Double Taxation

Tax Dude

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

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 MNCs (or employees deputed abroad) where it isnt 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

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

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 1
Article 2 Article 3 Article 4

Scope of convention
Taxes Covered General Definitions, Resident

Article 5

Permanent establishment
Taxation of various incomesBusiness profits, Royalties, Fees for Technical services, Interest, Dividends, etc. Business Profits

Article 6 to 21

Article 7

Overall Structure of DTAA

Article 10, 11 Article 12 Article 14 Article 15 Dividends & Interests Royalties & FTS Independent Personal Services Dependant Personal Services

Article 21
Article 22

Other Income
Taxation of capital

Article 23A and 23B Methods of elimination of double taxation Article 24 and 29 Article 30,31 Special provisions-Non discrimination Entry into force, Termination

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

 Treaty remains into force till terminated

treaty cannot be terminated

Ensure that the Treaty has not terminated!

Some treaties provide for a period during which Termination requires notice through diplomatic
channels

Some treaties provide for period of notice & some

do not

Check if the treaty is in force

before 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
Exemption with Progression

Credit Method

Full Exemption

Full Credit

Ordinary Credit
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

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

An Illustration
Total Income
Income in State of Residence Income in State of Source (S) Rate of tax in R on income of 100,000 Rate of tax in R on income of 80,000 Rate of tax in S

100,000
80,000 20,000

35%
30% (i) 20% (ii) 40%

Tax Incidence if No Double Tax Elimination

(i) Tax in State R (35% of 100,000) Tax in State S 35,000 4,000 (ii) 35,000 8,000

Total Tax

39,000

43,000

Tax Credits Full Exemption

(i) Tax State R (30% of 80,000) Tax in State S 24,000 4,000 (ii) 24,000 8,000

Total Tax
Relief given by R

28,000
11,000

32,000
11,000

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) Tax in State S Total Tax

28,000 4,000 32,000

28,000 8,000 36,000

Relief given by R

7,000

7,000

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) Tax in State S Total due Relief given by R

35,000
(4,000) 31,000 4,000

35,000
(8,000) 27,000 8,000

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) Tax in State S (Credit for source state tax restricted in scenario ii) Total due Relief given by R

35,000 (4,000) 31,000 4,000

35,000 (7,000) 28,000 7,000

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 R Total tax = 35,000 Total tax if tax in State B. Income arising in two S is States, viz, 80,000 in State R & 4,000 8,000 20,000 in State S (case (i)) (case (ii))

No convention
Full exemption Exemption with progression Full credit Ordinary credit

39,000
28,000 32,000 35,000 35,000

43,000
32,000 36,000 35,000 36,000

Amount of Tax Given Up by State of Residence

A. All income arising in State R If tax in State S is
4,000 (case (i)) No convention Full exemption Exemption with progression Nil 11,000 7,000 8,000 (case (ii)) Nil 11,000 7,000

Full credit
Ordinary credit

4,000
4,000

8,000
7,000

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

Underlying Tax Credit (Example)

Income before taxation of the Mauritius Co Tax @ 40% Income after Tax 100,000 40,000 60,000

Dividend Distributed by the Mauritius Co

Profit carried forward

30,000
30,000

50% of the equity of Mauritius Co. is held by Indian Co

Dividend paid to Indian Company

UTC (15,000 X 40,000 / 60,000)

15,000
10,000

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

Thank You