Presented By

1. Presented By CA Swatantra Singh,B.Com , FCA, MBA Email ID: singh.swatantra@gmail.com New Delhi , 9811322785, www.caindelhiindia.com, www.carajput.com

3. Application of the DTAA • Avoidance of double taxation due to dual residence • Resolves cases of double taxation between the State of Residence and State of Source • Allocates residential jurisdiction to one of the Contracting States • This Article needs to be traversed before proceeding to avail any treaty benefits

4. Treaty does not lay down conditions for defining residents under DTL • Residence must primarily be determined as per the rules of the DTL • Provides a mechanism when the respective DTL of a CS results in double residence • Once residence is determined under the treaty, residence under the DTL becomes irrelevant - SC in CIT v P.V.A.L. Kulandagan Chettiar ,267 ITR 654

5. Article 4(1) • Definition of a resident Article 4(2) • Tie-breaker rule for individuals Article 4(3) • Tie-breaker rule for persons other than individuals

6. “Resident of a CS” means: • Any person • who under the laws of the State • is liable to tax therein • by the reason of his domicile, residence, place of management (place of incorporation also in UN MC) • or any other criteria of similar nature • and also includes that State, any Political sub-division or local authority thereof

7. The term does not include any person who is liable to tax in that State in respect only of income from sources in that State or capital situated therein

8. Tie-breaker Rule • Availability of a Permanent Home • Closeness of personal and economic relations with a State (centre of vital interests) • Habitual Abode • Nationality • Mutual Agreement Procedure Should exist for the period for which taxation is an issue

9. US-UK DTAA Triangular treaty situation USA Interest income UK Indo-US DTAA India Indo – UK DTAA Article 4(2) also determines which of the two CS will tax income from sources in a third State

10. Tie-breaker for persons other than individuals If a person other than an individual is resident on both the States under Article 4(1), then it shall be deemed to be a resident only of the State in which its place of effective management is situated

11. Activated only when the company is a resident of both the Contacting States under Article 4(1) • Does not alter status under domestic tax laws • Place of incorporation not relevant but place of effective management

12. Meaning of ‘liable to tax’? • Any other criteria of similar nature? • Meaning of ‘Permanent home’? • Meaning of ‘Centre of Vital Interests’? • Meaning of ‘Habitual Abode’? • Meaning of ‘Place of effective management’?

13. Four situations possible : • Source of income not taxable in SoR • Entity is exempt from tax in SoR • Entity does not pay any tax in SoR due to losses, deductions, etc. • Entity itself is not covered by the tax law in SoR When can the person said to be ‘liable to tax’ in the above situations ?

14. Mohsinally Alimohammed Rafik’s case, 213 ITR 317 (AAR) • Cyril Eugene Pereira’s case , 239 ITR 650(AAR) • SC decision in the case of Azadi BachaoAndolan, 263 ITR 706 • Abdul Razak’ case ,276 ITR 306 (AAR) • Asst. DIT v. Green Emirate Shipping & Travels ,286 ITR (AT) 60 (Mum.)

15. Principle laid down in Rafik’s case • Does not mean the person should be factually charged to tax • Means a person who is liable to be subjected to tax • Otherwise DTAA would have used different words • Liberal interpretation of DTAA favoured to give full effect to the other words and provisions and the intention

16. Contrary Ruling in the case of Pereira’s case • DTAA meant only for the tax payers who are liable to pay tax twice on same income • Objective of the DTAA was to avoid only actual double taxation • Fiscal residence of a person is to be decided on the basis of his actual liability to pay taxes • Rejected the “potential” double taxation theory as tax is an actual levy

17. DTAA covers only existing taxes and any future taxes will have to be notified by the Competent Authorities • Section 90 does not mandate the Government to enter into a DTAA when there is no tax payable • Rafik’s case did not consider the scope of section 90 • DTAA has covered all eventualities to cover individuals also as it is expected to be in operation indefinitely

18. SC in Azadi Bachao Andolan: • ‘Liable to tax’ is not the same as ‘pays tax’ • ‘liability to tax’ is a legal situation and ‘payment of tax’ is a fiscal fact • Section 90(1)(a) and 90(1)(b) to be distinguished • “Residence” is a term of limitation

19. SC in Azadi Bachao Andolan: • Liability for taxation not to be decided on the basis of exemption granted for a source of income • Did not agree with the Cyril Pereira AAR • Accepted the “potential double taxation” theory

20. AAR, in Abdul Razak’s case held that: • Individuals were excluded from the definition of ‘person’ under the UAE decree and therefore not liable for tax • Expression meant that even though a person did not pay tax, he should be a tax subject • Article 4(1) postulated existence of tax liability in praesenti

21. AAR, in Abdul Razak’s case held that: • Tax treaty should be liberally interpreted but only to iron out creases • Proposed that a person need not pay tax but should be subject to tax Relied on SC decision and yet a different conclusion was reached

22. Mumbai ITAT, in Green Emirate Shipping, held: • Expression should be read with words immediately following it – “ by reason of” • Fiscal domicile required for liability to tax i.e. State should have right to tax – then it is immaterial whether the tax was actually levied • Covered “potential” double taxation also • Obiter passed for clarification Relied on SC decision and yet a different conclusion from Abdul Razak was reached

23. The position can be summed up: • Exempt Income - SC approved in UOI v. Azadi Bachao Andolan • Exempt entity - SC approved in UOI v. Azadi Bachao Andolan - AAR in Abdul Razak - OECD MC Comm (Pension funds, etc)

24. Non-taxpaying entity - SC approved in UOI v. Azadi Bachao Andolan • Excluded entity - Individuals - AAR disapproved in Abdul Razak’s case - ITAT in Green Emirate held that non-corporate entity eligible for DTAA - Amendment in Indo – UAE DTAA • Excluded entity – partnerships & companies - AAR rulings have not addressed in detail

25. Validity of a Tax Residency Certificate (‘TRC’) • TRC for residence under Indo – Mauritius DTAA recognized – Circular No. 789 dt 13-04-2000– upheld by SC • Whether TRC for other DTAAs permissible?

26. Should it be construed analogously to the preceding words? • AAR in Rafik’s case: - Cannot be given a very narrow meaning - Denote nexus of taxability with a Contracting State - Nexus for taxability could be the situs on income • Nationality / place of incorporation excluded ?

27. Permanent use of a house as opposed to short duration of stay • To be understood in an objective sense as an opposite of “ for a limited period” – AAR in Dr. Rajnikant Bhat’s case -222 ITR 562 • Uncertain stay in a CS does not make that stay less permanent • Continuous availability

28. No set formula. To be inferred from various circumstances: • Long residence • Purchase / lease of land • Marriage with a native • Presence of spouse / children • Existence of a business • Education of children • Membership of religious / charitable organisations

29. To be applied when Permanent Home available is available in both the States • Involves determination of personal and economic ties • Personal conduct of an individual is paramount • Circumstances listed under Permanent Home criteria are also relevant • Whether any preference of domestic ties over economic ties or vice-versa intended? • Overall circumstances should be evaluated

30. Applicable when a permanent home is available but the centre of vital interest cannot be determined • Also applicable when no permanent home is available • Regard should be had to stay in a CS whether at the permanent home or any other place within that State • Comparison must cover sufficient length of time • “Habitually” means repeatedly and persistently

31. AARP. No. 9 of 1995 (1996) 220 ITR 377 - From where, factually and effectively, the day to day affairs of the company was carried on and not the place in which may reside the ultimate control of the company - Article 4(3) contemplates not the location generally but as between two Contracting States • Affirmed in: - P. No.10 of 1996 [1997] 224 ITR 473 - DLJMB Mauritius Investment Co , 228 ITR 268

33. Article 4(1) • Additionally includes citizenship and place of incorporation • Additional clause for partnerships, etc. determining the residence of the partners/ beneficiaries to be the State of residence • Excludes a person who is liable to tax only in respect of income from sources within that State

34. Article 4(3) • Dual residency of companies – DTAA benefits denied except: - Article 10(2) – Dividends - Article 26 – Non-discrimination - Article 27 – Mutual Agreement Procedure - Article 28 – Exchange of information - Article 30 – Entry into Force • Dual residency of persons other than companies and individuals – Mutual Agreement Procedure

35. Indo – Australian DTAA Article 4(1) • Defines resident to be a person resident for the purposes of its tax. • Contains only availability of permanent home and centre of vital interests in the tie breaker rules. • Citizenship and habitual abode are factors determining the degree of personal and economic relations

36. Indo Bulgaria DTAA Article 4(1) • Contains different definitions for determination of a resident of Bulgaria and a resident of India. • Residence of Bulgaria is based on nationality and residence of India is based on the usual criteria Article 4(2) • Contains only the Centre of Vital Interest and the Mutual Agreement Procedure criteria

37. Indo Kuwait DTAA and Indo Saudi Arabia DTAA Article 4(1) • Residence in Kuwait / SA is based on a stay of 183 days in a fiscal year and residence of India is based on the usual criteria In the amended Indo – UAE DTAA, the period of stay of 183 days is in a Calendar year

38. No tie-breaker clause • Indo – Greece • Indo – Libya Head Office Criteria rather than POM • Indo – Japan • Indo – China Tie-breaker clause resorts to MAP rather than PEM • Indo – Japan • Indo – Canada • Indo – Indonesia • Indo – Thailand

39. Elimination of Double Taxation –Tax Credits

40. Effect of Double Taxation

41. Purpose of DTAA • Title in most Model Conventions: • “Convention between [State A] and [State B] for the avoidance of double taxation and prevention of fiscal evasion”.

42. Purpose of DTAA • One of the primary objectives of International tax principles is avoidance of double taxation • DTAA provides for the tax claims of two States both legitimately interested in taxing a particular source of income either by assigning to one of the two the whole claim or else by prescribing the basis on which the tax is to be shared between them • The scope of the Articles on elimination of double taxation is to deal with the “juridical double taxation” where the same income or capital is taxable in the hands of the same person by more than one State • Tax payers engaged in cross border transactions are taxed twice on same income • Double taxation implies ‘over – taxation’ due to overlapping taxing rights.

43. Objectives of DTAAs as defined under Indian Laws Information Avoidance Recovery Relief For exchange of information for the prevention of evasion or avoidance of income-tax in either Country – Section 90(1)(c). For avoidance of double taxation – Section 90(1)(b). For recovery of income-tax – Section 90(1)(d). • For granting relief in respect of • Income on which taxes have been paid both in India as well as the other State with which India has entered into a treaty (doubly taxed income) – Section 90(1)(a)(i) • Income tax chargeable under the Act and in the other State to promote mutual economic relations, trade and investment – Section 90(1)(a)(ii). Section 90 of the Income-tax Act 43

44. Elimination of double taxation • Countries often provide their residents with relief from double taxation through their domestic tax laws • DTAAs contain articles for the elimination of double taxation. • Relief via DTAAs may be more generous than the domestic tax laws • Relief entrenched in the DTAA also restricts a county’s ability to amend unilaterally the double tax relief provisions in its domestic law to the detriment of tax payers.

45. Elimination of Double Taxation • Residence State will provide the relief –Residence as per Article 4 • Allocation of Right to Tax-Renunciation of Right to tax by either state (Dependant services)- sharing of rights ( R will provide Relief ) • Exclusive right given to Country R – Term “shall be taxable only”

46. Methods to Eliminate Double Taxation • Deduction Method • Exemption Method • Foreign Tax Credit Method • Tax Sparing Method • Reduced Tax Rate Method Most jurisdictions use a mixture of deduction, exemption , foreign tax credit and tax sparing methods. The reduced rate method is generally not used

47. Deduction Method • Deduction of foreign taxes (FT) from the taxable income in Country R • Limits relief only to the extent of FT * tax rate in Country R • Does not completely eliminate Residence-Source conflict • Less Desirable Method • Good in Tax Loss situation

48. Example – Deduction Method State S tax rate is assumed at 40%, State R tax 35% Foreign Tax paid is 20, benefit received is 35% of 20 i.e 7

49. Exemption Method • Country R does not include in its taxable income computation of income which may be taxed only in Country S or E • Full Exemption method-completely ignores Foreign Income • Exemption with Progression – Considers foreign income for rate purpose-applicable only if Country R has progressive tax system – imposes higher tax on Domestic Income

50. Example-Full exemption Vs progressive exemption Group Dynamics