Double Taxation AVOIDANCE AGREEMENT

Abhishek Jha Akanksha Nishat Akanksha Takyar Aridman Mohan Aswin VP Sushmit Sinha

Legal Environment of Business

Double Taxation
concept and avoidance mechanism

Double Taxation

What is Double Taxation?

Levying of tax by two or more jurisdictions on the same declared income/asset/financial transaction

For example, in the US, there are corporate profits as well as personal taxation of shareholders dividends/profits

This

double

liability

is

often

mitigated

bytax

treatiesbetween various countries, which is DTAA in essence

Double Taxation

Types of Double Taxation

Juridicial
Levying on one taxpayer in one or more countries for one object in the same period of time

Economic
Taxation of two and more taxes from one tax basis

One country is using residence principal in levying taxes, and the other country is using territorial principal

For Ex. - when the goods are levied excise tax, and after this VAT is imposed on the price of the goods, including excise

Double Taxation

Tax Deduction Options

Resident Principal

Territorial Principal

Double Taxation

Methods of Double Taxation Avoidance

Unilateral
Article 23A Exemption Method

Multilatera l
Signing of international conventions

Article 23B Credit method

Double Taxation Avoidance Agreement

Double Taxation

Example
An artist earns ` 80,000 in the home country but INR Equivalent ` 20,000. Total worldwide income is ` 100,000.

In home country, there is a progressive tax rates of 35% and 30% on an income of ` 80,000.

Assume tax rate is 20% in source country leading to ` 4000 source tax.

Double Taxation

Full Exemption Method

No Relief Full Exemption (tax only on domestic income) at 30% 24,000 4,000 28,000 11,000

Home Country Foreign Country Total Tax Paid Tax Relief Given by home country

35,000 4,000 39,000 0

Double Taxation

Full Credit Method

No Relief Full Credit (Deduct foreign tax from domestic tax @35%) 35,000-4000 4,000

Home Country Foreign Country

35,000 4,000

Total Tax Paid

39,000

35,000

Tax Relief given by home Country

4,000

Double Taxation

What is DTAA?

Essentially

bilateral

agreement

entered

into

between two different countries.

Objectives

Avoid taxation of income in both countries To promote and foster economic trade and investment

Double Taxation

Underlying Tax Credit

mechanism for avoiding double taxation

Double Taxation

Underlying Tax Credit (UTC)

UTC refers to the credit that may be given in State R for the tax paid on the underlying profits out of which the dividend is paid by a subsidiary company in State S
o

Pre condition: Minimum threshold of shareholding

Applies only for companies

Eg: DTAA with Australia, Cyprus, Mauritius, Singapore and USA

Double Taxation

Example
S Ltd. is Singapore based company having an Indian subsidiary. Tax rate in India is 35%

Double Taxation

Tax Sparing

Benefits of fiscal incentives by way of exemptions accrue to the country of investor rather than to the investor

Resident State allows credit on deemed basis at the rate applicable in State S even though the income is exempt

Normally applicable to specific categories of income:

o

Export income Industrial profits

Indian Treaties with some countries providing for tax sparing

o

Japan, Canada, Kenya, Malaysia, Cyprus, Singapore, etc.

Double Taxation

Case Study
H Ltd., a Singapore based Company has an Indian branch, the rate of tax in Singapore is 35% and rate of tax in India 30%

Double Taxation

Central Board of Direct Taxes

body to create policies and administer direct taxes in India

Double Taxation

Central Board of Direct Taxes

Department of Revenue in the Ministry of Finance Provides inputs for policy and planning of direct taxes Administration of direct tax law through Income Tax Dept.

Issued notification stating that prescribed documents needed to be provided in addition to TRC from another country

Double Taxation

Structure

Chairman

Income Tax

Legislation & Computerizat ion

Personnel & Vigilance

Revenue

Investigation

Audit & Judicial

Double Taxation

Tax Computation

Announcement on 29th June, 2013 Modification in tax computation Related to taxation of development centres and IT sector

Profit-split method will no longer be preferred Relief for the IT sector as compliance costs will come down

Double Taxation

Self-Declaration

Finance Act 2002 stated that the TRC should contain all the information wanted by the Indian government

Amended by CBDT for double taxation relief purposes Announcement on 6th August, 2013 Foreign investors can declare additional info

themselves

Double Taxation

General Anti-Avoidance Rules

established to prevent misuse of double taxation avoidance agreement

Double Taxation

General Anti-Avoidance Rules

Framed to minimize tax avoidance. Set of rules to limit tax avoidance.

Empowers the Revenue Authorities to deny the tax benefits of transactions/arrangements without any commercial substance or consideration other than availing a tax benefit.

Double Taxation

Tax Disputes
regarding double taxation

Double Taxation

Introduction to Tax Disputes

Tax disputes globalization are an inevitable by-product of

Tax disputes between government and tax-payers

o o

Transfer pricing disputes Characterization of tax

Tax disputes between governments

Double Taxation

Resolution of Tax Disputes

Between government and tax-payers

Advances pricing arrangements (APA) Mutual agreement procedures (MAP)

Between governments

Bilateral and multilateral tax treaties based on OECD model

Double Taxation

OECD Model Convention

settling tax disputes in the European Union since 1995

Double Taxation

The Convention

First published in 1958 Latest amendment in 2008 If competent authorities 2 are unable are to reach to

agreement

within

years,

issues

sent

arbitration if complainant requests

Double Taxation

Key Features

Applicable to tax disputes with an underlying tax treaties Complainant can make written submission and present his case orally with the arbitrators assent

Not allowed if all issues are resolved by competent authorities Arbitration decision is binding on competent authorities but complainants can refuse and litigate through courts

Cost of arbitration borne by competent authorities Arbitration decisions may be published if complainant agrees

Double Taxation

EU vs. UN
comparative analysis

Double Taxation

The Convention
EU Arbitration Convention

Applies to EU member states Not clear whether the competent authority refusal to accept the complaint is subject to judicial review

UN Model Convention

Used in treaties between developed and developing nations If the competent authorities cannot come to agreement within 3 years, arbitration can be initiated
Double Taxation