Double Taxation

1. Double Taxation

2. Tax Dude Submitted by:Pawan Chaudhary (31) Ritesh Gupta(37) Sanjay (41) Satendra Agarwal (45)

3. Introduction to DTAA

4. Double taxation is imposition of two or more taxes on the same income (in case of IT), assets (in case of Capital Taxes) or any financial transaction (in case of sales taxes) in different countries Double taxation occurs mainly due to overlapping tax laws & regulations of countries where an individual does business When an Indian businessman makes a profit or some taxable gain in another country, he may be required to pay Tax on that income in India, as well as in country in which Income was made !! Introduction to DTAA (1)

5. Introduction to DTAA (2) Double Taxation is also common in MNC’s (or employees deputed abroad) where it isn’t fair for a taxpayer to bear burden of tax in both countries on a single income To protect Indian tax payers from this unfair practice, Indian government has entered into tax treaties, known as Double Taxation Avoidance Agreement (DTAA) with about 79 countries

6. India has comprehensive DTAA with 79 countries This means there are agreed rates of tax & jurisdiction on specified types of income arising in a country to a tax resident of another country The objective is to encourage Foreign Investments in India & also make Foreign Markets available to Indian entities The India- Mauritius DTAA is one of them. This agreement has contributed almost 37% of FDI in India in last 15 yrs (1991 to 2005) DTAA by India (1)

7. DTAA by India (2) Under the IT Act 1961, there are 2 provisions, Sec-90 & 91, which provides specific relief to taxpayers to save them from DTAA Sec-90 is for taxpayers who have paid tax to a country with which India has signed DTAA Sec-91 provides relief to tax payers who have paid tax to a country with which India has not signed DTAA Thus, India gives relief to both kind of taxpayers

8. Income escapes tax in one country on account of DTAA & in other country on account of its Local Tax laws This gives rise to the income escaping tax altogether Examples: Mauritius, UAE Large no. of FII trading on Indian markets operate from Mauritius Acc to treaty between, Capital Gains are taxable in country of residence of shareholder & not in country of residence of company whose shares are sold. Therefore, a company resident in Mauritius selling shares of an Indian company will not pay tax in India & since there is no capital gains tax in Mauritius, gain will escape tax altogether. Double Non-Taxation

9. DTAA Comprehensive agreements - Countries list  Armenia, Australia, Austria, Bangladesh, Belarus, Belgium, Botswana, Brazil, Bulgaria, Canada, China, Cyprus, Czech Republic, Denmark, Egypt, Finland, France, Germany, Greece, Hashemit, Kingdom of Jordan, Hungary, Iceland, Indonesia, Ireland, Israel, Italy, Japan, Kazakstan, Kenya, Korea, Kuwait, Kyrgyz Republic Libya, Luxembourg, Malaysia, Malta, Mauritius, Mongolia, Montenegro, Morocco, Myanmar, Namibia, Nepal, Netherlands, New Zealand, Norway, Oman, Philippines, Poland, Portuguese Republic Qatar, Romania, Russia, Saudi Arabia, Serbia, Singapore, Slovenia, South Africa, Spain, Sri Lanka, Sudan, Sweden, Swiss Confederation, Syrian, Arab Republic, Tajikistan, Tanzania, Thailand, Trinidad and Tobago, Turkey, Turkmenistan, UAEUAR (Egypt), UGANDA, UK, Ukraine, USA, Uzbekistan, Vietnam, Zambia

10. Causes of Double Taxation • One state claims to tax on the basis of “Source of Income” & another on the basis of “Residence”; OR • Both states claim to tax incomes based on “Residence” Hence need for elimination of Double taxation!

11. Double Taxation Convention - Objectives Various Conventions - UN, EU, OECD & between countries • Protect tax payers from Double Taxation • Free flow of International Trade & investment • Encourage transfer of technology • Prevent discrimination between tax payers • Reasonable level of legal & fiscal certainty to investors • Acceptable basis to share tax revenue between states

12. Treaty Override In cross-border tax scenario: • Assessee can avail benefit of bilateral agreements between contracting state; OR • Assessee can choose to be governed by Indian tax laws Whichever is more beneficial to tax-payer !!

13. Overall Structure of DTAA

14. Overall Structure of DTAA

15. Check if the treaty is in effect! • Entry into force – check for each of the countries, • The Date of Entry into force of the convention • The Date of Effect of the convention

16. Ensure that the Treaty has not terminated! • Treaty remains into force till terminated • Some treaties provide for a period during which treaty cannot be terminated • Termination requires notice through diplomatic channels • Some treaties provide for period of notice & some do not • Check if the treaty is in force before applying it!

17. Approaches for Elimination of Double Taxation • Bilateral Agreements between Contracting states • Section 90 provides for tax relief in accordance with treaties executed by India • Unilateral Tax credit – Foreign tax credit system • Section 91 provides relief where no treaty exists

18. Section-90 • Under Section 90 & 91 of IT Act, relief against double taxation is provided in 2 ways: Bilateral Relief, Under Section 90 • Indian government offers protection against double taxation by entering into a DTAA with another country, based on mutually acceptable terms. • Such relief may be offered under two methods: • Exemption method –Ensures complete avoidance of tax overlapping • Tax credit method – Provides relief by giving taxpayer a deduction from tax payable in India

19. Section-91 Unilateral Relief, Under Section 91 Indian government can relieve an individual from double taxation whether there is a DTAA between India & other country concerned. Unilateral relief may be offered if: The person /company has been a resident of India in previous year Same income must be accrued to & received by taxpayer outside India in previous year Income should have been taxed in India & in another country with which there is no tax treaty The person or company has paid tax under laws of foreign country in question

20. Exemption with Progression Ordinary Credit Full Credit Full Exemption Methods of Granting Tax Credits • Exemption Method • Credit Method State of residence allows credit of tax paid in state of source Restricted to that part of income-tax which is attributable to income, taxable in state of residence Total tax paid in state of source is allowed as a credit against any tax payable in state of residence Income earned in state of source is considered in state of residence only for rate purpose The Income earned in the state of source is fully exempt in the State of residence

21. An Illustration

22. Tax Incidence if No Double Tax Elimination

23. Tax Credits – Full Exemption The income earned in State of source is fully exempt in state of residence Old Austria Treaty, Greece

24. Tax Credits – Exemption with Progression The income earned in State of source is considered in state of residence only for rate purpose Australia, Cyprus, Germany (Indian Income), UK, Malta

25. Tax Credits – Full Credit Total tax paid in state of source is allowed as a credit against any tax payable in state of residence Germany, Canada, Singapore, Sweden

26. Tax Credits- Ordinary Credit State of residence allows credit of tax paid in state of source Restricted to that Part of income-tax which is attributable to income, taxable in state of residence Most Indian Treaties i.e. Australia, Cyprus, Denmark, UK, USA, France, Japan, Mauritius

27. Tax Impact at a Glance

28. Amount of Tax Given Up by State of Residence

29. Underlying Tax Credit (UTC) • Provides relief from tax on same income, which has already suffered tax in form of corporate profits tax • Pre condition: Certain percentage of share held by recipient in capital of the payer company • DTAA entered into by India do provide for UTC by other state – Illustratively USA, UK • DTAA with Mauritius & Singapore cover UTC in both countries

30. Underlying Tax Credit (Example)

31. Unilateral Tax Credit • Requirements • Resident of India for relevant previous year • Income has accrued or arisen outside India and is doubly taxed • Taxes have been paid in the source country • There is no DTAA with that country • Items of Income not covered under DTAA eligible for credit

32. Unilateral Tax Credit (UTC) • Relief • 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 • the Indian rate of tax if both the rates are equal

33. Thank You