Overview of International Taxation

1. Overview of International Taxation CA.Divakar Vijayasarathy Divakar Vijayasarathy & Associates

2. Presentation Schema What is International Taxation? Principles of International Taxation Governing Legislations What is OECD DTAAs – An introduction Types of DTAA Conventions International Taxation – Global Perspective International Taxation – Indian Perspective Indian Income Tax Law Transfer Pricing in India Authority for Advance Rulings International Taxation – DTC Era Divakar Vijayasarathy & Associates

3. International Taxation Tax rules which apply to transactions between two or more countries Taxes are always national and never international No international tax court or administrative body for international tax issues Divakar Vijayasarathy & Associates

4. Principles of International Taxation Tax Neutrality Clarity on the basis and rationale of taxation Effective tax cost should be reasonable Economic double taxation Juridical double taxation Divakar Vijayasarathy & Associates

5. Double Taxation Divakar Vijayasarathy & Associates Income subject to tax in more than one jurisdiction Reduces effective return on capital Disincentive for capital investment Affects exchange of goods and services between economies

6. Types of Double Taxation Divakar Vijayasarathy & Associates • Juridical Double Taxation • Same “Person” is taxed on the same “Income” in more than one Country • Economic Double Taxation • Same “Income” is taxed with different “Persons” in more than one Country Most Treaties tend to address “ Juridical Double Taxation” impact.

7. Types of Double Tax Relief Divakar Vijayasarathy & Associates Unilateral Relief – Domestic Law Bilateral Relief- DTAA

8. Unilateral Relief – Domestic Law Divakar Vijayasarathy & Associates • Sec 91 of Income Tax Act • Benefit available to the extent of lower of: • Effective Indian Tax Rate or • Foreign Tax Rate • Foreign rate includes income tax and super tax • Benefit u/s 91 only if India does not have a treaty with the source country.

9. Bilateral Relief - DTAA Divakar Vijayasarathy & Associates Article 23 of OECD and UN MC Advocates : Exemption Method and Credit Method The Arrangements already laid down in distributive rules for the purpose of eliminating double taxation, take precedence over and are supplemented by Article 23

10. Cases for Double Taxation Divakar Vijayasarathy & Associates Dual Residency: Where each Contracting State subjects the same person to tax on his world wide income Dual Taxability: Where a resident of a Country earns income from the source Country and both countries impose tax on that income Triangular Case- Non resident PE located in one country receives income from another country.

11. Methods of Double Tax Relief Divakar Vijayasarathy & Associates Exemption Method Foreign Tax Credit Method Tax Sparing Relief (double non taxation) Expense Deduction

12. Exemption Method Divakar Vijayasarathy & Associates • Income taxed in one jurisdiction will be exempt in the other. • Generally CoR exempts income taxed in the CoS • Simple Method and Easy to Adopt • Might lead to treaty shopping eg: Indo – Mauritius Treaty

13. Types of Exemption Divakar Vijayasarathy & Associates • Full Exemption: • Exempted income is not taxable in the CoR of the assessee • Exemption with Progression: • Exempted is not taxable in the CoR – however it is considered for rate purposes only

14. Treaty Clause – Full Exemption Divakar Vijayasarathy & Associates Indo Canada- Article 23(2)(b) “For the purpose of computing Canadian tax, a company which is a resident of Canada shall be allowed to deduct in computing its taxable income any dividend received by it out of the exempt surplus of a foreign affiliate which is a resident of India”

15. Treat Clause- Exemption with Progression Divakar Vijayasarathy & Associates Indo Canada- Article 23(2)(d) “Where in accordance with any provision of the Agreement, income derived or capital owned by a resident of Canada is exempt from tax in Canada, Canada may nevertheless, in calculating the amount of tax on the remaining income or capital of such resident, take into account the exempted income or capital.”

16. Illustration – Exemption Method Divakar Vijayasarathy & Associates

17. Full Exemption - Method Divakar Vijayasarathy & Associates

18. Exemption with Progression Divakar Vijayasarathy & Associates

19. Triangular Case Resident of A- Country of Residence PE in Country B Assume all the countries adopt full exemption method Source of Income – Country C . Divakar Vijayasarathy & Associates

20. Issues in a Triangular Case Divakar Vijayasarathy & Associates Which treaty to apply Where should the income be taxable Where should relief be given

21. MC Commentary Divakar Vijayasarathy & Associates Country C has the first right of taxation – Country of Source Country B may tax such income (Except income from immovable property) Treaty between Country B and C may not apply- since assessee is not a resident in both countries

22. Interpretation Divakar Vijayasarathy & Associates Treaty between Country B and C shall not apply Assessee is a resident of Country A By virtue of Article 24- Non Discrimination, Country B shall allow unilateral relief (Treaty between A and B) Using Article 23 of the treaty between Country A and B income shall not be taxed in Country A Therefore income is subject to tax only once

23. Credit Method Divakar Vijayasarathy & Associates Income is taxable in both Country of Source and Residence Amount of tax paid in CoS is reduced from the tax liability in CoR

24. Methods of Credit Relief Divakar Vijayasarathy & Associates • Full Credit Method: • Entire tax paid is fully allowed as a deduction. • Ordinary Credit Method: • Deduction is restricted to the extent of “effective tax rate” in the home country • Underlying Tax Credit (discussed later)

25. Treaty Clause – Ordinary Credit Method Divakar Vijayasarathy & Associates Indo Canada – Article 2(a): “Subject to the existing provisions of the law of Canada regarding the deduction from tax payable in Canada of tax paid in a territory outside Canada and to any subsequent modification of those provisions - which shall not affect the general principle hereof - and unless a greater deduction or relief is provided under the laws of Canada, tax payable in India on profits, income or gains arising in India shall be deducted from any Canadian tax payable in respect of such profits, income or gains”

26. Illustration – Credit Method Divakar Vijayasarathy & Associates

27. Full Credit - Method Divakar Vijayasarathy & Associates

28. Ordinary Credit - Method Divakar Vijayasarathy & Associates

29. Underlying Tax Credit Divakar Vijayasarathy & Associates Benefit generally available to companies Reduces the effect of double taxation in the hands of company (profits) and shareholders (dividends) Generally granted where a company holds a specified percentage shares in the dividend paying company in the source country

30. Treaty Clause- Underlying Credit Divakar Vijayasarathy & Associates Indo China – Article 23 (1)(b) “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 China and which owns not less than 10 per cent of the shares of the company paying the dividend, the credit shall take into account the tax paid to India by the company paying the dividend in respect of its income.”

31. Illustration – Underlying Tax Credit Company B (60% held by A) (Country S) Company A (Country R) Declares Dividend . Divakar Vijayasarathy & Associates

32. Illustration – Underlying Tax Credit Divakar Vijayasarathy & Associates

33. Tax Sparing Divakar Vijayasarathy & Associates Tax incentive of source country extended in residence country A Policy level benefit Given to certain specific types of income Generally leads to a case of double non taxation Discourages re investment in Host Country Preferred by Developing Countries to promote investment

34. Methods of Tax Sparing Divakar Vijayasarathy & Associates Double Tax Sparing : Income spared from taxation in the source country shall be fully exempt in the country of residence Deemed Tax Credit: Income shall be included in total income by country of residence. However a foreign tax credit to the tune of tax rate of country of source shall be allowed on such income (income spared in the country of source).

35. Treaty Clause- Tax Sparing Divakar Vijayasarathy & Associates Indo Mauritius – Article 23(5) For the purposes of the credit referred to in paragraph (4), the term “Indian tax payable” shall be deemed to include any amount by which tax has been reduced by the special incentive measures under— (i) section 10(4), 10(4A), 10(6)(viia), 10(15)(iv), 10(28), 10A, 32A, 33A, 35B, 54E, 80HH, 80HHA, 80-I or 80L of the Income-tax Act, 1961 (43 of 1961); (ii) any other provision which may subsequently be enacted granting a reduction of tax which the competent authorities of the Contracting States agree to be for the purposes of economic development.

36. Illustration – Tax Sparing Divakar Vijayasarathy & Associates Company A in Country R receives dividends from Company B in Country S Company A holds 60% in Company B Company B earns income which is eligible for tax incentives in Country S Determine the Tax Sparing relief in Country A

37. Illustration – Tax Sparing Divakar Vijayasarathy & Associates

38. Tax Credit and MAT Divakar Vijayasarathy & Associates MAT provisions apply even for Foreign Companies - Advance ruling in Timken India Ltd Tax Credit shall be available only on regular tax liability and not on MAT tax MAT Credit shall however be allowed considering Foreign Tax Credit

39. Illustration – Tax Credit and MAT Divakar Vijayasarathy & Associates

40. Expense Deduction Divakar Vijayasarathy & Associates Tax paid in the source country is allowed as an expenditure in the residence country Only partial relief available on double tax Not a popular method and rarely used in treaties

41. Practical Issues Divakar Vijayasarathy & Associates Definition of income tax Different periods of assessment – different fiscal years Resident in more than one country Different computational provisions Benefit of carry forward of excess foreign tax credit Tax credit on CFC Income

42. Thank YouDivakar Vijayasarathy & AssociatesChartered AccountantsChennai – Bangalore- Coimbatore- Vijayawadawww.dvsca.com . Divakar Vijayasarathy & Associates