Double Taxation_International Taxation
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Transcript of Double Taxation_International Taxation
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Double TaxationAVOIDANCE AGREEMENT
Legal Environment of Business
Abhishek Jha
Akanksha NishatAkanksha TakyarAridman Mohan
Aswin VPSushmit Sinha
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Double Taxation
Double Taxationconcept and avoidance mechanism
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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 aswell as personal taxation of shareholders
dividends/profits
This double liability is often mitigated by tax
treaties between various countries, which is DTAA in
essence
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Double Taxation
Juridicial
Levying on one taxpayer in one
or more countries for one object
in the same period of time
One country is using residence
principal in levying taxes, and
the other country is using
territorial principal
Economic
Taxation of two and more taxes
from one tax basis
For Ex. - when the goods are
levied excise tax, and after this
VAT is imposed on the price of
the goods, including excise
Types of Double Taxation
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Double Taxation
ResidentPrincipal Territorial
Principal
Tax Deduction Options
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Double Taxation
Article 23A Exemption Method
Article 23B Credit method
Unilateral
Signing of international
conventions
Double Taxation
Avoidance Agreement
Multilateral
Methods of Double Taxation Avoidance
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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.
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Full Exemption Method
No ReliefFull Exemption (tax
only on domesticincome) at 30%
Home Country 35,000 24,000
Foreign Country 4,000 4,000
Total Tax Paid 39,000 28,000
Tax Relief Given byhome country
0 11,000
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Full Credit Method
No Relief
Full Credit (Deductforeign
tax from domestictax @35%)
Home Country 35,000 35,000-4000
Foreign Country 4,000 4,000
Total Tax Paid 39,000 35,000
Tax Relief given by homeCountry
0 4,000
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What is DTAA?
Essentially a bilateral agreement entered into
between two different countries.
Objectives
Avoid taxation of income in both countries
To promote and foster economic trade and investment
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Underlying Tax Creditmechanism for avoiding double taxation
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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
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Example
S Ltd. is Singapore based company having an Indian
subsidiary. Tax rate in India is 35%
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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
o
Industrial profits
Indian Treaties with some countries providing for tax sparing
o Japan, Canada, Kenya, Malaysia, Cyprus, Singapore, etc.
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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%
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Central Board of Direct Taxesbody to create policies and administer direct taxes in India
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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 TaxDept.
Issued notification stating that prescribed documents
needed to be provided in addition to TRC from another
country
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Chairman
Income TaxLegislation &Computerizat
ion
Personnel &Vigilance
Revenue InvestigationAudit &Judicial
Structure
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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
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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
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General Anti-Avoidance Rulesestablished to prevent misuse of double taxation avoidance agreement
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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 thanavailing a tax benefit.
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Double Taxation
Tax Disputesregarding double taxation
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Double Taxation
Introduction to Tax Disputes
Tax disputes are an inevitable by-product of
globalization
Tax disputes between government and tax-payers
o Transfer pricing disputes
o
Characterization of tax Tax disputes between governments
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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
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Double Taxation
OECD Model Conventionsettling tax disputes in the European Union since 1995
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Double Taxation
The Convention
First published in 1958
Latest amendment in 2008
If competent authorities are unable to reach
agreement within 2 years, issues are sent to
arbitration if complainant requests
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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
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Double Taxation
EU vs. UNcomparative analysis
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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