OECD MC Article 23 to 26. Diploma in International Taxation Course. Arpit Jain. Ahmedabad, January 2017

Transcription

1 OECD MC Article 23 to 26 Diploma in International Taxation Course Ahmedabad, January 2017 Arpit Jain

2 Elimination of Double Taxation Article 23

3 Taxation Systems Principles of Taxation Residence Based Source Based Citizenship Based Taxation Systems Worldwide [e.g.. USA, UK, India] Territorial [e.g.. HK] Modified territorial taxation [e.g.. Singapore]

4 Double Taxation India follows residence based taxation - Residents taxed on global income Tax in India under Sections 4, 5 or 9 by way of residence or source in India In following circumstances, double taxation may occur A resident in India is also resident of other country which follows resident based taxation INDIA R USA A US resident has income from India (COR: US, COS: India) Example: X Co. has provided some technical services in India. In India it will be taxable u/s 9(1)(vii) whereas in US, X Co (a resident of US) will be liable to pay tax on its global income India Source X Co Residence USA

5 Types of Double Taxation Juridical Double Taxation Same person taxed in two (or more) different countries for the same income Dual Residence Based on residence in one country and source in another Economic Double Taxation Two different taxpayers taxed on same income in two (or more) countries Eg. DDT on Dividends, Transfer Pricing adjustments, etc. Typically DTAA eliminates Juridical Double Taxation

6 Elimination of Double Taxation Unilateral Relief Under Domestic Laws Section 91 Bilateral Relief Under DTAAs Section 90 / 90A

7 Section 90 / 90A Provisions under the domestic law granting foreign tax credit under DTAA Section 90 / 90A: Agreement with foreign countries / specified territories / specified associations Govt may enter into agreement with foreign countries or specified territories for granting relief in respect of income which has been doubly taxed for avoidance of double tax The more beneficial provision applicable DTAA or ITAct 1961 GAAR overrides!! [GAAR postponed to A.Y ] Tax Residency certificate (TRC) must for an NR to claim treaty benefits in India [w.e.f ]

8 Unilateral Tax Credit.. Section 91 of the Act grants unilateral Tax Credit in case where no DTAA exists. 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 Conditions: Applies only to Resident In respect of income accruing outside India Income should not be deemed to accrue or arise in India For taxes paid in any country with which there is no DTAA Limited DTAA / EOI Agreements?

9 ..Unilateral Tax Credit.. Amount of deduction of taxes by India = Doubly taxed income X min of (rate of foreign tax OR Indian tax) Example ( Individual Indian resident): Indian income = 11,00,000 out of which 3,00,000 is from Chile (tax paid is 1,00,000 Particulars India Chile Total Income 11,00,000 3,00,000 11,00,000 Tax 1,60,000 1,00,000 2,80,000 Rate 14.55% 33.33% Relief 3,00,000 X 14.55% = 43,636

10 ..Unilateral Tax Credit.. Foreign tax rate (iii) the expression "rate of tax of the said country" means incometax 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;

11 ..Unilateral Tax Credit.. Example: An Indian resident has a PE in Chile. This PE earns $100 from Germany and this income is subject to withholding tax in Germany (say $20). Let assume that as per Chile laws, this $100 is taxable in Chile at 25%, i.e. $25 and Chile grants credit of the foreign tax paid ie $20. $100 taxable in India since it is income earned by Indian resident. Tax payable in Chile: $25 Credit of foreign tax paid: $20 Tax actually paid in Chile: $ 5 (25-20) What will be the tax paid in Chile for the relief u/s 91? - $5 or $25?

12 ..Unilateral Tax Credit Tata Sons [DCIT v. Tata Sons Limited (ITA No. 4776)] Mumbai Tribunal US has a federal system wherein States have autonomy in levying state income taxes US constitution does not permit Federal Government to enter into treaty with respect to foreign countries for giving relief Indo US Treaty Taxes covered includes only federal tax Federal Tax in US: 35% and state tax can vary from 3 % to 11 % Tribunal held that under treaty, only 35% credit will be given whereas under the provisions of the Act u/s. 91, 38.5% credit is available. Since Act is beneficial, provisions of the Act shall apply. Hence, credit of State as well as Federal Tax paid in USA may be eligible for credit under Section 91

13 Bilateral Relief Basic model conventions OECD, UN, US OECD Model convention is followed in this presentation Article 23 of OECD - Elimination of Double Taxation Exemption method - Resident State grants complete exemption on the income taxed in the Foreign State Tax Credit method - Resident State grants credit on the foreign tax paid Article 23 governs taxation of Resident State

14 Bilateral Relief Methods Bilateral Relief Exemption Method Credit Method Full Exemption Exemption with progression Full Credit Ordinary Credit Underlying tax credit Tax sparing credit Bangladesh (PE Profits) Brazil (dividend) India-Namibia DTAA India-Canada DTAA (for Canada) Most of Indian DTAA Singapore DTAA, - Mauritius DTAA UK, Singapore, Italy

15 Exemption method Article 23A : Exemption method India rarely follows the exemption method In the following treaties with India, exemption method has been followed: By both the CS: Bulgaria, Poland (old treaty before Revision) and Egypt (United Arab Republic) By the other CS (i.e. the other CS adopts exemption method and India adopts Tax Credit method): Austria, Belgium, Turkey

16 Para 1 of Art. 23A Article 23A : Exemption method Para 1 basic provision Where a resident of a Contracting State (say, Indian R.) derives income or owns capital which, in accordance with the provisions of this Convention, may be taxed in the other Contracting State (say, Egypt), the first-mentioned State (i.e. India) shall, subject to the provisions of paragraphs 2 and 3, exempt such income or capital from tax. Exemption granted by the Resident State Exemption granted only if income is taxable in other State under the treaty Resident State completely exempts the income

17 Para 2 of Art. 23A Para 2 the Exceptions Where an Indian resident derives items of income which, in accordance with the provisions of Articles 10 (Dividends) and 11 (interest), may be taxed in Egypt, India shall allow as a deduction from the tax on the income of the Indian Resident an amount equal to the tax paid in Egypt. Such deduction shall not, however, exceed that part of the tax, as computed before the deduction is given, which is attributable to such items of income derived from Egypt. Dividend and Interest are exceptions to the exemption method and follow Tax Credit (TC) method. Such deduction is subject to the Indian Tax attributable on the income so taxed in Egypt Dividend and Interest always follow TC method

18 Para 3 of Art. 23A Para 3 Inclusion of Exempt Income Where in accordance with any provision of the Convention income derived or capital owned by an Indian resident is exempt from tax in India, India may nevertheless, in calculating the amount of tax on the remaining income or capital of such Indian resident, take into account the exempted income or capital. This becomes relevant in case of a person who is subjected to progressive taxation, e.g. Individuals Could be also relevant when there are additional taxes payable beyond a certain thresh-hold - Surcharge Exempt income included for rate purpose

19 Para 4 of Art. 23A The provisions of paragraph 1 shall not apply to income derived or capital owned by a resident of a Contracting State where the other Contracting State applies the provisions of this Convention to exempt such income or capital from tax or applies the provisions of paragraph 2 of Article 10 or 11 to such income. Example: Indian resident derived income from Egypt (Exemption method followed) India will exempt such income provided it is taxable in Egypt under Indo Egypt treaty Egypt tax authorities take a view that such income is not taxable in Egypt under the treaty This provision not there in any Indian treaty

20 Tax Credit method Article : 23B Under Tax Credit method, the Resident State retains the right to tax a particular income. Tax Credit method is adopted in most of the Indian treaties

21 Para 1 of Art. 23B Where an Indian Resident derives income or owns capital which, in accordance with the provisions of this Convention, may be taxed in UK, India shall allow: a) as a deduction from the tax on the income of that Indian resident, an amount equal to the income tax paid in UK; b) as a deduction from the tax on the capital of that Indian resident, an amount equal to the capital tax paid in UK. Such deduction in either case shall not, however, exceed that part of the income tax or capital tax, as computed before the deduction is given, which is attributable, as the case may be, to the income or the capital which may be taxed in that other State. India to grant deduction of the taxes paid in UK Such deduction is subject to the Indian Tax attributable on the income so taxed in UK

22 Para 2 of Art. 23B Where in accordance with any provision of the Convention income derived or capital owned by an Indian resident is exempt from tax in India, such State may nevertheless, in calculating the amount of tax on the remaining income or capital of such Indian resident, take into account the exempted income or capital.

23 Questions What is tax attributable to Indian income? Relief provided based on incremental tax basis or on basis of tax paid What is Indian tax payable? Does it include DDT?

24 Computation issues 1 Mr X an Indian resident has a PE in US USA Mr X earns $10,000 (INR 500,000) Tax paid is $4,000 (INR 200,000, 40%) India Income: INR 15,00,000 Tax payable: INR 2,80,000 Global - India Income: INR 20,00,000 Tax payable: INR 4,30,000 (21.5%) Tax paid in US: INR 2,00,000 Subject to Indian tax on income earned in US: (1) 4,30,000 2,80,000 = 1,50,000 OR (2) 5,00,000 * 21.5% = 1,07,500 Credit of tax paid on incremental basis (1) or on the basis of rate of tax (2)?

25 Computation Issues 2 Indian R. Co. has a branch in USA US profit: $ 100 Tax Paid: $ 20 Indian Co taxable profit : (-INR 50,000) Tax : 0 US Co. tax profit : $100 * say 50 = INR 5,000 Indian Co tax profit : (-INR 45,000) Indian Co. tax payable = [Book profit = (-3,000) + 5,000 = 2,000*18% =INR 360] Tax Credit: INR 1,000 (Min of 1,000 or 5,000 * 18%) or INR 360 Different Accounting Period PE Related Issues Forex conversion issues Exemptions

26 Underlying Tax Credit.. An indirect credit for tax levied on the profit of the company out of which the dividend has been paid Avoidance of Economic Double Taxation Important treaties having UTC clause Both CS granting UTC Mauritius, Singapore Only other CS granting UTC Canada, China, Germany, Japan, UK, US Only India granting UTC None!!

27 ..Underlying Tax Credit.. USA (UTC only for US residents) ARTICLE 25 - Relief from double taxation - 1. In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), the United States shall allow to a resident or citizen of the United States as a credit against the United States tax on income (a) ; and (b) in the case of a United States company owning at least 10 per cent of the voting stock of a company which is a resident of India and from which the United States company receives dividends, the income-tax paid to India by or on behalf of the distributing company with respect to the profits out of which the dividends are paid.

28 ..Underlying Tax Credit.. Japan treaty Where the income derived from India is a dividend paid by a company which is a resident of India to a company which is a resident of Japan and which owns not less than 25 per cent either of the voting shares of the company paying the dividend, or of the total shares issued by that company, the credit shall take into account the Indian tax payable by the company paying the dividend in respect of its income. Will Indian Tax Payable include DDT?? Threshold 1. % of holding 2. manner of holding: direct, direct or indirect, not specified 3. holding of share capital, shares issued, voting power, etc

29 ..Underlying Tax Credit Participation threshold for exemption Country % holding % holding of- Benefit available China* 10 Shares UTC Germany* 10 Voting Dividend exemption Japan* 25 Total shares issued OR Voting power UTC Mauritius 10 Shares paying dividend UTC Singapore 10 Share Capital UTC UK* 10 Voting power UTC US* 10 Voting power UTC UTC: Underlying Tax Credit Not for the Indian Resident

30 Tax Sparing.. Extension of normal and regular tax credit to taxes that are spared, forgiven or reduced by source country. Credit for taxes forgone by the source State as incentives for economic development of source state Most of the treaties contain this provision in so far as credit for Indian Taxes granted by the foreign country Developing Countries Tax laws are pre-dominantly used for growth If the Tax sparing provisions are not applied then the benefit given to a person is taken away by other country and not retained by the enterprise Here, tax is deemed to be paid in the foreign country

31 ..Tax Sparing France (Tax sparing provision for the French Resident) (c) For the purposes of the tax credit referred to in sub-paragraph (a) (i) the term tax paid in India shall be deemed to include any amount which would have been payable as Indian tax under the laws of India, and within the limits provided for by this Convention, for any year but for an exemption from, or reduction of, tax granted for that year under : (i) section 10(4), 10(4B), 10(15)(iv) covering interest, section 10(6)(viia) covering salaries and section 80L covering interest and dividends, of the Income-tax Act, 1961 (43 of 1961), so far as they were in force on, and have not been modified since, the date of the signature of this Convention, or have been modified only in minor respects so as not to affect their general character ; or (ii) any other provisions which may be enacted after this Convention enters into force granting a deduction in computing the taxable income or an exemption or reduction from tax which the competent authorities of the Contracting States agree to be for the purposes of the economic development of India, if it has not been modified thereafter or has been modified only in minor respects so as not to affect its general character.

32 Tax Credit Inter-play of various Factors Underlying Tax Credit Tax Sparing Foreign Tax Credit Tax Relief or Mode of Payment of Tax

33 Mauritius Interesting Case UAE FZE MauCo HoldCo GBC1 InCo Ultimate HoldCo Earns income of US $ 10 Million Tax Nil Remittance as Dividend 10 Million Receives Dividend of US $ Million 15 % of US $ 1.50 Million Tax Credit of 80 % of tax1 i.e. us $ 1.20 Mi. Tax Paid in Mauritius US $ 0.30 Million [3 %] Remittance as dividend US $ 9.70 Million Dividend Received in India US $ 9.70 Mi Grossed up [UTC] US $ Mi Tax U/s. 115 BBD 15 % US $ 1.50 Mi Tax Credit [Mauritius] US $ 1.50 Mi [Tax Paid Nil] - Deemed foreign tax credit of 80% in Mauritius - UAE income gets distributed to shareholders with 3% ETR - Additional 10% on dividends received by Indian resident individuals

34 Participation Exemption Exemption from taxation for shareholder in a company on dividends received, and / or potential capital gains arising on sale of shares GERMANY ARTICLE 23 - Relief from Double taxation - 1. Tax shall be determined in the case of a resident of the Federal Republic of Germany as follows : (a) In the case of dividends exemption shall apply only to such dividends as are paid to a company (not including partnerships) being a resident of the Federal Republic of Germany by a company being a resident of the Republic of India at least 10 per cent of the capital of which is owned directly by the German company. Example: A German company receives dividend from its Indian subsidiary. Such dividend will be completely exempt in Germany.

35 Issues in Claiming Tax Credit in accordance with the provision of the Convention Timing of credit Carry forward/ Carry backward of excess credit may be taxed Impact of losses in State R Administrative burden Inclusion of surcharge in calculation of credit Availability of credit for DDT Foreign Tax Credit Rules Notified w.e.f. 1 April 2017

36 Foreign tax credit rules Rule 128 Taxes covered Mode of credit When to claim Compliance DTAA country Taxes covered by DTAA Non DTAA country Section 91(iv) Tax, surcharge or cess not interest, penalty No tax credit if the amount of foreign tax/ part thereof is in disputes Ordinary credit Source by source and country by country No carry forward of credit excess ignored Foreign tax conversion - TT Buying rate on last day of month preceding the month in which taxes paid / deducted Credit available against MAT liability In the year when the income offered to tax Can be claimed proportionately as and when income offered Furnish Form 67 before due date of filing tax return (even for carry back losses) Income and Tax certificate from deductor, deductee or tax authority Proof of payment/ deduction of tax

37 Non-Discrimination Article 24

38 Non-Discrimination Article 24 establishes principle of non-discrimination in tax matters in double taxation law The Article specifies 4 criteria which a national tax law of Contracting States is not permitted to use as a basis for tax discrimination. Nationality Location (Permanent Establishment) Deduction of expense payments made to Non Residents Ownership

39 Para 1 of Art Para 1 : Nationality Nationals of India shall not be subjected in Armenia to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of Armenia in the same circumstances, in particular with respect to residence, are or may be subjected. This provision shall, notwithstanding the provisions of Article 1, also apply to persons who are not residents of one or both of the Contracting States. Aimed to curb nationality based discrimination Taxation or any requirement connected therewith (other requirement (returns, payments, prescribed times, etc) other or more burdensome than... No ban on favourable treatment of foreigners!

40 ..Para 1 of Art. 24 This provision applicable even if a person is not a resident of either Contracting States. in the same circumstances, in particular with respect to residence Example : Special emphasis is provided In India, an Indian national who is a resident of India may be granted certain benefits not available to an Armenian national who is not a resident of India. This is not discrimination based on nationality but discrimination based on residence.

41 Para 2 of Art. 24 Para 2 : Residence Stateless persons who are Indian residents shall not be subjected in either Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of the State concerned in the same circumstances, in particular with respect to residence, are or may be subjected. Residence based discrimination None of the Indian treaties have adopted this provision! Klaus Vogel: Stateless person means a person who is not considered as a national by any State under its law. The field of application of Article 24(2) of Model Convention is limited to individuals. The question, whether a stateless company is even able to exist thus does not play a role for Article 24(2) MC. Not relevant for India

42 Para 3 of Art Para 3 : Permanent establishment (PE) The taxation on a permanent establishment which a UK enterprise has in India shall not be less favorably levied in India than the taxation levied on Indian enterprises carrying on the same activities. This provision shall not be construed as obliging India to grant to UK residents any personal allowances, reliefs and reductions for taxation purposes on account of civil status or family responsibilities which it grants to its own residents. Location based discrimination PE of an Indian enterprise in UK cannot be less favourably taxed compared to a UK enterprise carrying on the same activities

43 ..Para 3 of Art. 24 Benefits granted by a country to its residents A country may treat its residents favourably based on civil status or family responsibilities. This wont attract the non discrimination provisions. Para 3 deals only with taxation, i.e. the quantum of tax. It doesn t deal with the requirements connected to taxation. Exceptions : Any benefits granted by a state to its Residents on account of civil status or family responsibilities. Examples: Sec 80U which grants deduction in case of a person with disability and other similar sections like Sec 80DD (medical treatment of a disable dependant), 80DDB (deduction in respect of medical treatment for specified disease), etc.

44 Para 4 of Art. 24 Para 4 : Deduction of expenses Except where the provisions of paragraph 1 of Article 9, paragraph 7 of Article 11, or paragraph 7 of Article 12 (dealing with expenses not incurred at Arm s length), apply, interest, royalties and other disbursements paid by an Indian enterprise to a UK resident shall, for the purpose of determining the taxable profits of such Indian enterprise, be deductible under the same conditions as if they had been paid to the Indian resident. Similarly, any debts of an Indian enterprise to a UK resident shall, for the purpose of determining the taxable capital of such Indian enterprise, be deductible under the same conditions as if they had been contracted to an Indian resident.

45 Para 5 of Art. 24 Para 5 : Capital Indian enterprise, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of UK, shall not be subjected in India to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of India are or may be subjected.

46 Para 6 of Art Para 6 : Taxes included The provisions of this Article shall, notwithstanding the provisions of Article 2, apply to taxes of every kind and description. Alternative The provisions of this Article shall apply to taxes which are subject to this convention. [UK Treaty]

47 ..Para 6 of Art Example: Austria ARTICLE 2 : Taxes Covered - 3. The existing taxes to which the Convention shall apply are in particular : (a) in Austria : (i) (ii) the income-tax (die Einkommensteuer); the corporation tax (die Korperschaftsteuer); (hereinafter referred to as Austrian taxes ) (b) in India : the income-tax, including any surcharge thereon imposed under the Income-tax Act, 1961 (43 of 1961); (hereinafter referred to as Indian tax )

48 ..Para 6 of Art. 24 Para 5 : The provisions of this Article shall, notwithstanding the provisions of Article 2, apply to taxes of every kind and description. Hence although only income tax is included in Article 2, Article 24 may be applicable even in case of DDT, FBT, etc. Most of Indian treaties contain the provision that only those taxes which are a subject matter of the treaty would be included.

49 A typical tax treaty Minor modifications present in all the treaties with India in the non discrimination article Lets analyse Article 24 of Indo Denmark, which is in line with OECD with only minor differences

50 Indo Denmark DTAA.. 1. The nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, in particular with respect to residence, are or may be subjected. This provision shall, notwithstanding the provisions of Article 1, also apply to persons who are not residents of one or both of the Contracting States.

51 ..Indo Denmark DTAA.. Para 2 w.r.t stateless persons is absent in this treaty. 2. The taxation of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities in the same circumstances and under the same conditions. 3. Nothing contained in this Article shall be construed as obliging a Contracting State to grant to persons not resident in that State any personal allowances, reliefs, reductions and deductions for taxation purposes which are by law available only to persons who are so resident. (Clause 3 with respect to Model Convention) Bold portion addition in treaty vis-à-vis OECD

52 ..Indo Denmark DTAA.. 4. Except where the provisions of paragraph 1 of Article 10, paragraph 7 of Article 12, or paragraph 7 of Article 13, apply, interest, royalties and other disbursements paid by an enterprise of a Contracting State to a resident of the other Contracting State shall, for the purpose of determining the taxable profits of such enterprise, be deductible under the same conditions as if they had been paid to a resident of the first-mentioned State. Similarly, any debts of an enterprise of a Contracting State to a resident of the other Contracting State shall, for the purpose of determining the taxable capital of such enterprise, be deductible under the same conditions as if they had been contracted to a resident of the firstmentioned State.

53 ..Indo Denmark DTAA.. 5. Enterprises of a Contracting State the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of that first-mentioned State are or may be subjected in the same circumstances and under the same conditions.

54 ..Indo Denmark DTAA.. 6. In this Article, the term taxation means taxes which are the subject of this Convention.

55 Discrimination.. Exceptions to Non-Discrimination..

56 ..Discrimination.. Para 3 of Art. 24 (PE) Most of the Indian treaties contain additional provision: Example : Indo UK treaty 2. The taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favorably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities in the same circumstances or under the same conditions. This provisions shall not be construed as preventing a Contracting State from charging the profits of a permanent establishment which an enterprise of the other Contracting State has in the first-mentioned State at a rate of tax which is higher than that imposed on the profits of a similar enterprise of the first-mentioned Contracting State, nor as being in conflict with the provisions of paragraph 4 of Article 7 of this Convention. Higher rate of tax is not to be considered discriminatory Not relevant for an Indian resident because of the following amendment Explanation 1. 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 favorable charge or levy of tax in respect of such foreign company

57 ..Discrimination.. nor as being in conflict with the provisions of paragraph 4 of Article 7 of this Convention. UK treaty - Para 4 to Article 7 (Business profits) 4. Insofar as it has been customary in a Contracting State according to its law to determine the profits to be attributed to a permanent establishment on the basis of an apportionment of the total profits of the enterprise to its various parts, nothing in paragraphs 1and 2 of this Article shall preclude that Contracting State from determining the profits to be taxed by such an apportionment as may be necessary; the method of apportionment adopted shall, however, be such that the result shall be in accordance with the principles laid down in this Article. Determination of profits of a PE by method of apportionment of the total profits of the enterprise Discrimination for convenience!

58 Rajeev Gajwani (80HHE).. Rajeev Sureshbhai Gajwani Vs. ACIT (ITAT Ahd- Special Bench) 2011-TII-38-ITAT-AHM-SB-INTL Assessee is a Citizen of America and a non-resident. Exported software from a PE in India and claimed deduction u/s 80HHE (only residents / domestic cos are eligible for 80HHE). Article-26(2) of the India-USA DTAA provides that the taxation of an enterprise of USA resident shall not be less favorable than the taxation of a resident enterprise carrying on the same activity. So deductions (in the given case 80HHE) & exemptions available to Indian Enterprises would also be available to the US enterprises if they are carrying on the same activity. Held that the assessee is entitled to deduction under section 80HHE on the same footing as it is available to a resident person in India.

59 ..Rajeev Gajwani (80HHE).. Deduction in respect of profits from export of computer software, 80HHE. (1) Where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of, (i) export out of India of computer software or its transmission from India to a place outside India by any means; (ii) providing technical services outside India in connection with the development or production of computer software,

60 ..Rajeev Gajwani (80HHE) Article 26(2) of Indo US (Permanent Establishment) Except where the provisions of paragraph 3 of article 7 (Business Profits) apply, the taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities. This provision shall not be construed as obliging a Contracting State to grant to residents of the other Contracting State any personal allowances, reliefs and reductions for taxation purposes on account of civil status or family responsibilities which it grants to its own residents.

61 ABAQUS Engineering [40(a)(i)].. the ITAT, Bench 'B', Chennai 2011-TII-143-ITAT-MAD-INTL AY to Assessee, an Indian co. had made certain payments to a NR Payment held to be royalty in nature Since tax deductible u/s 195, which was not deducted, payments were disallowed u/s 40(a)(i) In AY , there was no provision in Act requiring deduction of tax on payment made to residents [Sec 40(a)(ia) effective AY onwards]. So, the case was of non-discrimination provision as contained in article 26(3) (deductibility of expenses). (Herbalife International 101 ITD 450 ITAT Delhi - AY ) and Peoplesoft are on similar lines.

62 ..ABAQUS Engineering [40(a)(i)] Post insertion of Sec 40(a)(ia)? The provisions for payment to Residents are favourable compared to payments to Non Residents regarding Time limit for depositing the tax deductible (for period between AY to AY ) Not all taxable payments to residents are subject to TDS (eg. Payment for purchase of goods taxable if business connection exists) Only 30% of expense is disallowed in case of payments to Residents No disallowance us 40(a)(ia) if the resident recipient fulfils certain conditions Hence, can Non Discrimination provisions be invoked? Similar views by ITAT Delhi in case of Mitsubishi Corporation [2015]

63 Metchem Canada (44C) Section 44C deals with deduction of head office expenditure in the case of non-residents Sec 44C starts with a non obstante clause: 44C. Notwithstanding anything to the contrary contained in sections 28 to 43A, in the case of an assessee.. There is a ceiling limit in respect of deduction of specified expenses: Held that the non discrimination provisions are applicable. The scope of deduction under section 37(1) will not stand curtailed by the restriction placed under section 44C of the Act.

64 Examples??.. Can you think of any examples in the Indian domestic tax law which contains non discrimination provisions?? 64

65 Food for Thought Discrimination should not be based on Nationality Individual Residency Determination Section 80-IA Permanent Establishment Section 44C Section 80HHE Payment to Non Resident Section 40(a) Ownership TP Adjustment on Income? Transfer of Capital Assets by WOS to Indian Parent not regarded as Transfer

66 Corporate Entities are Nationals Corporate Entities Whether Nationals? US defines it as individuals, UK does not define Standard Chartered Bank 39 ITD 57 (Mum) No definition of term national in Indo UK DTAA Reliance on SC in State Trading Corp Corporations have nationality Refers to the Jural relationship of nationals and citizens Held that Companies are nationals and have capacity to invoke non-discrimination clause under the Indo UK DTAA

67 Entitlement to foreign treaty? By non discrimination provision, can the benefit of treaty be availed, which otherwise is not available (other than nationality based)? InCo Singapore Branch of Netherlands Bank Netherlands Bank Payment of Interest Tax With-held by InCo Whether Tax Credit Available?

68 Mutual Agreement Procedures Article 25

69 Resolving Disputes Unilateral APA AAR Regular Appellate Proceedings (Appellate or DRP) Safe harbours Settlement Commission Bilateral / Multilateral MAP Arbitration International Litigation International Court of Justice

70 What is MAP?? Mutual process for resolving difficulties arising out of application of DTAA Lays down procedural rules Negotiation process Different from litigation Assessee presents case to CA If deemed fit, CA will initiate discussion with CA of other CS Covers disputes of double taxation TP Adjustment, existence of PE and attribution of profits, dual tax residency not resolved under tiebreaker, etc. CAs not obliged to find a solution! MAP is a lengthy procedure

71 Para 1 [Assessee presents case] Para 1: Where a person considers that the actions of one or both of the CS result or will result for him in taxation not in accordance with the provisions of this Convention, he may, irrespective of the remedies provided by the domestic law of those States, present his case to the CA of the CS of which he is a resident or, if his case comes under paragraph 1 of Article 24, to that of the CS of which he is a national. The case must be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the Convention. Assessee (A) CA (A) Assessee to present the case to CA within 3 years

72 Para 2 [Negotiation between CAs] Para 2: The CA shall endeavor, if the objection appears to it to be justified and if it is not itself able to arrive at a satisfactory solution, to resolve the case by mutual agreement with the CA of the other CS, with a view to the avoidance of taxation which is not in accordance with the Convention. Any agreement reached shall be implemented notwithstanding any time limits in the domestic law of the CS Assessee (A) CA (A) CA (B) Mutual agreement with CA of other CS

73 Para 3 [negotiation between CAs] Para 3: The CA of the Contracting States shall endeavor to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Convention. They may also consult together for the elimination of double taxation in cases not provided for in the Convention. Suo motu by the CA? Resolution of problems relating to interpretation or application of Convention Broad scope Includes cases not covered in DTAA

74 Para 4 [CA communicates directly] Para 4:The competent authorities of the CS may communicate with each other directly, including through a joint commission consisting of themselves or their representatives, for the purpose of reaching an agreement in the sense of the preceding paragraphs. Direct communication between CAs Diplomatic channels not required

75 Para 5 [Unresolved issues submitted to Arbitration].. Para 5: Where, a) under paragraph 1, a person has presented a case to the CA of a CS on the basis that the actions of one or both of the CS have resulted for that person in taxation not in accordance with the provisions of this Convention, and b) the competent authorities are unable to reach an agreement to resolve that case pursuant to paragraph 2 within two years from the presentation of the case to the CA of the other CS, CA(A) CAs unable to reach consensus CA(B)

76 ..Para 5 [Unresolved issues submitted to Arbitration] Any unresolved issues arising from the case shall be; Submitted to arbitration if the person so requests. Shall not be submitted to arbitration if decision already rendered by Court/Tribunal of either CS Decision binding on both CS if person affected accepts mutual agreement Decision to be implemented notwithstanding time limits under Domestic laws of any CS CA of the CS to settle mode of application of this provision

77 Benefits Mechanism for resolving Double taxation Probably the only solution for aggrieved tax payers Widens scope and broadens perspective towards a particular issue as brings in additional perspective of the other CA. Can be pursued along with domestic Appeals in CS Simultaneous application Demand stayed till dispute resolved, subject to provisions of bank guarantee For e.g. US, UK

78 Issues India The approach lacks cooperation Expected level of assistance/support absent among the CAs Lengthy process with long settlement cycle General Low probability of actual settlement TP Adjustments Interplay of Article 9(2) and MAP For e.g. Indo- Japan DTAA

79 Provisions in Domestic Law Power given to Board u/s 295(2) Rule 44G Resident Assessee aggrieved by foreign tax authority Application to CA (India) for MAP by assessee Form 34F Rule 44H Foreign CA approaches Indian CA W.r.t. actions by Indian tax authorities Indian CA will examine the issue and will endeavor to resolve it Detailed procedure mentioned

80 Exchange of Information Article 26

81 . Para 1 - CAs to exchange relevant information Para 1:The competent authorities of the CS shall exchange such information as is foreseeably relevant for carrying out the provisions of this Convention or to the administration or enforcement of the domestic laws concerning taxes of every kind and description imposed on behalf of the CS, or of their political subdivisions or local authorities, insofar as the taxation thereunder is not contrary to the Convention. The exchange of information is not restricted by Articles 1 and 2.

82 Application.. (a) When applying Article 12 State A where the beneficiary is a resident asks State B where the payer is resident, for information concerning the Royalty transmitted (b) Conversely, for granting exemption under Article 12 State B asks State A whether the recipient is in fact a resident in State A and the beneficial owner of the Royalties paid

83 ..Application (c) Similarly, information needed for proper allocation of taxable profits between AEs in different states or adjustment of profits in accounts of a PE in one State and HO in other State. Articles 7, 9, 23A and 23B

84 How does it work?? Competent Authorities of CS to supply info to carry out provisions of (i) DTAA and (ii) Domestic tax laws in so far as the taxation thereunder is not contrary to DTAA Info to be supplied irrespective of whether or not such info concerns residents of either CS but certainly subject to specific restrictions Coupled with an obligation to observe secrecy in tax matters The term information to be understood broadly it should cover both actual facts and legal relationships

85 Para 2 - Secrecy Element Any information received by a CS under Article 26 shall be treated as secret In same manner as information obtained under Domestic Laws of that State To be disclosed only to persons or authorities which are involved in assessment or collection of, enforcement or prosecution in respect of, or determination of appeals in relation to, the taxes covered Such persons or authorities shall use such information only for the above mentioned purposes, but may disclose it in public court proceedings or in judicial decisions.

86 Para 3 - No obligation on CS To carry out administrative measures at variance with the laws and administrative practice of one of the CS, nor To supply information (a) which is not obtainable under laws of one of the CS; (b) the contents of which come under the protection of a trade, business, industrial, commercial or professional secret; (c) the supply of which would disclose a trade process; or (d) furnishing of which would be contrary to public policy.

87 Para 4 and 5 - No obligation on CS Exception However, in no case shall the no obligation provision be construed to permit a CS to decline to supply information solely because (a) it has no domestic interest in such information or (b) information is held by a Bank, FI, person acting as agent etc. or it relates to ownership interests in a person.

88 Para 6 - Procedures Para 6 Procedures for Effective EOI The competent authorities shall, through consultation, develop appropriate methods and techniques concerning the matters in respect of which exchanges of information under paragraph 1 shall be made.

89 TIEAs of India Exchange of information Article in most of Indian treaties 19 TIEAs signed by India 2016: Maldives, Saint Kitts and Nevis, Seychelles 2014: San Marino 2013: Argentina, Bahrain, Belize, Gibraltar, Liechtenstein, Monaco 2012: Guernsey, Jersey, Liberia, Macau 2011: Bahamas, BVI, Cayman Islands, Isle of Man 2010: Bermuda

90 Another Step towards Transparency US-India Agreement to Improve International Tax compliance and to implement FATCA 9 July 2015 Various DTAAs revised Switzerland, Mauritius, Cyprus Guidance provided to field officers for EOI with BVI - 12 May 2016 Base Erosion and Profit Shifting Project of OECD Action Plan 12 Mandatory Disclosure Rules Action Plan 13 - CBCR Multilateral Competent Authority Agreement (MCAA) for automatic exchange of CbCR signed by 31 countries 27 January 2016 Does not include India

91 EOI - Summarized March towards global security Periodic consultation and review Protection of confidentiality Limitation Ambit of power not uniform Power of cross border enquiry Reasonable restraints

92 Arpit Jain Director Office: Mobile: This presentation is prepared exclusively for the benefit and use of the clients of K. C. Mehta & Co. This should not be used as a substitute for professional advice. Reasonable care has been taken for ensuring the accuracy and the authenticity of the contents of the presentation. However, we do not take any responsibility for any error or omission contained therein on any account. It is recommended that the readers should take professional advice before acting on the same. The provisions contained in Finance Bill, 2015 are the proposals and are likely to undergo amendments while passing through the Houses of the Parliament before being enacted.