International Taxation

Transcription

1 International Taxation Presentation by: CA Amit Maheshwari Partner, Ashok Maheshwary & Associates Chartered Accountants, Gurgaon (Independent Member of the Leading Edge Alliance) info@akmglobal.com Gurgaon 15 th December 2012

2 Contents 1. Indian Income-tax Provisions related to Non Residents 2. Double Tax Avoidance Agreements DTAA Purpose and objectives OECD MC vs. UN MC

3 Indian Income-tax Provisions Related to Non Residents

4 Income Tax Provisions related to Non Residents Taxation of Non Resident Definitions Sec.6 Scope of Taxation Section 4,5,9 Special provisions Section 44C, 44D, 115A Presumptive taxation Sec. 44B/BB/BBA/ BBB TDS Sec.195, 197 DTAA Sec 90 & 91 Anti-Avoidance Provision Sec 92 Agent Section 160, 163

5 Income Tax Provisions related to Non Residents Brief Outline Definition Section 2(30): Defines non-resident Section 6(1): Defines resident Section 6(6): Defines not ordinarily resident Which income to tax? Section 4: Charging section Section 5: Scope of taxation

6 Income Tax Provisions related to Non Residents Types of Income R R & OR NR Received or deemed to be received in India by or on behalf of the assessee Income that accrues or arises or is deemed to accrue or arise in India Income that accrues or arises outside India and is not derived from business controlled in or a profession set up in India Income that accrues or arises / received outside India

7 Income Tax Provisions related to Non Residents Which income to tax? Section 9: Income deemed to accrue or arise in India Section 9(1): Business connection Section 9(1)(ii): Salary, if it is earned in India Section 9(1)(iii):Salary payable by the Government to a citizen of India for services outside India Section 9(1)(iv): dividend paid by an Indian company outside India Section 9(1)(v): Interest Section 9(1)(vi): Royalty Section 9(1)(vii): Fees for technical services As per the retrospective amendment in section 9(1) by the Finance Act, 2010, the income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) of section 9 and shall be included in his total income, whether or not, non-resident has a residence or place of business or business connection in India; or the non-resident has rendered services in India.

8 Income Tax Provisions related to Non Residents How is business income taxed? Section 28 to 44C Presumptive determination of income Section 44B - Shipping business Section 44BB - Exploration of mineral oil Section 44BBA - Operation of aircrafts Section 44BBB - Civil construction in turnkey projects Section 44C: Head office expenses

9 Income Tax Provisions related to Non Residents Tax deduction at source Section 195 Section 195(1) Any person responsible to pay to a Non resident to withhold tax Only in respect of sum chargeable under Income tax Act, 1961 At the time of credit or payment, whichever is earlier At the rates in force Non resident does not include not ordinarily resident

10 Income Tax Provisions related to Non Residents Relief provisions Section 195 (2) If whole of the sum to be paid is not income chargeable to tax, Payer to apply for order for determination of taxable portion Application by recipient Section 195(3)/197 Section 195 (3) Payee can also apply for receiving payment without deduction of tax Section 197 Recipient Non-resident can apply for determination of taxable income/ withholding tax rate

11 Income Tax Provisions related to Non Residents Source & Residence : The Conflict Tax treaties: framework between the two or more contracting states/ countries on bilateral basis to prevent double taxation. Almost all treaties are bilateral, although there have been some ventures into concluding multilateral treaties. Role of Tax Treaties Increased cross border economic activity by limiting double taxation Bilateral Economic Assistance through beneficial treaty provisions Non discrimination in Tax matters Exchange of information leading to better enforcements of tax laws

12 Income Tax Provisions related to Non Residents DTAAs aim to remove the international double taxation. However the concept of the tax treaties by which treaties aim to achieve this is broader than the simply defined concept of double taxation. It attempts to address the whole host of related issues based on the economic double taxation- that is, taxation of something already taxed under another country's law whether or not it is formally subject to multiple levels of taxation.

13 Double Tax Avoidance Agreements Purpose and objectives

14 Double Taxation Avoidance Agreement (DTAA) Need of a DTAA explained Through Concept of Juridical Double taxation. Concept of Economic Double taxation.

15 Double Taxation Avoidance Agreement (DTAA) Juridical double taxations Juridical double taxation (or International Double taxation) Same legal entity is subject to tax, on same income, in two (or more) countries for the same taxable year. This may arise because most countries: Example tax residents on global income (i.e. regardless of source); and tax non-residents on domestic-source income. Company A resident in Country U Country U Branch Country I Company A s branch profits are subject to tax in two countries: (i) in Country U, due to residence; and (ii) in Country I, due to source.

16 Double Taxation Avoidance Agreement (DTAA) Economic double taxation Two legal entities are subject to tax, on (economically) the same income, in two (or more) countries. Arises where one country applies its transfer pricing rules. Example Taxable profits = US$ 5 million Taxable profits = $ 2 million Loan ($100 million Company A 5% p.a. ($ 5 million) Company B Country U Country I If Country I considers that the arm s length rate of interest on the loan should be 4% p.a., it will reduce Company B s interest deduction by $1 million Company B s taxable profits increase by $ 1 million to $ 3 million Unless Country U provides some relief for Company B, economic double taxation will occur in respect of the $ 1 million.

17 Double Taxation Avoidance Agreement (DTAA) Purpose of double tax treaties To Eliminate such double taxation (i.e. juridical and economic) in order to prevent discouragement of international trade and investment which would otherwise be caused To provide certainty to tax regime faced by investors and traders. To provide for co-operation between tax administrations to combat tax avoidance and tax evasion. To provide for exchange of information, in order to: combat tax avoidance and tax evasion; and ensure the treaty operates properly To eliminate certain forms of discriminatory taxation Also Refer to Section 90(1) which lays down in the Indian Income tax Act, the object and purpose of Indian Government for entering into a DTAA.

18 Double Taxation Avoidance Agreement (DTAA) Types of double tax treaties Subject matter Income (this is our focus) Inheritance, estates and gifts Social security Comprehensive vs. limited Comprehensive (this is our focus) Airline and/or shipping operations Bilateral vs. multilateral Bilateral (i.e. between 2 countries): most common (and our focus) Multilateral (i.e. between 3 or more countries) For example: Nordic multilateral treaty (Denmark, Faroe Islands, Finland, Iceland, Norway and Sweden)

19 Structure of a typical tax treaty Scope of Convention Article 1 and 2 Definitions Article 3, 4 and 5 Taxation of Income Article 6 to 21 Taxation of Capital Article 22 Provisions for elimination of Double Tax Special provisions such as Anti Avoidance Provisions Article23A and 23B Article 24 to 27 (e.g. LOB) Miscellaneous Provisions Article 28 to 31 Protocols and Termination

20 Double Taxation Avoidance Agreement (DTAA) Legal effect of a double tax treaty Tax treaty is an agreement between two governments Treaty becomes part of the tax law of each country, and thereby creates rights for taxpayers

21 Double Taxation Avoidance Agreement (DTAA) Treaty is an agreement between two governments Process of concluding agreement involves following steps: Negotiations (one or more rounds) Agreed text is initialed by negotiators If there is more than one language for treaty: translations are prepared and agreed Signature of the agreement (usually by high-ranking government officers)

22 Double Taxation Avoidance Agreement (DTAA) Treaty is an agreement between two governments Completion of domestic procedures (if any) to incorporate treaty into domestic tax law. Exchange of instruments of ratification (or letters of notification) Agreement enters into force Agreement becomes effective in regard to specific income

23 Double Taxation Avoidance Agreement (DTAA) Treaty becomes part of tax law of each country Till the treaty becomes part of tax law of each country, taxpayers have no rights in respect of treaty Each country has different rules by which a treaty becomes part of tax law

24 Double Taxation Avoidance Agreement (DTAA) Importance of Protocols and notes The double tax treaties are generally accompanied by one or more exchanges of notes and/or protocols, which clarify/expand/restrict application of main treaty When two countries want to change their double tax treaty, they can do so in either of two ways: I. enter into a new treaty and terminate the old treaty; or II. make amendments to the existing treaty If (ii) is followed, a protocol is used to make the relevant amendments

25 Organization for Economic Cooperation & Development (OECD) Model Conventions (MC) vs. United Nations (UN) Model Conventions

26 Tax Treaty Model Conventions The most practiced DTAA models are the model treaties framed by the Organization for Economic Cooperation & Development [ OECD ] also referred to as OECD MC, the United Nations (UN MC)

27 Double Taxation Avoidance Agreement (DTAA) Model treaties and commentaries Commentaries on OECD model treaty: Starting with the 1963 edition, the OECD model treaty has been published with a commentary to each article. The Commentaries have been referred to as an aid to interpretation by the courts in many OECD countries and in some non-oecd countries (e.g. Malaysia)

28 Double Taxation Avoidance Agreement (DTAA) Model treaties and commentaries UN model treaty Based on, and very similar to, OECD model treaty. Is focused on double tax treaties between developed and developing countries. Allows greater source country taxation than the OECD model. Commentaries on UN model treaties Substantially copy OECD model treaty commentaries. Some original commentary.

29 Section 195(6) CA Certificate Section 195(6) introduced by Finance Act 2008 (w.e.f. 1 April 2008) Requires the person making payment to NR to furnish the information relating to payment Furnishing of information - Rule 37BB (w.e.f. 1 July 2009) Furnish information to the tax department - Form 15CA Obtain CA certificate before making payment to NR - Form 15CB

30 Procedure - Form 15CA and 15CB Remitter Obtains certificate from Accountant (Form 15CB) Electronically upload the remittance details in Form 15CA on Take printout of filled undertaking form (15CA) with system generated acknowledgement number Printout of the undertaking form (15CA) is signed Submit the signed paper undertaking form to the RBI/ AD along with certificate of an Accountant in duplicate RBI/ AD remits the amount A copy of undertaking (15CA) & Certificate of Accountant (15CB) forwarded to AO Applicable only for remittance purposes Not a conclusive proof Every remittance required to follow procedure even if not chargeable to tax in India Requires the payer to provide PAN of the non resident Form 15CB need not be filed with the tax department information requirement is same as Form 15CA

31 Key Takeaways/Checklist 1. What is the position / taxability under domestic law? 2. Is there a tax treaty with the country of the NR? 3. Is the treaty / applicable provision in effect? 4. Is the NR a person under the treaty? 5. Is the NR a resident of the foreign country under the treaty? 1. Are other eligibility criteria (e.g. LOB article) met? 2. Are the relevant taxes covered in the treaty? 3. Read and apply the relevant article 4. Check for Protocols / Technical Explanations / MoU 5. Is there an MFN Article? If yes, are there beneficial provisions in qualifying later treaties that can be applied? Existence of Treaty Eligibility for treaty Benefits Applicability of Treaty Amendments /MFN etc.

32 New Domains for Chartered Accountants Taxability of NRI after section 206AA Cross border transactions Permanent Establishments in India 15CA/CB- Certifications by a CA

33 Thank You