INTERNATIONAL TAXATION

Transcription

1 By CA. SANJAY D. SONAWANE M.COM; LLB; FICWA; DISA(ICAI); FCA INTERNATIONAL TAXATION International taxation is a study of determination of a tax on income earned in different countries, of a person or of any business entity, with reference to tax laws of different countries and the tax laws of it s own domestic country. In India, tax matters are mainly handled by Chartered Accountants who plays a very challenging role in the field of International Taxation for the following reasons:- 1. Chartered Accountants works as an advisers, who understand and interpret various issues arising to tax payers dealing in multiple counties. Few issues are as under:- i. Multinational companies which are growing multifold and intends to do global business with better compliance with taxation laws. ii. In the area of transfer pricing regarding determination of arms length of price. iii. Consultancy to multinationals and non-residents for optimum utilization of DTAAs (Direct Taxes Avoidance Agreements) iv. To appear before the Advance Ruling Authorities in the cases of nonresidents v. To explore investment opportunities to tax planning across the globe 2. To comply with the provisions of Indian Tax Laws like Section 92 E of the Income Tax. Every person who has entered into an international transactions should obtain report from Chartered Accountant in a prescribed format. Income Tax Act Section 92E 92E. Every person who has entered into an international transaction during a previous year shall obtain a report from an accountant and furnish such report on or before the specified date in the prescribed form duly signed and verified in the prescribed manner by such accountant and setting forth such particulars as may be prescribed. 3. The provision of section 195 of the Income Tax Act refers that tax deduction at source in the case of payment to non residents are required to be certified. Vasai Br of WIRC of The Institute of Chartered Accountants of India * Page No.1 of 7

2 The concepts of International Taxation can be studied with reference to the following: 1. Double Taxation Meaning Double Taxation means taxing same income in more than one country i.e. in the home country and again in the host country of the Assessee. How the double taxation arises Mr. A, an ordinary resident under the Indian Income Tax is required to pay tax on his salary income in USA alongwith his any other income in India. In short, he has to pay tax on all income earned in world. Mr. A is also required to pay tax on his salary income earned in USA in that country. The following provisions under Indian Laws be considered while dealing with such double taxation:- 1. The lower/reduced tax rates or exemptions available. 2. Agreement with foreign countries(section-90) Such agreements are not binding to assesses. Assessee can avail benefit, if it is beneficial. 3. Adoption by Central Government - Agreement between specified associations for double taxation relief ( Section- 90A). 4. Unilateral relief - s. 91 (with which India does not have a treaty) Credit for taxes paid in foreign country on foreign income can be claimed. This requires deep study of issues arising out of different interpretations. There is no certainty of computing and no method is full-proof. Double Jurisdiction Person is taxed in the country of it s source and also in the country where he is enjoying status of resident jurisdiction. Concept of Double Taxation The general thinking does not permit to tax same income twice at different places. In order to overcome double taxation, the countries may come to an understanding through negotiation of tax treaties. Through this there could be relief on the overlapping tax. Tax treaties plays important role to avoid taxing the same income in more than one country. Scope of Tax treaties. Normally tax treaties are executed keeping in mind the following factors. Person covered In this case the citizenship and residential status of a person is considered and attempt is made to protect tax payers from suffering double taxation on the same income. Attempts are made to tax its citizens and their residents on their income throughout the world. 1. Rates of taxes Reliefs are given on the basis of original source country. 2. Territory 3. Period Vasai Br of WIRC of The Institute of Chartered Accountants of India * Page No.2 of 7

3 The provisions of treaty have no fixed duration and can be terminated by a contracting state with notice. Few facts of Treaties 1. It is an written agreement or contract between two countries. 2. It is some sort of protocol, memorandum of agreement, convention between counties. 3. It creates rights and obligations for the contracting countries only. No other country is concern with such treaties. 4. Such agreements are governed by international laws. 5. The tax payer may opt the tax treaty, if it is beneficial. Else tax payer may apt for provisions applicable under domestic laws. However tax payer cannot choose some part from domestic laws and some part from treaties, as per their choice. 6. At the outset, mostly treaties are beneficial to tax payer. For illustration the following could be Articles of Tax Convention/Treaties Article General Scope Article Taxes Covered Article General Definitions Article Residence Article Permanent Establishment Article Income from Immovable Property (Real Property) Article Business Profits Article Shipping and Air Transport Article Associated Enterprises Article Dividends Article Interest Article Royalties and Fees for Included Services Article Gains Article Permanent Establishment Tax Article Independent Personal Services Article Dependent Personal Services Article Directors' Fees Article Income Earned by Entertainers and Athletes Article Remuneration and Pensions in Respect of Government Service Article Private Pensions, Annuities, Alimony and Child Support Article Payments Received by Students and Apprentices Article Payments Received by Professors, Teachers and Research Scholars Article Other Income Article Limitation on Benefits Vasai Br of WIRC of The Institute of Chartered Accountants of India * Page No.3 of 7

4 Article Relief from Double Taxation. Article Non-discrimination Article Mutual Agreement Procedure Article Exchange of Information and Administrative Assistance Article Diplomatic Agents and Consular Officers Article Entry Into Force Article Termination At the end:- Protocol At the signing today of the Convention between the Republic of India and (foreign country) for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, the undersigned have agreed upon the following provisions, which shall form an integral part of the Convention. Double tax relief can be distinguished from double tax avoidance as under: Double tax relief Double tax relief means granting of relief in respect of income on which Income Tax has been paid under the tax laws in India and also under the tax laws in other countries, Double tax avoidance Whereas double tax avoidance means, avoiding double taxation under the tax laws of two countries. Such double taxation avoidance can be implemented by the country in the following ways. 1. Unilateral relief 2. Bilateral relief 3. Multilateral relief 4. Non tax treaties The Income Tax Act,1961 deals with Double Taxation Relief as stated below:- In India, Section 91 of the Income Tax provides unilateral relief. Under this Double taxation relief is granted when there is no agreement exist. Income Tax Act Section 91 See Annexure-A Further Section 90 of the Income Tax Act empowers Central Government to enter into an agreement with the foreign Government which may take in the form of Bilateral, Multilateral, and Non tax treaty basis. Enters into agreement with foreign countries. Income Tax Act- Section 90 See Annexure-B Adoption by Central Government of agreement between specified associations for double taxation relief. Income Tax Act Section 90A See Annexure-C Vasai Br of WIRC of The Institute of Chartered Accountants of India * Page No.4 of 7

5 The objectives of double taxation avoidance/credit agreements are to avoid double taxation on the same income. Here the assumption is that the tax payer is paying tax, atleast in one country. While drafting treaties, nondiscrimination clause is a must. Under this clause neither of the contracting counties gives any preferential treatment in taxing it s citizen or resident viza-viz foreign person. ADDITIONAL CONCEPTS International taxation covers the following additional concepts, which are required to be interpreted with lot care:- 1. Cross Border mergers and acquisitions cases. 2. Concept of control foreign corporation 3. Thin capitalization 4. Hybrid/Financial instruments 5. In the abuse of Double Taxation Avoidance Agreement Transfer Pricing Treaty Shopping Misuse of DTAAs in tax havens with nil or very low tax rates. ANNEXURE-A 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 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. (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, Vasai Br of WIRC of The Institute of Chartered Accountants of India * Page No.5 of 7

6 (i) the expression Indian income-tax means income-tax 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 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. ANNEXURE-B 90. [(1)] The Central Government may enter into an agreement with the Government of any country outside India [(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 that country; or (ii) income-tax chargeable under this Act and under the corresponding law in force in that country 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 country, 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 country, 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 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.] [(3) Any term used but not defined in this Act or in the agreement referred to in subsection (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.For the removal of doubts, it is hereby declared that the charge of tax in respect of a foreign company 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 foreign company ANNEXURE-C Vasai Br of WIRC of The Institute of Chartered Accountants of India * Page No.6 of 7

7 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 subsection (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.] Vasai Br of WIRC of The Institute of Chartered Accountants of India * Page No.7 of 7