International Accounting and Taxation


CA Aarti Patki
 Indian GAAP
• Accountancy is often referred to as an art
– the art of recording, classifying and
summarizing financial information.
• Accountancy also involves the use of one’s
creative skills, to maintain a record of
financial transactions
 Indian GAAP
• Since financial statements are used by various
users there is need for accounting framework
on the basis of which financial transactions will
be recorded.
• That is why GAAP are framed.
• GAAP are basic accounting principles and
guidelines which provide the framework for
more detailed and comprehensive accounting
rules, standards and other industry-specific
accounting practices. 
 Indian GAAP
• In India, financial statements are prepared
o n t h e b a s i s o f  a c c o u n t i n g
standards  issued by the  Institute of
Chartered Accountants of India  (ICAI) and
the law laid down in the respective
applicable acts (for example, Schedule III
to Companies Act, 2013 should be
compulsorily followed by all companies). 
 Indian GAAP
• The basic accounting principles may not
directly form part of the accounting
standards and the related laws, they are
assumed and expected to be universally
followed.
 Indian GAAP
• The following are the general accounting
principles as mentioned earlier:
• Business Entity Assumption:  It states that
every business entity should be treated as an
entity that is separate from its owners
• Monetary Unit Assumption:  All the financial
transactions of a business should be capable
of being expressed in a monetary unit 
 Indian GAAP
• Accounting Period: This principle entails
that the accounting process of a business
should be completed within a certain time
period which is usually a financial year or a
calendar year. 
• Historical Cost Concept: The market value
of the asset is not taken into account
unless specifically required by law or an
accounting standard.
 Indian GAAP
• Going Concern Assumption:  The business
entity is assumed to be a going concern,
i.e., it will continue to operate for an
indefinite amount of time.
• Full Disclosure Principle: The full disclosure
principle requires the entity to disclose all
the financial information relevant to the
investor/user to assist him in decision
making.
 Indian GAAP
• Matching Concept:  This concept requires
the revenue for a particular period to be
matched with its corresponding expenditure
so as to show the true profit for the period.
• Accrual Basis of Accounting:  This principle
requires all revenue and expenditure to be
recorded in the period it is actually incurred
and not when cash or cash equivalent has
been received/spent.
 Indian GAAP
• Consistency: An entity may decide to follow a
particular accounting procedure in relation to a
series of transactions.
• Such accounting procedures need to be
followed consistently over the following
accounting periods so as to facilitate
comparison of the results between two periods.
• For example, an entity might choose to adopt
the straight-line method of depreciation of its
tangible fixed assets. This method needs to be
consistently followed even in the coming years.
 Indian GAAP
• Conservatism: This means that while accounting
for a particular transaction, all anticipated
expenses or losses will need to be accounted
for but all potential income or gains should not
be recorded until actually earned/received.
• This is why a provision for expenses like bad
debts is made but there is no corresponding
record provided for an increase in the realisable
value of an asset.  
 Indian GAAP
• Materiality: Materiality Principle  or
materiality concept is the  accounting
principle  that concern about the relevance
of information, and size and nature of
transactions that report in the financial
statements.
 US GAAP
• US GAAP is focused on the practices of U.S.
companies.
• T h e  F i n a n c i a l A c c o u n t i n g S t a n d a r d s
Board (FASB) issues GAAP. 
• GAAP is only a set of standards.
• Although these principles work to improve the
transparency in financial statements, they do not
provide any guarantee that a company's financial
statements are free from errors or omissions that
are intended to mislead investors.
 Accounting Standard
• Accounting Standards
➢are written policy documents
➢issued by expert accounting body or by the
government or other regulatory body
covering the aspects of
➢recognition, measurement, treatment,
presentation, and disclosure of accounting
transactions in financial statements
 Accounting Standard
• Accounting Standards eliminate the non-
comparability of financial statements
• Improve the reliability of financial statements
• Improve credibility of accounting data
• Improves comparison intra and inter
enterprises
• Such comparisons are useful for
assessment of financial health of enterprise
 Accounting Standard
• Advantage of standardisation is reduction
of scope for creative accounting
• Creative accounting refers to twisting of
accounting policies to produce financial
statements favourable to a particular
enterprise
 Standard setting process
• The Institute of Chartered accountants of India(ICAI) has
set up Accounting Standards Board(ASB) in 1977
• ASB is a committee under ICAI which consists of
representatives from government department,
academicians and other professional bodies
• So far 29 Accounting standards are issued
Advantages of Accounting Standard
 IFRS
• There has been a change in global scenario
• There has been emergence of trans-
national companies
• Many companies have ventured into foreign
capital markets to raise capital
• But each country has its own set of rules
and regulations for accounting and financial
reporting
 IFRS
• So therefore if an Indian company wants
finance from other foreign markets, it will
have to draft the financial statements
according to International Standards.
• Therefore there was strong need to bring
uniformity, rationalisation, comparability,
transparency and adaptability in
financial statements.
 IFRS
• IFRS are International financial reporting standards
• International Accounting Standards Board(IASB)
publishes these standards.(UK based)
• IFRS are considered a principle based set of
standards.
• ICAI considered the IFRS and tried to integrate
them to the extent possible in the light of the laws,
customs, practices and business environment
prevailing in India. This is known as convergence.
These are known as Indian Accounting standards
or Ind AS
 TAX HAVENS
• What is a Tax Haven?
• A tax haven or offshore financial center is any
country or jurisdiction that offers minimal tax
liability to foreign individuals and businesses.
• Tax havens  do not require businesses to
operate out of their country or the individuals
to reside in their country to receive tax
benefits.
 

Criteria for Tax Havens


• In 1998, the  Organization for Economic

Cooperation and Development (OECD) gave a
number of factors to identify tax havens.
• Some of the most common factors are given
below:
• No or nominal tax on relevant income
• Lack of effective exchange of information
• Lack of transparency
• No substantial activities
 

How Governments Earn Money from Tax Havens


• Tax havens are not completely tax-free. They

charge a lower tax rate than other countries.
• Tax havens may charge a fee for new
registration of companies and renewal
charges to be paid every year.
• Additional fees may also be charged such as
license fees.
• Such fees and charges would add up to a
recurring fixed income for the tax havens.
How Governments Earn Money from Tax
Havens
• By attracting foreign individuals or
businesses, even if they are only charged a
nominal tax rate, the country may earn
substantially more in tax revenues than it
would otherwise.
• Also, the country may benefit from
corporate investments in business
operations that offer jobs to the country’s
residents.
 

Benefits to a Tax Haven


• To Tax Haven Countries – The countries benefit

by way of attracting capital to their banks and
financial institutions, which can then be used to
build a thriving financial sector.
• To Individuals or Businesses – The individuals
and businesses benefit by saving tax, which in
tax haven countries may range from zero to low
single digits compared to high taxes in their
country of citizenship or domicile.
 

Top Tax Havens in the World


• Bermuda  – Declared the world’s worst (or best if you’re looking to

avoid taxation) corporate tax haven in 2016 by Oxfam with zero
percent tax rate and no personal income tax.
• Netherlands – Most popular tax haven among the world’s Fortune
500. The government uses tax incentives to attract businesses to
invest in their country. One such tax incentive cost an estimated 1.2
billion euros in 2016 to Netherlands.
• Luxembourg  – It gives benefits such as tax incentives and zero
percent withholding taxes.
• Cayman Islands – No personal income taxes, no capital gains taxes,
no payroll taxes, no corporate taxes, and the country does not
withhold taxes on foreign entities.
• Singapore  – Charges reasonable nominal corporate taxes.
Reasonable corporate tax rates are provided through tax incentives,
lack of withholding taxes, and what appears to be substantial profit
shifting.
 Top Tax Havens in the World
• The Channel Islands – No capital gains taxes, no council taxes, and
no value added taxes.

• Isle of Man – No capital gains tax, turnover tax. or capital transfer

tax. It also imposes a low income tax, with the highest rates at 20%.

• Mauritius – Low corporate tax rate and no withholding tax.

• Switzerland – Full or partial tax exemptions depending on the bank

used.

• Ireland – Referred to as a tax haven despite officials asserting that it

is not. Apple discovered that two of the company’s Irish subsidiaries
were not classified as tax residents in the United States or Ireland,
despite being incorporated in the latter country.
 

Top Companies that Benefit from Tax Havens


• Apple – Amount booked offshore is $214.9

billion. It uses Ireland as a tax haven. Would
have owed the U.S. government $65.4 billion in
taxes if tax haven benefits were not used.
• Nike – It holds $10.7 billion offshore. It uses
Bermuda as a tax haven. It would have paid $3.6
billion for taxes if tax havens benefits were not
used.  This implies Nike pays a mere 1.4% tax
rate to foreign governments on those offshore
profits, indicating that nearly all of the money is
officially held by subsidiaries in tax havens.
 Top Companies that Benefit from Tax
Havens
• Goldman Sachs – It holds $28.6 billion
offshore and uses Bermuda as a tax haven.
• Some of the 50 biggest U.S. companies
that have stashed approximately $1.6
trillion offshore
i n c l u d e  M i c r o s o f t ,  I B M ,  G e n e r a l
E l e c t r i c ,  P f i z e r ,  Exxon
Mobil, Chevron, Walmart
 Panama Papers
• The leak of 11.5 million files from the database of world’s
fourth-biggest offshore law firm, Mossack Fonseca.
• The Panama Papers revealed the ways in which the rich
could exploit secretive offshore tax regimes.
• Owning an offshore company is not illegal but Panama
Papers revealed that concealing the identities of the true
company owners was the primary aim of the majority of
the offshore companies.
• Panama Papers revealed the names of various well
known international banks that helped their clients
establish a business in offshore jurisdictions as a part of
wealth management services
 Double Taxation Avoidance
Agreement(DTAA)
• A DTAA is a tax treaty signed between two
or more countries.
• Its key objective is that tax-payers in these
countries can avoid being taxed twice for
the same income.
• A DTAA applies in cases where a tax-payer
resides in one country and earns income in
another.
 Double Taxation Avoidance
Agreement(DTAA)
• DTAAs can either be comprehensive to
cover all sources of income or be limited to
certain areas such as taxing of income from
shipping, air transport, inheritance, etc. 
• India has DTAAs with more than eighty
countries, of which comprehensive
agreements include those with Australia,
Canada, Germany, Mauritius, Singapore,
UAE, the UK and US.
 Double Taxation Avoidance
Agreement(DTAA)
• DTAAs are intended to make a country an
attractive investment destination by
providing relief on dual taxation. 
• Such relief is provided by exempting
income earned abroad from tax in the
resident country or providing credit to the
extent taxes have already been paid
abroad. 
 Basic rules of taxation
• THE SOURCE RULE
• THE RESIDENCE RULE
 SOURCE RULE
• Income is to be taxed in the country in
which it originates irrespective of whether
the income accrues to a resident or non-
resident
 Residence rule
• The Power to tax should rest with the
country in which the taxpayer resides
 IMPORTANCE OF DTAA
• Cross-Border Transactions

• Tax policies different

• Application of both rules i.e source rule and residence

rule -cost of operating internationally would become
prohibitive

• Negative effect on globalisation

 

Section 90 of Income Tax Act


• Is associated with relief measures for

assesses involved in paying taxes twice i.e.
paying taxes in India as well as in Foreign
Countries or a territory outside India. 
• It also contains provisions which will
certainly enable the Central Government to
enter into an agreement with the
Government of any country outside India or
a definite territory outside India. 
 

Double Taxation Relief(Bilateral Relief)


• Bilateral Relief
• When there is an agreement between two
countries, relief is calculated according
mutual agreement between such two
countries. Bilateral relief can be granted by
either of the following methods:
• Relief from double taxation can be
provided under two ways namely
exemption method and tax credit method.
Double Taxation Relief(Bilateral Relief)

• Under exemption method, specific income

is taxed in one of the two countries and
exempted in another country.
• Under tax credit method, the income is
taxed jointly with the countries mentioned
in the income tax treaty, in addition to the
country of residence. This will authorize the
tax credit or deduction for the tax charged
in the country of residence.
 Bilateral Relief
• It might happen that 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 income received anywhere in the world 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.
 Bilateral Relief
• 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
• 6.The amount of relief shall be lower of (4) and (5).
 Bilateral Relief
• Mr. Sameer, a resident, earned income in India Rs. 3,00,000/-.
He also earned income from foreign country Rs. 1,00,000 (Tax
paid in foreign country Rs. 10,000). How much tax relief Mr.
Sameer could claim and how much tax he shall be required to
pay?
• The relief shall be calculated as follows:
• Global income is Rs. 4,00,000/- (Rs.3,00,000+ Rs.1,00,000)
• Tax on global income Rs. 15,000/-
• Average rate of tax Rs. 3.75% (15,000/4,00,000*100)
• Tax required to be paid Rs. 3,750/- (Rs.1,00,000*3.75/100)
• Tax paid in foreign country is Rs. 10,000/-.
• The amount of relief shall be lower of (4) and (5) i.e Rs. 3,750/-
 Unilateral Relief
• When there is no mutual agreement
between the countries, relief is provided by
the home country
 Unilateral Relief
• 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.
 Unilateral Relief
• Example on relief u/s 91

• Mr. Rohan has doubly taxed foreign income of Rs. 1,00,000/-. Tax is
payable in India at the rate of 30%. Tax rate in Foreign country is
20%.

• The relief shall be calculated as follows:

• Tax payable in India will be Rs. 30,000/- (1,00,000*30%)

• Lower of Indian rate of tax (30%) and rate of tax in Foreign country
(20%) is 20%.
• 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.
 TRANSFER PRICING
• Multinational Companies have branches
and Subsidiaries/Divisions operating in
more than one country
• It is a common event for MNCs to transfer
goods produced by a branch in one tax
jurisdiction to an associate branch
operating in another jurisdiction.
 TRANSFER PRICING
• MNC concerned has in mind the goal of
minimizing tax burden and maximizing
profits.
• But the two jurisdictions/countries have
also the consideration of maximizing their
revenue while making laws that govern
such transactions.
 TRANSFER PRICING
• Transfer price is the price at which divisions
of a company transact with each other, 
• Transfer prices generally do not differ much
from the market price. If the price does
differ, then one of the entities is at a
disadvantage and would ultimately start
buying from the market to get a better
price.
 TRANSFER PRICING
• Transfer pricing can also refer to
regulations that governments and tax
authorities use for regulating intercompany
transfers. 
• When transfer pricing occurs, companies
can book profits of goods and services in a
different country that may have a lower tax
rate
TRANSFER PRICING
 TRANSFER PRICING
• In the picture you see that Enterprise X manufactures
pianos in Malaysia. Enterprise Y distributes these from
Hong Kong. Both X and Y are 100% owned by Enterprise
Z. Because Z participates directly in the capital of both X
and Y, they are all associated enterprises.
• When selling pianos on the market, Z has no control on
the price at which one piano is sold. Reason is that prices
are set by supply and demand. Currently, the market
price for one piano is USD 5,000. However, Z does
control any transactions between X and Y.
• Therefore, the internal sale of a piano by X to Y is called
a “controlled transaction.” The price charged for this
transaction is what is called a “transfer price.”
 TRANSFER PRICING
• The price at which one piano is sold by X to Y affects their
individual financial results (remember: this is the controlled
transaction). If X charges a high price, X makes more profit. If
X charges a low price, Y makes more profit.

• From a commercial perspective, the price doesn’t matter. The

financial results of X and Y are consolidated. For shareholder
Z, it doesn’t matter which of the two companies makes the
profit. However, from a tax perspective it does matter.

• X is taxed in Malaysia and Y is taxed in Hong Kong. The

corporate tax rate in Hong Kong is 16.5%. In Malaysia, it is
25%. Z wants to see as much profit after tax as possible. Z
can use its influence as a shareholder to set the prices in such
a way that the profits are highest where taxes are lowest.
 TRANSFER PRICING
• Say that the direct / indirect costs of manufacturing one
piano are USD 1,000. And say that the average third
party piano manufacturer similar to Y realizes a profit
before tax of USD 3,000 when selling one piano to a
distributor. We already know that the market price for one
piano is USD 5,000.
• Now, we will show 2 scenarios. Scenario 1 shows the
profit if the price X charges to Y for the supply of one
piano is similar to the market price (USD 4,000 as this
ensures a profit of USD 3,000). The 2nd scenario shows
the potential profit when X charges a non-market price of
USD 2,000.
• 

 TRANSFER PRICING

SCENARIO 1
 TRANSFER PRICING

SCENARIO-2
 

What Is The Goal Of Transfer Pricing Rules?


• There are large differences in tax rates

between countries. If left unchecked, the
practice could lead to the shifting of profits
from high-tax countries to low(er)-tax
countries, as shown in the example.
 ASSOCIATED ENTERPRISES
• means an enterprise—
• which participates, directly or indirectly, or
through one or more intermediaries, in the
management or control or capital of the
other enterprise
INTERNATIONAL TRANSACTION
INTERNATIONAL TRANSACTION
INTERNATIONAL TRANSACTION
 ARM’S LENGTH PRINCIPLE
• Arm length price of a transaction between
two associated enterprises is the price that
would be paid if the transaction had taken
place between two comparable
independent and unrelated enterprises,
where the consideration is only commercial
SIGNIFICANCE OF ALP
SIGNIFICANCE OF ALP
 

Place of Effective Management(POEM)


• As per the section 6 (3) of the Income Tax

Act, the company qualifies as resident of
India in any previous years, if –
• It is an Indian Company, or
•  Its place of effective management in that
year is in India.
Place of Effective Management(POEM)

• The definition of place of effective

management as provided under the Act
means a place where key management
and commercial decisions that are
necessary for the conduct of the business
of an entity as a whole are, in substance,
made.
Place of Effective Management(POEM)

• As per the principles, the company shall be said to be

engaged in ‘active business outside India’, if the following
factors are satisfied:
• Passive income of the company is not more than 50% of
its total income, and
• Out of the total assets of the company less than 50% are
situated in India, and
• Out of the total number of employees less than 50% are
situated in India or less than 50% are resident in India,
and
• Out of the total payroll expenses incurred by the
company less than 50% of payroll expenditure is incurred
for such employee
 Withholding Tax
• The Indian Constitution has empowered only the
Central Government to levy and collect taxes.
• Every person whose total income exceeds the
maximum exemption limit shall be chargeable to
the income tax at the rate or rates prescribed in
Income Tax Act.
• Such income tax shall be paid on the total income
of the previous year in the relevant assessment
year.
• But the total income of the individual is determined
on the basis of the residential status in India.
 Withholding Tax
• Status of Resident or Non Resident :
• The income tax to be paid by individual is
determined on the basis of his residential status.
• An individual can be termed as a “resident” if he
stays for the prescribed period during the previous
year (1st April to 31st March) either for:
• 182 days or more in previous year
• 60 days or more and has been in India in
aggregate for 365 days or more in four years
preceding previous year.
• Any person who does not satisfy this requirement
is termed as ‘non resident’.
 Withholding Tax
• Taxability of Non resident Non residents
are liable to tax in Indian source income,
including:
• Interest, royalty and fees for technical
services paid by an Indian resident,
• Salary paid for services rendered in India,
• Income arises from business connection
or property in India.
 Withholding Tax
• Taxability of Non resident :
• Non residents are liable to tax in Indian
source income, including:
• • Interest, royalty and fees for technical
services paid by an Indian resident,
• • Salary paid for services rendered in India,
• • Income arises from business connection
or property in India.
 Withholding Tax
• Rates of Withholding Tax Current rates for withholding
tax for payment to non-residents are:-
• 1. Interest: 20 %
• 2. Dividends paid by domestic companies: Nil
• 3. Royalties: 10%
• 4. Technical Services: 10%
• 5. Any other services:
• Individuals: 30% of the income • Companies: 40% of the
net income
• The above rates are general and are applicable in
respect of countries with which India does not have a
Double Taxation Avoidance Agreement (DTAA).