in state of residence Germany, Canada, Singapore, Sweden

Tax Credits- Ordinary Credit (i)(ii) Tax in State R (35% of 100,000)35,000 Tax in State S (Credit for source state tax restricted in scenario ii) (4,000)(7,000) Total due31,00028,000 Relief given by R4,0007,000 State of residence allows credit of tax paid in state of source Restricted to that Part of income-tax which is attributable to income, taxable in state of residence Most Indian Treaties i.e. Australia, Cyprus, Denmark, UK, USA, France, Japan, Mauritius

Tax Impact at a Glance A. All income arising in State RTotal 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 convention39,00043,000 Full exemption28,00032,000 Exemption with progression32,00036,000 Full credit35,000 Ordinary credit35,00036,000

Amount of Tax Given Up by State of Residence A. All income arising in State RIf tax in State S is 4,000 (case (i)) 8,000 (case (ii)) No conventionNil Full exemption11,000 Exemption with progression7,000 Full credit4,0008,000 Ordinary credit4,0007,000

Underlying Tax Credit (UTC) Provides relief from tax on same income, which has already suffered tax in form of corporate profits tax Pre condition: Certain percentage of share held by recipient in capital of the payer company DTAA entered into by India do provide for UTC by other state – Illustratively USA, UK DTAA with Mauritius & Singapore cover UTC in both countries

Income before taxation of the Mauritius Co100,000 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)

Unilateral Tax Credit Requirements Resident of India for relevant previous year Income has accrued or arisen outside India and is doubly taxed Taxes have been paid in the source country There is no DTAA with that country Items of Income not covered under DTAA eligible for credit

Unilateral Tax Credit (UTC) Relief Deduction from the Indian income-tax payable by him of a sum calculated 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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