Assignment on Double Taxation Avoidance agreement

Submitted to: Ms. Rekha Handa Assistant Professor

Submitted by: Vishal Salwan MBA HONS FS IV Roll No. 1044

DEPARTMENT OF COMMERCE & BUSINESS MANAGEMENT GURU NANAK DEV UNIVERSITY AMRITSAR 2010-2012

Double Taxation
Definition:
Double taxation is the imposition of two or more taxes on the same income (in the case of income taxes), asset (in the case of capital taxes), or financial transaction (in the case of sales taxes). It refers to taxation by two or more countries of the same income, asset or transaction, for example income paid by an entity of one country to a resident of a different country. The double liability is often mitigated by tax treaties between countries. For e.g. An NRI will have to pay tax on the income earned in India on

source basis i.e. where income accrues or arises. On the same income, tax will have to be paid in the country of residence on residence basis. As such, an NRI will end up paying Income-tax twice on the same income. Tax Treaties provide protection to tax payers against such double taxation.

International double taxation agreements

It is not unusual for a business or individual who is resident in one country to make a taxable gain (earnings, profits) in another. This person may find that he is obliged by domestic laws to pay tax on that gain locally and pay again in the country in which the gain was made. Since this is inequitable, many nations make bilateral double taxation agreements with each other. In some cases, this requires that tax be paid in the country of residence and be exempt in the country in which it arises. In the remaining cases, the country where the gain arises deducts taxation at source ("withholding tax") and the taxpayer receives a compensating foreign tax credit in the country of residence to reflect the fact that tax has already been paid. To do this, the taxpayer must declare himself (in the foreign country) to be nonresident there. So the second aspect of the agreement is that the two taxation authorities exchange information about such declarations, and so may investigate any anomalies that might indicate tax evasion.

Double taxation avoidance agreement signed by India

India has comprehensive Double Taxation Avoidance Agreements (DTAA ) with 79 countries. This means that there are agreed rates of tax and jurisdiction on specified types of income arising in a country to a tax resident of another country. Under the Income Tax Act 1961 of India, there are two provisions, Section 90 and Section 91, which provide specific relief to taxpayers to save them from double taxation. Section 90 is for taxpayers who have paid the tax to a country with which India has signed DTAA, while Section 91 provides relief to tax payers who have paid tax to a country with which India has not signed a DTAA. Thus, India gives relief to both kinds of taxpayers. A large number of foreign institutional investors who trade on the Indian stock markets operate from Mauritius. According to the tax treaty between India and Mauritius, capital gains arising from the sale of shares are taxable in the country of residence of the shareholder and not in the country of residence of the company whose shares have been 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, the gain will escape tax altogether. The Indian and Cypriot tax treaty is the only other such Indian treaty to provide for the same beneficial treatment of capital gains. It must be noted that India has and is making attempts to revise both the Mauritius and Cyprus tax treaties to eliminate this favorable treatment of capital gains tax. The Indian government periodically checks for its DTAA with many countries and come up with amendments.

OBJECTIVES OR NEED OF DTAA

(1) Protection against double taxation: These Tax Treaties serve the purpose of providing protection to tax-payers against double taxation and thus preventing any discouragement which the double taxation may otherwise promote in the free flow of international trade, international investment and international transfer of technology; (2) Prevention of discrimination at international context: These treaties aim at preventing discrimination between the taxpayers in the international field and providing a reasonable element of legal and fiscal certainty within a legal framework; (3) Mutual exchange of information: In addition, such treaties contain provisions for mutual exchange of information and for reducing litigation by providing for mutual assistance procedure; and (4) Legal and fiscal certainty: They provide a reasonable element of legal and fiscal certainty within a legal framework.

Methods of Eliminating Double Taxation

The objective of double taxation can be achieved Tax treaties employ various methods or a combination of (i) Exemption Method One method of avoiding double taxation is for the residence country to altogether exclude foreign income from its tax base. The country of source is then given exclusive right to tax such incomes. This is known as complete exemption method and is sometimes followed in respect of profits attributable to foreign permanent establishments or income from immovable property. Indian tax treaties with Denmark, Norway and Sweden embody with respect to certain incomes. (ii) Credit Method This method reflects the underline concept that the resident remains liable in the country of residence on its global income, however as far the quantum of tax liabilities is concerned credit for tax paid in the source country is given by the residence country against its domestic tax as if the foreign tax were paid to the country of residence itself. (iii)Tax-Sparing One of the aims of the Indian Double Taxation Avoidance Agreements is to stimulate foreign investment flows in India from foreign developed countries. One way to achieve this aim is to let the investor to preserve to himself/itself benefits of tax incentives available in India for such investments

Adoption by Central Government of agreement between specified associations for double taxation relief.

Countries with which agreement exists

Section 90A.
(1) Any specified association in India may enter into an agreement with any specified association in the specified territory outside India and the Central Government may, by notification in the Official Gazette, make such provisions as may be necessary for adopting and implementing such agreement (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 any specified territory outside India; or (ii) income-tax chargeable under this Act and under the corresponding law in force in that specified territory outside India 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 specified territory outside India, 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 specified territory outside India, 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 specified territory outside India. (2) Where a specified association in India has entered into an agreement with a specified association of any specified territory outside India under sub-section (1) and such agreement has been notified under that sub-section, 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 company incorporated in the specified territory outside India 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 company.

Explanation 2.For the purposes of this section, the expressions (a) specified association means any institution, association or body, whether incorporated or not, functioning under any law for the time being in force in India or the laws of the specified territory outside India and which may be notified as such by the Central Government for the purposes of this section; (b) specified territory means any area outside India which may be notified as such by the Central Government for the purposes of this section.] Example Agreement with Mauritius - Any resident of Mauritius deriving income from alienation of shares of Indian companies will be liable to capital gains tax only in Mauritius as per Mauritius tax law and will not have to pay any capital gains tax in IndiaCircular: No. 682, dated 30-31994. The provisions of the Indo-Mauritius DTAC of 1983 apply to residents of both India and Mauritius. Article 4 of the DTAC defines a resident of one State to mean any person who, under the laws of that State is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. Foreign Institutional Investors and other investment funds, etc., which are operating from Mauritius are invariably incorporated in that country. These entities are liable to tax under the Mauritius Tax law and are, therefore, to be considered as residents of Mauritius in accordance with the DTAC. Prior to 1-6-1997, dividends distributed by domestic companies were taxable in the hands of the shareholder and tax was deductible at source under the Income-tax Act, 1961. Under the DTAC, tax was deductible at source on the gross dividend paid out at the rate of 5% or 15% depending upon the extent of shareholding of the Mauritius resident. Under the Income-tax Act, 1961, tax was deductible at source at the rates specified under section 115A, etc. Doubts have been raised regarding the taxation of dividends in the hands of investors from Mauritius. It is hereby clarified that wherever a Certificate of Residence is issued by the Mauritian Authorities, such Certificate will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for applying the DTAC accordingly.

Countries with which no agreement exists

Section 91.
(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 income78 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 79[***] 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 80[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.

Double Taxation Relief: India has entered into DTAA with 65 countries including countries like U.S.A., U.K., Japan, France, Germany, etc. These agreements provides for relief from the double

taxation in respect of incomes by providing exemption and also by providing credits for taxes paid in one of the countries. These treaties are based on the general principles laid down in the model draft of the Organisation for Economic Cooperation and Development (OECD) with suitable modifications as agreed to by the other contracting countries. In case of countries with which India has double taxation avoidance agreements, the tax rates are determined by such agreements and are indicated for various countries as under:

Country

Dividends %

Interest % 15 20 10 10 15 15 15 15 10 10 15 10 15 20 10 15

Royalties % 15 30 10 15 20 15 20 15 10 15 30 10 20 30 20 10/20

Australia Austria Bangladesh Belarus Belgium Brazil Bulgaria Canada China Cyprus Czechoslovakia Czech Republic Denmark Egypt Finland France

15 20 15 15 15 15 15 25 10 15 20 10 20 20 15 10

Germany Greece Hungary Indonesia Israel Italy Japan Jordan Kazakhstan Kenya Korea Kyrgyzstan Libya Malaysia Malta Mauritius Mongolia Morocco Namibia Nepal Netherlands New Zealand Norway

10 20 15 15 10 20 15 10 10 15 20 10 20 20 15 15 15 10 10 15 10 15 15

10 20 15 10 10 15 15 10 10 15 15 10 20 20 10 20 15 10 10 15 10 10 15

10 30 30 15 10 20 20 20 10 20 15 15 30 30 15 15 15 10 10 15 10 10 30

Oman Philippines Poland Portugal Qatar Romania Russian Federation Singapore South Africa Spain Sri Lanka Sweden Switzerland Syria Tanzania Thailand Trinidad Tobago Turkey Turkmenistan United Emirates Arab and

12.5 20 15 15 10 20 10 15 10 15 15 10 15 0 15 20 10 15 10 15 15 20

10 15 15 10 10 15 10 15 10 15 10 10 15 7.5 12.5 20 10 15 10 12.5 15 15

15 15 22.5 10 10 22.5 10 15 10 20 10 10 20 10 20 15 10 15 10 10 15 15

United Kingdom United States

Uzbekistan Vietnam Zambia Non treaty countries

15 10 15 0

15 10 10 20

15 10 10 20

Double Taxation in India

India has entered into Double Taxation Avoidance Agreements (DTAA) with 65 countries including countries like U.S.A., U.K., Japan, France, Germany, etc. These agreements provide for relief from double taxation in respect of incomes by providing exemption and also by providing credits for taxes paid in one of the countries. These treaties are based on the general principles laid down in the model draft of the Organisation for Economic Cooperation and Development (OECD) with suitable modifications as agreed to by the other contracting countries. A typical DTA agreement between India and another country covers only residents of India and the other contracting country which has entered into the agreement with India. A person who is not a resident either of India or of the other contracting country cannot claim any benefit under the said DTA agreement. Such agreement generally provides that the laws of the two contracting states will govern the taxation of income in respective states except when express provision to the contrary is made in the agreement. A situation may arise when originally the tax provision in the other contracting state gave concessional treatment compared to India at a particular time but Indian laws were subsequently amended to bring incidence of tax to a level lower than the tax rate existing in the other contracting state.Since the tax treaties are meant to be beneficial and not intended to put taxpayers of a contracting state to a disadvantage, it is provided in Sec.90 that a beneficial provisions under the Indian Income Tax Act will not be denied to residents of contracting state merely because the corresponding provision in tax treaty is less beneficial. Some Double taxation avoidance agreements provide that income by way of interest, royalty or fee for technical services is charged to tax on net basis. This may result in tax deducted at source from sums paid to non- residents which may be more than the final tax liability. Taxation of Business Profits under DTA agreements One of the important terms that occurs in all the Double Taxation Avoidance Agreements is the term 'Permanent Establishment' (PE) which has not been defined in the Income Tax Act. However as per the Double Taxation Avoidance Agreements, PE includes, a wide variety of arrangements i.e. a place of management, a branch, an office, a factory, a workshop or a warehouse, a mine, a quarry, an oilfield etc. Imposition of tax on a foreign enterprise is done

only if it has a PE in the contracting state. Tax is computed by treating the PE as a distinct and independent enterprise. In order to avoid double taxation it is provided that if a resident of India becomes liable to pay tax either directly or by deduction in the other country in respect of income from any source, he shall be allowed credit against the Indian tax payable in respect of such income in an amount not exceeding the tax borne by him in the other country on that portion of the income which is taxed in the said other country. The same benefit is available to the resident of the other Country, on income taxed in India. In respect of incomes on which taxes are either exempted or reduced, the country of residence will not take the exempted income into account while determining the tax to be imposed on the rest of the income. Taxation of Income from Air and Shipping Transport under DTA agreements Income derived from the operation of Air transport in international traffic by an enterprise of one contracting state will not be taxed in the other contracting state. In respect of an enterprise of one contracting state, income earned in the other contracting state from the operation of ships in international traffic, will be taxed in that contracting state wherein the place of effective management of enterprise is situated. However some DTA agreement contain provisions to tax the income in the other contracting state also, although at reduced rate. These provisions do not apply to coastal traffic. Taxation of Income from Associated Enterprises under DTA agreements In order to plug loop holes for tax evasion, a separate article in DTA agreement provides for taxing the notional income deemed to arise on account of an enterprise of one contracting state participating directly / indirectly in the management of another enterprise in the other contracting state or where some persons participate directly or indirectly in both the enterprises under conditions different from those existing between the independent enterprises. Taxation of Dividend Income under DTA agreements Dividend paid by a Company which is a resident of a Contracting State to a resident of the other Contracting State will be taxed in both the States. Taxation of Interest Income under DTA agreement Interest paid in a Contracting State to a resident of the other Contracting State is chargeable in both the States. Taxation of Income from Royalties under DTA agreements Regarding Royalties arising in a Contracting State and paid to a resident of the other Contracting State

1. Some DTA agreements provide for taxation in the other Contracting State. 2. Some agreements provide for taxation in the contracting State. 3. Some agreements provide for taxation in both the States. Taxation of Income from Capital Gains under DTA agreements Capital Gains will be taxed in the state where the capital asset is situated at the time of sale. Taxation of Income from Professional Services under DTA Agreements Income will be taxed in the state where the person is a resident. However if he has a fixed base in the other Contracting State, the income attributable to the fixed base will be taxed in the other contracting state. Withholding Tax for NRIs and Foreign Companies Withholding Tax Rates for payments made to Non-Residents are determined by the Finance Act passed by the Parliament for various years. The current rates are: 1. 2. 3. 4. 5. Interest - 20% of Gross Amount Dividends - 10% Royalties - 20% Technical Services - 20% Any other Services - Individuals - 30% of net income

Companies/Corporates - 40% of net income The above rates are general and in respect of the countries with which India does not have a Double Taxation Avoidance Agreement (DTAA).

Recent NEWS
India concludes Double Taxation protocol with Singapore
New Delhi, June 25, 2011(ANI): India has signed a protocol amending Double Taxation Avoidance Agreement (DTAA) with Singapore for effective exchange of information in tax matters. The protocol was signed by Central Board of Direct Taxes (CBDT) Chairman Prakash Chandra, on behalf of the Indian Government, and High Commissioner of Singapore to India Karen Anne Tan Ping Ming, on behalf of the Singapore Government, on Friday. The negotiations for entering into an amending protocol were completed in one round at Singapore.

"Both India and Singapore have adopted internationally agreed standard for exchange of information in tax matters. This standard includes the principles incorporated in the new paragraphs 4 and 5 of OECD Model Article on 'Exchange of Information' and requires exchange of information on request in all tax matters for the administration and enforcement of domestic tax law without regard to a domestic tax interest requirement or bank secrecy for tax purposes," a Union Finance Ministry statement said. "In the aftermath of the global financial crisis, there is increased recognition on part of governments that improvements in exchange of information in tax matters are a part of a broader agenda to improve transparency and global governance." "There is recognition that effective and comprehensive exchange of information in tax matters is a vital part of the ongoing efforts of revenue authorities to tackle international tax avoidance and evasion. Towards that end, India and Singapore joined hands for effective exchange of information including banking information," it added. (ANI) More Facts (Next Topic) The Central Government, acting under Section 90 of the Income Tax Act, has been authorised to enter into Double Tax Avoidance Agreements (tax treaties) with other countries. The object of such agreements is to evolve an equitable basis for the allocation of the right to tax different types of income between the 'source' and 'residence' states ensuring in that process tax neutrality in transactions between residents and non-residents. A non-resident, under the scheme of income taxation, becomes liable to tax in India in respect of income arising here by virtue of its being the country of source and then again, in his own country in respect of the same income by virtue of the inclusion of such income in the 'total world income' which is the tax base in the country of residence. Tax incidence, therefore, becomes an important factor influencing the non-residents in deciding about the location of their investment,services,technologyetc. Tax treaties serve the purpose of providing protection to tax payers against double taxation and thus preventing the discouragement which taxation may provide in the free flow of international trade, international investment and international transfer of technology. These treaties also aim at preventing discrimination between the tax payers in the international field and providing a reasonable element of legal and fiscal certainty within a legal framework. In addition, such treaties contain provisions for mutual exchange of information and for reducing litigation.