Elimination of Double Taxation

INSTITUTE OF CHARTERED ACCOUNTANTS OF
INDIA
RELIEF FROM DOUBLE TAXATION
Presentation by:
T.P.OSTWAL
26/07/2013
(c) T.P.Ostwal & Associates
SYNOPSIS
Causes of double taxation
What is double taxation relief (DTR)
Unilateral relief
Treaty relief
Credit method
Exemption method
Tax sparing
Underlying tax credit
Other methods for relieving double taxation
Some issues
26/07/2013
CAUSES OF DOUBLE
TAXATION
Rules of taxation
Article 265 of Constitution (Indian context)

[No tax shall be levied or collected except by authority of law.]
Sufficient nexus between subject and state.
Residence rules
Source based rules
[Supreme Court Ruling- Ishikawajma-Harima Heavy Industries Ltd. vs. DIT (288 ITR
408)]
Taxation systems:
worldwide taxation system [eg. USA, UK, India, etc]
territorial taxation system [eg. HK]
modified territorial taxation system [eg. Singapore]
26/07/2013
CAUSE OF DOUBLE TAXATION

Same income taxed twice
Residence in two states
Residence in state A and source in state B
Concept of:
Juridical double taxation
Economic double taxation
DTR:
Unilateral; or
Bilateral
26/07/2013
UNILATERAL TAXATION RELIEF-INDIA

S.91 OF ITA
Resident in India only eligible for UTR
Income accrued outside India (say, in state X)

and
Foreign source
income
That income NOT deemed to accrue in India
No DTAA with state X [providing for (a) relief or, (b) avoidance of, double taxation]
What about notified territories with which only exchange of information or

assistance in tax collection treaty signed? Will they be out of section 91?
What about the countries with whom limited treaty exist [eg. India-Ethiopia] and
subject income is not covered in treaty? Whether s.91 will rescue the case?
Tax paid in state X-federal, state or municipal
By deduction or otherwise
Relief from Indian income tax available
Relief only on doubly taxed income
26/07/2013
UNILATERAL TAXATION RELIEF

- INDIA
Relief at
Indian rate of tax.

or
Rate of tax in state X
26/07/2013
Whichever is
lower
S. 91 Foreign Source
Income ??
Loan for Indian project
SBT HK
Branch
SBT BANK Ltd

India
Interest
ABC Ltd
HK
HK income tax on interest income
-Whether tax credit for HK

corporate tax available?
- Whether tax credit for
Indian TDS, if any,
available?
26/07/2013
Power project set up contract
Indian
Project Office
Indian
Customer
ILLUSTRATION
CASE 1
Income in foreign state A
100
Indian income
Global income
Tax rate in foreign state A
Tax rate in India
Indian tax on global Income
Foreign tax on foreign income
Indian tax on foreign income
26/07/2013
150
250
25%
30%
75
25
30
CASE 2
100
150
250
35%
30%
75
35
30
ILLUSTRATION
CASE 1
2
DTR in India
30
Effective tax out go
In State A
In India
45
Total income tax paid
Effective global tax rate
80
26/07/2013
CASE
25
25
35
50
7530%
32%
TREATY RELIEF
Article 23 of MC- Methods of Elimination of Double Taxation.
Article 23A : Exemption Method
Article 23B : Credit Method
Credit subject to the restriction and limitation of the domestic tax
laws
Covers cases of juridical double taxation
[same income taxed in the hands of same person by more than one
state]
Does not cover all cases of Economic double taxation
[same income taxed in the hands of different persons by different states]
MAP is remedy for economic double taxation ??
26/07/2013
10
INTERNATIONAL JURIDICAL DOUBLE TAXATION
Concurrent full liability to tax ( e.g. residence in both states)

Residence of state R taxed in state R on residence rules and
taxed in state S on source rules

PE situations-NR in both states.
(Concurrent limited tax liability)
26/07/2013
11
TREATY PROVISIONS
Shall be taxable only(normally) in state R
No DTR required
May be taxed ( in state S)
DTR required to be given by state R
Article 23 provides rules for DTR by state R and not by state
S.
26/07/2013
12
EXEMPTION METHOD
R does not tax income which may be taxed in S.
R does not tax income which shall be taxable only in S
Two Methods:
Income taxed in S not taken into account at all by R

(full exemption method)
Income taxed in S not taxed by R, but R takes into

consideration the income for tax rate purposes
(exemption with progression)
26/07/2013
Effective only where progressive rates of taxes exist,

mostly in case of individuals
13
CREDIT METHOD
State R includes the income earned in State S for computing
total tax liability in State R

Out of the total tax liability in state R, credit is given for tax
paid in S
26/07/2013
14
CREDIT METHOD
Two approaches:
R allows deduction of total amount of tax paid in S

(Full Credit Method)
R allows deduction restricted to that part of tax payable

in R which is appropriate to the income earned in S
(Ordinary Credit Method)
26/07/2013
15
CREDIT METHOD
Exemption Method = income exclusion
V/s.
Credit Method
26/07/2013
= tax credit .
16
ILLUSTRATIONS
Income from R
80,000
Income from S
20,000
Total Income
1,00,000
Rate of Tax in R :
On 80,000
30%
On 1,00,000
35%
26/07/2013
17
ILLUSTRATIONS
Rate of Tax in S :
Case I
Case II
:
:
20%
40%
Assume no DTAA relief /no Unilateral relief.

Total Tax Liability:
Case I : (R)35,000 + (S) 4,000=39,000
Case II: (R)35,000 + (S) 8,000= 43,000
26/07/2013
18
FULL EXEMPTION METHOD

CASE I
Tax in R (30% of Rs 80,000)
Tax in S (20 or 40% of 20K)
24,000
4,000
Total global tax

(Notional) DTA relief
CASE II
24,000
8,000
28,000
11,000
11,000
39,000
43,000
32,000
In full exemption method, rate of tax in foreign jurisdiction does mat
26/07/2013
19
EXEMPTION WITH
PROGRESSION
CASE I
CASE II
Tax in R(35% of Rs 80,000)
28,000
28,000
Tax in S
4,000
8,000
Total tax
32,000
(notional) tax relief
36,000
7,000
39,000
7,000
43,000
In exemption with progression, level of foreign source income matt

addition to foreign tax rate.
26/07/2013
20
CREDIT METHOD
(FULL CREDIT METHOD)
CASE I
CASE II
Tax due in R(35% of 1,00,000)

Tax due in S
35,000
4,000
35,000
8,000
Tax credit:
Total tax payable in State R
35,000
Foreign tax credit by R (full)

Final tax payable in R
35,000
4,000
31,000
8,000
27,000
In full tax credit, total amount of foreign taxes is credited to the ex

not exceed overall state R taxes.
26/07/2013
21
CREDIT METHOD
(ORDINARY CREDIT-simplistic
illustration)CASE I
CASE II
Tax in R(35% of 1,00,000)
Tax in S
35,000
4,000
8,000
Total tax payable in state R
35,000
35,000
Tax credit:
State R tax on foreign source income
Qualifying tax credit
Final tax payment in state R
35,000
7000
7000
4000
7000
31000
28000
In ordinary tax credit, tax credit is restricted to state R tax or foreig

on foreign income whichever is lower. Excess FTC?
26/07/2013
22
ORDINARY CREDIT METHOD

LIMITATIONS:
Usual restrictions:
item or source basis
per category basis
per country basis
averaging of foreign taxes on income falling in same

category
averaging of foreign taxes on incomes arising in single
country
worldwide or overall limitations

averaging of foreign taxes on all foreign source income
26/07/2013
23
Ordinary Credit
Method:Limitations:
Effect of Country R Source Rules.
Effect of Country R tax computation rules
Effect of Country R expense allocation rules
26/07/2013
24
UNDERLYING TAX CREDIT

Concept:
A form of relief from Economical Double Taxation.
Computation Methodology
Co-relation of dividends to post tax profits of subsidiary
Effect of exchange rates
Requirement of substantial shareholding

Also applied under CFC regulations
Indias tax treaty with Singapore and Mauritius provide for
underlying tax credit.
Some countries specify upto how many layers, UTC can be
claimed
UTC under national tax law eg. Singapore, UK, Mauritius etc.
26/07/2013
25
TAX SPARING
Not found in MC -but found in some treaties.
Generally, national tax laws of countries not provide for Tax
Sparing; only treaty may provide for same.
Exception: national tax credit rules of Mauritius.
Income exempt in S for some reasons
(like economic development etc)

Income taxable in R
R provides for deemed tax exemption or deemed tax credit.
26/07/2013
26
TAX SPARING
Generally attached to income like:
Dividend
Royalty
Foreign branch / PE income
Interest
May provide for more or less than the Country S tax
waived(e.g. India-Cyprus on interest @ 10%, Cyprus=> India:

dividend @10%)
Source country taxes spared are not grossed up (No Phantom
Grossing up)
26/07/2013
27
Other Methods
Expense deduction for foreign tax
Carry forward / backward of excess tax credit
Countries have exhaustive foreign tax credit rules.
Micros oft Office

Word 97 - 2003 Document
26/07/2013
28
Some issues
26/07/2013
Date: 18th May 2007
| 29
(c) T.P. Ostwal
Some issues
Qualifying foreign taxes?
Same or similar taxes
Taxes on income
What if foreign taxes are paid on presumptive basis?

Whether foreign taxes to be grossed up in case of underlying
tax credit?...tax sparing?

Whether foreign taxes can be claimed as tax deductible
expense?
Issues concerning source of income?
Section 91
Tax treaty
26/07/2013
30
..some issues
Amount of maximum tax credit?
How to quantify residence country tax on foreign source income?
What if tax exemptions or deductions exist on foreign source

income?
Average rate to be applied?
Issues related to allocation of expenses to foreign source income?
Issues connected with underlying tax credits:
Upto how many layers?
How to compute?
Level of shareholding?
Proof of foreign taxes?

26/07/2013
31
..some issues
Whether accrued foreign tax but not paid, can be claimed as
foreign tax credit?

What if there is change in foreign tax liability subsequently?
Additional liability
Refund of foreign taxes
What exchange rate to be applied for conversion of foreign
taxes into Indian rupees?

Carry back or carry forward of foreign tax credit?
Whether excess foreign tax credit can be claimed as expenses?
Whether tax credit can be claimed for interest and / or penalty
or fine paid in foreign country?

26/07/2013
32
some issues
ESOPs
Perquisites in state A in year of exercise

Capital Gains in state B in year of sale
26/07/2013
33
Sec. 90 of ITA
[Agreement with foreign countries or specified territories.

14
90. (1) The Central Government may enter into an agreement with the Government of any country outside India or specified territory
outside India,
(a) for the granting of relief in respect of
(i) income on which have been paid both income-tax under this Act and income-tax in that country or specified territory, as the case
may be, or
(ii) income-tax chargeable under this Act and under the corresponding law in force in that country or specified territory, as the case
may be, to promote mutual economic relations, trade and investment, or
(b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country or
specified territory, as the case may be, or
(c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the
corresponding law in force in that country or specified territory, as the case may be, or investigation of cases of such evasion or avoidance,
or
(d) for recovery of income-tax under this Act and under the corresponding law in force in that country or specified territory, as the
case may be,
and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement.
(2) Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory
outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation,
then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more
beneficial to that assessee.
(3) Any term used but not defined in this Act or in the agreement referred to in sub-section (1) shall, unless the context otherwise
requires, and is not inconsistent with the provisions of this Act or the agreement, have the same meaning as assigned to it in the
notification issued by the Central Government in the Official Gazette in this behalf.
Explanation 1.For the removal of doubts, it is hereby declared that the charge of tax in respect of a foreign company at a rate higher
than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such
foreign company.
Explanation 2.For the purposes of this section, specified territory means any area outside India which may be notified 14a as such by the
Central Government.]
26/07/2013
34
Sec. 91 of ITA
Countries with which no agreement exists.

1791. (1) If any person who is resident in India in any previous year proves that, in respect of his income which accrued or arose during that
previous year outside India (and which is not deemed to accrue or arise in India), he has paid in any country with which there is no
agreement under section 90 for the relief or avoidance of double taxation, income-tax, by deduction or otherwise, under the law in force in
that country, he shall be entitled to the deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed
income18 at the Indian rate of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax if both the rates
are equal.
(2) If any person who is resident in India in any previous year proves that in respect of his income which accrued or arose to him during that
previous year in Pakistan he has paid in that country, by deduction or otherwise, tax payable to the Government under any law for the time
being in force in that country relating to taxation of agricultural income, he shall be entitled to a deduction from the Indian income-tax
payable by him
(a) of the amount of the tax paid in Pakistan under any law aforesaid on such income which is liable to tax under this Act also; or
(b) of a sum calculated on that income at the Indian rate of tax;
whichever is less.
(3) If any non-resident person is assessed on his share in the income of a registered firm assessed as resident in India in any previous year
and such share includes any income accruing or arising outside India during that previous year (and which is not deemed to accrue or arise
in India) in a country with which there is no agreement under section 90 for the relief or avoidance of double taxation and he proves that he
has paid income-tax by deduction or otherwise under the law in force in that country in respect of the income so included he shall be
entitled to a deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income so included at the
Indian rate of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax if both the rates are equal.
Explanation.In this section,
(i) the expression Indian income-tax means income-tax 19[***] charged in accordance with the provisions of this Act;
(ii) the expression Indian rate of tax means the rate determined by dividing the amount of Indian income-tax after deduction of any
relief due under the provisions of this Act but before deduction of any relief due under this 20[Chapter], by the total income;
(iii) the expression rate of tax of the said country means income-tax and super-tax actually paid in the said country in accordance
with the corresponding laws in force in the said country after deduction of all relief due, but before deduction of any relief due in the said
country in respect of double taxation, divided by the whole amount of the income as assessed in the said country;
(iv) the expression income-tax in relation to any country includes any excess profits tax or business profits tax charged on the profits
by the Government of any part of that country or a local authority in that country.
26/07/2013
35
THANK YOU
T.POSTWAL
FCA@VSNL.COM
+919004660107
26/07/2013
36

Elimination of Double Taxation

Transféré par

Informations du document

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

Elimination of Double Taxation

Transféré par

Droits d'auteur :

Formats disponibles

INSTITUTE OF CHARTERED ACCOUNTANTS OF

RELIEF FROM DOUBLE TAXATION

(c) T.P.Ostwal & Associates

(c) T.P.Ostwal & Associates

Article 265 of Constitution (Indian context)

Sufficient nexus between subject and state.

Source based rules

worldwide taxation system [eg. USA, UK, India, etc]

territorial taxation system [eg. HK]

modified territorial taxation system [eg. Singapore]

(c) T.P.Ostwal & Associates

CAUSE OF DOUBLE TAXATION

Residence in two states

Residence in state A and source in state B

Juridical double taxation

Economic double taxation

(c) T.P.Ostwal & Associates

UNILATERAL TAXATION RELIEF-INDIA

Resident in India only eligible for UTR

Income accrued outside India (say, in state X)

That income NOT deemed to accrue in India

What about notified territories with which only exchange of information or

Tax paid in state X-federal, state or municipal

Relief from Indian income tax available

Relief only on doubly taxed income

(c) T.P.Ostwal & Associates

UNILATERAL TAXATION RELIEF

Indian rate of tax.

(c) T.P.Ostwal & Associates

SBT BANK Ltd

HK income tax on interest income

-Whether tax credit for HK

Power project set up contract

(c) T.P.Ostwal & Associates

(c) T.P.Ostwal & Associates

(c) T.P.Ostwal & Associates

Article 23A : Exemption Method

Article 23B : Credit Method

Credit subject to the restriction and limitation of the domestic tax

[same income taxed in the hands of different persons by different states]

MAP is remedy for economic double taxation ??

(c) T.P.Ostwal & Associates

INTERNATIONAL JURIDICAL DOUBLE TAXATION

Concurrent full liability to tax ( e.g. residence in both states)

taxed in state S on source rules

(Concurrent limited tax liability)

(c) T.P.Ostwal & Associates

May be taxed ( in state S)

DTR required to be given by state R

Article 23 provides rules for DTR by state R and not by state

(c) T.P.Ostwal & Associates

Income taxed in S not taken into account at all by R

Income taxed in S not taxed by R, but R takes into

Effective only where progressive rates of taxes exist,

(c) T.P.Ostwal & Associates

total tax liability in State R

(c) T.P.Ostwal & Associates

R allows deduction of total amount of tax paid in S

R allows deduction restricted to that part of tax payable

(c) T.P.Ostwal & Associates

(c) T.P.Ostwal & Associates

(c) T.P.Ostwal & Associates

Assume no DTAA relief /no Unilateral relief.

Case I : (R)35,000 + (S) 4,000=39,000