International Taxation and Transfer Pricing

Mayank Kalsan Srishti Tulsyan Naveen Pachisia

Roadmap

Introduction Initial concept Types of taxes Tax burden Tax administration system Foreign tax incentives Taxation of Foreign Source Income & Double Taxation Foreign Tax Credit U.S Taxation of Foreign Source Income Tax Treaties

Continued
Tax Planning Dimensions
Subpart F Income Offshore Holding Companies

Foreign Sales Corporations

International Transfer Pricing Transfer Pricing Methodology

Determining arms length prices

Transfer Pricing In India

Introduction
Decisions on where to invest, what form of business organization to employ, how

to finance, when and where to recognize elements of revenue and expenses, and what transfer prices to charge are typical decisions strongly influenced by tax considerations. Management has little control over tax. National tax systems are complex and diverse. The definition of the taxable income, tax rates, incentives etc could be different International tax agreements, laws and regulations are constantly changing.

Initial concept
The laws and regulations that governs the taxation of foreign corporations and profit earned abroad rests on a few basic concepts. Among these are the notions of Tax equity and tax neutrality Tax equity- means that taxpayer who are similarly situated should be similarly treated Tax neutrality 1. Domestic neutrality- a foreign subsidiary is simply a domestic concern that happens to be operating abroad 2. Foreign neutrality-hold that, domestic affiliates abroad should be looked upon as foreign companies that happens to be owned by domestic residents

Types of taxes
A company operating abroad encounters variety of taxes Direct taxes such as income taxes are clearly recognizable and normally disclosed on most companies financial statements Indirect taxes such as consumption taxes are not so clearly recognized or frequently disclosed

Earning effects of direct vs. indirect taxes

Revenues Expenses Pretax income Direct taxes(40 %) After tax income

direct 250 150 100 40 60

indirect 250 190 60 -060

Continued.
Withholding tax- are those imposed by governments on dividends,

interests and royalty payment to foreign investors. These taxes are typically withheld at source by the paying corporation Value added tax- this tax is typically levied at each stage of production and distribution but only on the value added at that particular stage Border tax- value added tax are often the basis of border taxes. Like import duties border taxes generally aims at keeping domestic goods prices competitive with the imports Taxes assed on imports is parallel to excise and other indirect taxes paid by domestic producer of similar goods Transfer tax- this tax is imposed on transfer of items between taxpayers. It is an indirect tax.

Tax administration systems

National tax assessment systems also affects relative tax burdens. Several major systems are currently in use Classical- under classical system, corporate income taxes on taxable income are levied at two levels, at corporate level and the shareholder level A corporation is taxed on income measured before the dividends are paid and shareholders are than taxed on their dividends. The dividend income paid to the shareholders is effectively taxed twice

Corporate income --Income tax at 33% = net income Dividend --Personal income tax @ 30% = net income

100 33 67 67 20.10 46.90

Total tax paid (33.0+20.10)= 53.10

Continued
Integrated system- under integrated system , both corporate and shareholders taxes are integrated Split rate system- A lower tax is levied on distributed income than on retained earnings. While corporate income is still subject to double tax but the lower rate on distributed income results in a lower tax burden than classical rate system. Tax credit or Imputation System- in this system, a tax is levied on corporate income, but part of the tax paid can be treated as a credit against personal income taxes when dividends are distributed to shareholders.

Foreign tax incentives

Many countries offer tax incentives to attract foreign

investments
Incentives includes tax free cash grants applied towards the

cost of fixed assets of new industrial undertakings or relief from paying taxes for certain time periods
Temporary tax relief includes , reduced income tax rates, tax

deferrals and reduction of various indirect taxes

Continued.
Some countries, particularly those with few natural resources, offer permanent tax inducement These so called tax havens includes the followings The Bahamas, Bermuda and the Cayman islands which have no tax at all The British virgin islands which have very low taxes Hong Kong , Liberia and Panama, which tax locally generated incomes but exempt income from foreign sources

Main characteristics of tax havens

No or low taxes on all or certain types of income and capital. Lack of exchange controls : Many tax havens developed a dual currency control system, under

which residents are subjected to both local and foreign currency controls and non-residents, only to the local currency controls. Companies set up in a tax haven are treated as nonresidents for exchange control purposes and their operations conducted outside the tax haven, in foreign currency, are not subjected to exchange controls. Relative importance of banking : In tax havens, the banking sector gives different treatment to residents and non-residents, suppressing or smoothing controls and imposing lighter or no taxation on the latter. Communications : Tax havens must be accessible physically and have facilities to deal with information. Thus, it is necessary an infrastructure that provides good means of transportation and networks such as post, telephone, cable and satellite communication, which are especially important to financial and banking activities in tax havens. Other aspects : political and economic stability, existence of a tax treaties and double tax agreements, and availability of competent professional advisers, such as accountants and lawyers

Use of tax havens

Residence principle : taxing the income of the residents
Source principle : capital income to be taxed by the country where

that income is generated and not by the country where the funds for the invested capital originated, thus ignoring whether the receiver of the incomes is a resident or not But when countries different methods, the problem of double taxation arises. To tackle this, the countries must have double tax agreements.

Use of tax havens contd.

Tax havens have been used for reducing tax liabilities purposes and are particularly attractive for individual taxpayers from high-tax countries who would be subject to high marginal tax rates on reported incomes in their countries.
Earnings are channelled to tax havens where they are subject to zero or very low tax rates and if the residence principle is fully applied, these earnings might end up escaping taxation almost completely, leading the country

where the financial capital originated to lose tax revenue. Hence, it is the combination of tax havens with the application of the residence principle that brings about depressing effects on the world rate of taxation on capital income

TAX HAVENS AS A MEANS OF TAX AVOIDANCE

a) Emigration and shifting of residence: In countries with a relatively high level of taxation, taxpayers may be tempted to avoid being subjected to domestic taxes by moving their residence to a tax haven country. b) Base companies: For tax purposes, the most important function of a base company set up in a tax haven jurisdiction is to collect and shelter income from high taxation in the taxpayers country of residence The base company, be it a holding company, an investment company, a finance company or a trade company, is an entity with its own legal personality and is recognized as such in the country of residence, so that the income is no longer subject to the normal taxation regime of his country of residence.

Example: the company T, resident in country R, has developed a new product. It is patented in favor of a base company in a tax haven country which gives license do third parties in country S. The income arising from the source country S can be sheltered in the tax haven country or lent to company T against the payment of interest which is deducted from Ts taxable profits.

 c) Conduit companies: Some companies are established with the only

objective of serving as a channel for the income. Such a company is used by a taxpayer resident of one country to direct flows of income originated in a third country, through a tax haven which has a suitable network of bilateral tax conventions. The objective is to benefit from a more favorable tax treatment in the source countries made available by the tax treaties. As conduit companies are set up in countries benefiting from double tax treaties, which levy no or little tax on receipts of foreign-source or passive investment income, dividends and other payments they receive pay low withholding taxes at source due to the treaty and are usually transmitted to a base company in a low-tax country.

 Example:

A company Z is a parent company with wholly-owned subsidiary in the source country S. The country of residence of Z has no treaty with source country S. Z transfers its participation in C to a conduit company in the tax haven country A. The dividends received are not subject to a tax because of a participation exemptions or a system of indirect credit existing in the tax haven country. Exemption from withholding taxes in the source country S is claimed on the basis of the treaty network of the tax haven country A. The dividends are reinvested by Z in new subsidiaries.

 Investment incentives in Mauritius

Mauritius is not a tax haven, but a low tax jurisdiction. The corporate tax rate for domestic and non domestic activities is 15%. With tax incentives for certain sectors, this is reduced to 3% for offshore companies, and to 0-5% for some ICT activities No withholding tax on payments made to shareholders and on loan interest paid No capital gains tax No minimum capital Minimum number of shareholders: one No need for shareholder(s) to be resident in Mauritius No exchange control Effective regulation by the Financial Services Commission (FSC) Strict anti-money laundering legislation
Source:INDIA OPPORTUNITY HSBC Bank (MAURITIUS) Ltd November 2007

Foreign Direct Investment (FDI) inflows into India

Year US$ billion 2004-2005 3.7 2005-2006 5.5 2006.2007 15.7 US$6.3 billion of last years total FDI inflows came from Mauritius. Mauritius accounted for US$10 billion out of a total of US$ 25 billion in FDI inflows that India has been able to attract in the last three years, starting 2004-2005. In 2008, Mauritius and Singapore were the top source of FDI into India, while inflows from Cyprus was more than that from Germany, Japan, Netherlands and France. The total FDI from these three tax havens during 2007-08 was Rs 60,187 crore which was around 61% of the total FDI inflows into India.
Source:INDIA OPPORTUNITY HSBC Bank (MAURITIUS) Ltd November 2007

Taxation of Foreign Source Income & Double Taxation

Territorial Principle of Taxation Exempt from taxation the income of resident corporations and citizens generated outside their borders Foreign Tax Neutrality Worldwide Principle of Taxation Tax resident corporations and citizens on income earned within and outside their borders Domestic Neutrality

Foreign Tax Credit

Due to Worldwide principle of taxation, foreign earnings of a

domestic company is subject to full tax levies of both home and host country Treat foreign taxes paid as a credit against the parents domestic tax liability or as a deduction from taxable income.

Economic Effect of claiming Foreign Tax Credit and Deduction

Tax deduction
Foreign Taxable Income Foreign tax paid Taxable income ( U.S. purpose) U.S. tax @ 35% Less foreign tax credit $1000 $200 $800 $280

Tax Credit
$1000 $1000 $350 $200

Resultant U.S. tax

Total tax burden Effective Tax rate $480 48%

$150
$350 35%

U.S Taxation of Foreign Source Income

Withholding taxes on royalty and dividend payments = 15 % in

Countries A, C & D Income tax rates = 30 % in Country B Income tax rates = 40 % in Country C Indirect sales tax = 40 % in Country D Foreign Indirect Tax Credit =
Dividend (including any withholding tax) x Creditable foreign taxes Earnings net of foreign income tax

Royalties from A

Branch in B

Subsidiary in C

Subsidiary in D

Before tax earnings

Foreign Income Taxes After Tax earnings Dividend Paid

100
30 70

100
40 60 30

60
nil 60 30 4.5 30

Other foreign income

Foreign withholding taxes (15%) U.S. Income Dividend gross-up

20
3 20 0 100 4.5 30 20

Taxable Income
U.S. Tax (35%) Foreign Tax Credit Paid

20
7 (3) (3) 4

100
35 (30) (30) 5

50
17.5 (4.5)

30
10.5 (4.5) (4.5) 6

Deemed Paid
Total U.S tax (net)

(20)
(24.5) (7)

Foreign Taxes
Total taxes of U.S Taxpayer

3
7

30
35

24.5
17.5

40
46

Limits to Tax Credit

Maximum tax liability will always be the higher of the host

country and home countrys tax rate Limit on the amount of foreign taxes creditable in any year Foreign Tax credit limit =
Foreign Source Taxable Income x

U.S tax before credits

Worldwide taxable income

Tax Treaties
Profits earned by a domestic enterprise in the host country shall

not be subject to its taxes unless the domestic entity maintains a permanent establishment there. Tax treaties affect withholding taxes on dividends, interest and royalties paid by the enterprise of one country to foreign shareholders They usually grant reciprocal reduction in withholding taxes on dividends, and exempt royalties and interest from withholding entirely.

 International tax agreements have a number of objectives like elimination of double taxation, the allocation of taxes between treaty partners, the encouragement of trade and investment between the Contracting States, the prevention of international tax avoidance and evasion. With industrialised and developed countries, they cover all sources of income arising out of inflow of technology industrial equipment and direct investment in India, besides programmes for exchange of teachers, research workers, students and artists as also provisions relating to avoidance of taxes. With the communist bloc countries which do not have a tax system similar to that of European and capitalist countries the agreements cover only international maritime and air traffic; and With the developing countries the agreements are structured to encourage the flow of technology, equipment and professional services which India is capable to transfer and offer. Double tax agreements help to create an environment of fiscal certainty which

encourages trade and investments between countries.

 Comprehensive Agreements -

DTAA Limited

With Respect to Taxes on Income

Armenia Australia Bangladesh Brazil Canada China Cyprus Turkey UAE USA Uzbekistan Vietnam Zambia

Agreements - With respect to income of airlines/merchant shipping

DTAA - Other

Agreements / Double Taxation Relief Rules

African National

Afghanistan Bulgaria Czechoslovakia Ethiopia Saudi Arabia Switzerland UAE Yemen Arab Republic

Congress Mission Income-tax (Double Taxation Relief ) (Aden) Rules, 1953 Income-tax (Double Taxation Relief) (Dominions) Rules, 1956

Treaties withholding Tax rates in United States

Country Australia Austria Dividends 15 15 Interest 10 10 Royalty 5 10

Barbados
Belgium Canada Cyprus Czech Republic Denmark Egypt Estonia Finland France Germany Greece Hungary Iceland India

15
15 15 15 15 15 15 15 15 15 15 30 15 15 20

5
15 10 10 0 0 15 10 0 0 0 0 0 0 15

5
0 0 0 10 0 0 5 5 5 0 0 0 0 10

Source: IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities (January 2006).

Treaties withholding Tax rates in India

Country Australia Canada China Germany Malaysia Dividends 15% 25% 10% 10% 20% Interest 15% 15% 10% 10% 20% Royalty 15% 15% 10% 10% 30%

New Zealand
Singapore USA Non treaty countries

15%
15% 20% Nil

10%
15% 15% 20%

10%
15% 10% 10%

Source: Income Tax Department, 2007

Tax Planning Dimensions

Multinationals have a distinct advantage over purely domestic

companies because they have more geographical flexibility in locating their production & distribution systems Two caveats
Tax considerations should never replace business strategy Constant changes is tax laws constrain the benefits of long term

tax planning

Organisational Considerations
Branch Income consolidated with that of the parent company
Fully taxed in the year earned

Subsidiary Option not available for a subsidiary

whether remitted or not

If initial operations are forecast to

Earnings not taxed until remitted

generate losses - advantageous

When turn profitable - advantageous

Subpart F Income
The U.S taxes shareholders of controlled foreign corporations (CFC) on certain undistributed income of that corporation
A CFC is a corporation in which more than 50 % of the combined

voting power or fair market value is owned directly or indirectly by a U.S shareholder A U.S. shareholder is a U.S. person who owns directly, indirectly, 10% or more of foreign corporation, such as U.S. corporations, citizens and residents of U.S.

Subpart F Income
Subpart F income comprises various types of income such as: Passive investment income Net gains on foreign exchange or commodities Gains from the sale of investment property Income from shipping operations in foreign commerce Income from transporting or distributing oil or gas.

Offshore Holding Companies

A holding company is a company of which the business activity

is holding shares in other companies. A parent company incorporated in a high tax country may form a subsidiary company in a low tax or tax free offshore area This can give rise to opportunities for deferring tax and for more effective cash management.

Foreign Sales Corporations

Foreign-Sales Corporations (FSC) is a foreign corporation

created by a "parent" shareholder (usually a corporation)

It exempts a portion of income derived from the export of U.S.

products from U.S. income taxation.

Introduction
A multinational enterprise has facilities of many types located

in many locations in the world The profits of each portion of business are structured through intercompany transactions like sales, licensing, leasing etc. Transfer pricing is a field of analysis that reflects the price of goods, services or intangible transfers between entities. The regulations require related parties to deal with each other at arms length i.e. as they would with unrelated parties.

International Transfer Pricing

About 40% of all international trade consist of transfer between

related business entities Cross country transactions expose MNC to many environmental factors that both create and negate the options for increasing profits Some factors are:
Taxes Tariffs Competition Inflation risks Performance evaluation considerations

Tax considerations Corporate profits can be increased by setting transfer prices so as to move profits from subsidiaries in high tax countries towards subsidiaries in low tax countries Eg:
A and B are wholly owned subsidiaries of Global Enterprise in UK and USA. A sells its product(500,000) to B at $6 per piece B sells in market at $12 per piece Tax rate in UK16.5% and in USA is 35%

A(UK)
Sales Cost of sale

Global enterprise $3000,000 $6000,000 $6000,000

$2100,000 $3000,000 $2100,000

B(USA)

Gross margin

$900,000

$3000,000 $3900,000
$1500,000 $2000,000 $1500,000 $1900,000 $525,000 $591,000

Operating Exp. $500,000 Pre tax income $400,000 Income tax $66,000

Net income

$334,000

$975,000

$1309,000

A(UK)
Sales Cost of sale

Global enterprise $4250,000 $6000,000 $6000,000

$2100,000 $4250,000 $2100,000

B(USA)

Gross margin

$2150,000 $1750,000 $3900,000

$1500,000 $2000,000

Operating Exp. $500,000

Pre tax income $1650,000 $2500,000 $1900,000 Income tax $272,200 $87,500 $359,750

Net income

$1377,750 $162,500

$1540,250

Tariff Consideration Tariffs on import goods also affect the transfer pricing policies. Company exporting goods to a subsidiary domiciled in a high tariff country could reduce the tariff assessment by lowering the prices of merchandise sent there.

Competitive factors To facilitate the establishment of a subsidiary abroad, parent company could supply the subsidiary with inputs invoiced at low prices Excess profits earned in one country could subsidize the penetration of another market To improve the foreign subsidiaries access to local capital markets This may call forth anti-trust actions by host government or retaliatory actions by host government.

 Environmental Risks
The risk of high inflation in a country may call for high transfer prices on goods provided to a subsidiary facing high inflation. It will remove as much cash from subsidiary as possible and avoid eroding the purchasing power of firms cash

 Performance Evaluation considerations

Transfer prices are a major determinant of corporate performance It is difficult for decentralized firms to set transfer price that both (a) motivate managers to make decisions that maximize their units well being and are congruent with companys goal (b) provide an equitable basis for judging the performance of managers and units of the firm.

Arms Length Price

Section 482 of Internal Revenue Code, USA, requires that

pricing of intra company transfers be based on arms length pricing

It is the price that an unrelated party would receive for the

same or similar goods under identical or similar situations

Transfer Pricing Methodology

Market based transfer prices Cost based transfer prices

Market Based Transfer Pricing

The subsidiary supplies the products at the market price of

that product Advantages

Efficient use of the firms scarce resources Use is consistent with decentralized profit centre orientation

Consistent with arms length method

Shortcomings Often there is no intermediate market for products or services If there is a market, still it would not be perfectly competitive or internationally comparable. Does not allow a firm to adjust prices for competitive purposes

Cost based systems In this system the subsidiary sell its products to the parent or other subsidiary at its cost Advantages
Simple to use Based on readily available data

Easy to justify before tax authorities

Shortcomings Provide little incentive for sellers to control their price Production inefficiencies may simply be passed on to buyers as inflated prices The problem of cost determination is compounded internationally, as every country has different cost accounting concepts

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.

Transfer Pricing In India

Transfer Pricing Regulations

The Finance Act 2001 introduced the detailed TPR

w.e.f. 1st April 2001 The Income Tax Act AS-18 Other Relevant Acts

Related Parties
Requires disclosure of any elements of the related

party transactions necessary for an understanding of the financial statements. Control by ownership
50% of the voting right

Control over composition of board of directors Power to appoint or remove the directors Control of substantial interest 20% or more interest in the voting power

Income Tax Act and TP

Finance Act 2001 substituted the old section of 92 of

the ITA by sections 92,92A to 92 F.

These sections are the backbone of Indian TPR. These sections define the meaning of related parties,

international transactions, pricing methodologies etc.

Associate Enterprise: 92A

Direct Control/Control through intermediary
Holding 26% of voting power

Advance of not less than 51% of the total assets of

borrowing company.
Guarantees not less than 10% on behalf of borrower Appointment of more than 50% of the BoD Dependence for 90% or more of the total raw material or

other consumables

Methods for determining arms length prices Sec 92 OECD ( Organisation for economic cooperation and development ) identifies several broad methods:
Comparable uncontrolled pricing method (CUP) Resale pricing method (RPM) Cost plus pricing method (CPM)

Comparable uncontrolled pricing method

Transfer prices are set by reference to prices used in

comparable transactions between independent companies or between the corporation and an unrelated third party
Differences in quality, trademark, brand names makes the

direct comparisons difficult

Resale pricing method

The price at which the item can be sold to an independent

customer is taken Appropriate mark up associated with expense, And normal profit margin is deducted from the price to derive the intra company transfer price The problem with this method is deciding the appropriate mark up

Cost plus pricing method

A markup is added to transferring affiliates costs in local currency
The markup includes:
Financing costs related to export inventory, receivables, assets employed

A percentage of cost covering manufacturing, distribution, warehousing

and other related costs to export operations

Adjustments are made to reflect the government subsidy, if any

Other Pricing Methods Comparable profits method Comparable uncontrolled transaction method Profit split method (PSM) Transactional Net Margin Method (TNMM) Powers of Assessing Officer Consequences of recomputation of income

Comparable uncontrolled transaction method

Applicable to intangible assets

Identifies a benchmark royalty rate referencing transactions

in which same or similar intangibles are transferred This method relies on market comparables

Profit split method

The operations of two or more parties are highly integrated, making

it difficult to evaluate their transactions on an individual basis The first step is to determine the total profit earned by the parties from a controlled transaction The second step is to split the profit between the parties based on the relative value of their contribution considering the functions performed, the assets used, and the risks assumed by each

Transactional Net Margin Method

The net profit realised by the enterprise from an international transaction entered with an

associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base The profit margin realised by the enterprise or by an unrelated enterprise from a comparable transaction or a number of such transactions is computed having regard to the same base The net profit margin referred to as above arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transactions and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market. The net profit margin thus established is then taken into account to arrive at an arms length price in relation to the international transaction.

Choice of Most Appropriate Method

Even though it is not possible to standardize the selection of Most Appropriate Method, the following can be stated as suggestive guidelines Comparable uncontrolled price method is relevant in case of transactions of loans, royalties services, transfer of tangibles Resale price method is relevant in case of marketing operations of finished goods Cost plus method is used where raw materials or semi-finished products are sold. Profit spilt method is required when transactions involved provisions of integrated services of more than one enterprise TNMM is used in most of the cases including transfer of semi-finished goods, distribution of products where RPM appears to be inappropriate .

International Transactions: 92 B
Transaction between two or more AE of which either both or anyone is a non-resident. Transactions: Purchase/Sale/Lease Provision of service Lending or borrowing

Some Transactions subject to ALP

Purchase at little or no cost.
Payment for services never rendered. Sales below MP/ Purchase above MP

Interest free borrowings

Exchanging property

Selling of real estate at a price different from MP

Use of trade names or patents at exorbitant rates even after their

expiry.

Framing Of Transfer Pricing Rules

Transfer pricing rules were introduced by the Government about five

years back to check likely losses in revenue while estimating the value of transactions in goods and services between an entity in India and a related party abroad.

Indian Transfer Pricing Regulations

Intra-group cross-border sale, purchase, lease or cost sharing transactions involving intangible property are inter-alia covered by the new Transfer Pricing code.
Methods prescribed (by section 92C) for the determination of the Arms Length Price (ALP) of a transaction may not be adequate for valuation of intangibles.

It may be necessary to apply other internationally applied valuation methods for the valuation of intangible assets.

Indian Transfer Pricing Regulations (Contd)

Use of such Other methods is permissible under laws of other countries like US, UK, etc, and is also allowed by the OECD Guidelines.
OECD Guidelines recognize that the general ALP and methods can be difficult to apply to transactions involving IP. Indian rules also need to recognize these internationally applied valuation

methods/approaches and adopt a consensual approach for dealing with such transactions.

Transfer Pricing Penalties

In order to ensure compliance with the arm's length principle, the I-

T Act has prescribed stiff penalties Transfer Pricing "adjustments" in India are now treated as concealment of income, deserving harsh penalties of up to 300 per cent. The Indian TP regulations are broadly based on OECD guidelines. These guidelines are internationally applied by various countries for resolving TP issues.

Burden of Proof
The burden to establish that an international transaction

is carried out at arms length price is on the tax payer who is to disclose all the relevant information and documents relating to prices charged and profit earned with related and unrelated customers.

Double Taxation Relief

A DTAA is an agreement entered between two countries in order to avoid taxing the same income twice. The double taxation is of two kinds:Juridical double taxation: a person is taxed on the same income in different contracting states. Economic double taxation: the same income is taxed in the hands of different persons in different countries

Thus in order to avoid the burden of being taxed twice,the country may frame laws to grant relief. Double taxation relief is of 2 types :Unilateral Relief Bilateral relief In case of unilateral relief, the country of which the tax payer is resident provides relief to the tax payer through its domestic tax laws irrespective of the country from which the tax payer earned his incomeSec 91 In case of bilateral relief , the two countries negotiate the double taxation relief provisions as part of DTAA.

Sec 90Agreement with Foreign countries

The CG may enter into an agreement with any foreign government for granting

relief in respect of (a) Income on which tax has been paid both under the IT Act and income tax in that foreign country. (b)For the avoidance of double taxation of income under this Act and under the corresponding law in force in that country, or (c) For exchange of information for the prevention of evasion or avoidance of incometax chargeable under this Act or under the corresponding law in force in that country, or investigation of cases of such evasion or avoidance, (d) For recovery of income-tax under this Act and under the corresponding law in force in that country, 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 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.

Sec 91- Relief when there is no DTAA

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 income 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.

Some Cases
Peico Electronics & Electricals Ltd.
Parent: Phillips Netherlands and its subsidiaries

Asea Brown Boveri

Parent: ABB Switzerland and its subsidiaries

Videocon Group
Collaborators: Toshiba Co., Mitsubishi Co

Thank You!