International Taxation - To begin with

CA. P.R.Sreenivasan, PSDY & Associates

BASICS OFINTERNATIONAL TAXATION

An overview of Indian Income Tax Provisions applicable to Non- Residents.

Important Concepts to understand Double Taxation Avoidance Agreements.


Introduction Growing importance and emphasis on International

Taxation

Taxation of Non Residents & NRIs

Taxation of foreign nationals

Cross border taxation of MNCs

Issues related to black money


Contents

1. Indian Income Tax Provisions related to Non Residents.

2. Double Tax Avoidance Agreements

(i) DTAA – Purpose and objectives

(ii) OECD MC vs. UN MC

3. Basic Important DTAA Concepts.


Indian Income Tax Provisions related to Non

Residents


Income Tax Provisions related to Non Residents

Taxation of Non Resident

Definitions Sec. 2(30), 6

Scope of Taxation

Section 4,5,9

Special provisions

Chapter XII-A

Presumptive taxation Sec. 44B/BB/BBA/

BBB

TDS Sec.195, 197

DTAA Sec 90 & 91

Anti-Avoidance Provision

Sec 92, 94A

Agent Section 160,

163


Income Tax Provisions related to Non Residents

Types of Income R R & OR

NR

Received or deemed to be received in India by or on behalf of the assessee

Income that accrues or arises or is deemed to accrue or arise in India

Income that accrues or arises outside India and is not derived from business controlled in or a profession set up in India

Income that accrues or arises / received outside India


NR & NOR is taxable in India if


CHAPTER XII-ATaxation of NRIs – Special Provisions

Meaning of NRI – Non Resident Indians

i.e Indian Citizen or PIO who is NR

Type of income– Income from investment in “foreign exchange

assets”– L.T Capital Gain on sale of “foreign exchange

assets”


Taxation of NRIs – Special Provisions

“Foreign Exchange Assets” means– Shares in an Indian Company– Debentures / Deposits in an Indian company

other than a private company– Central Government Securities– Purchased using convertible foreign exchange





Other benefits available under Chapter XII-ANo need to file return if TDS is deducted

Option to continue availing the benefit even after becoming resident on application made to the assessing officer.

Chapter XII-A shall not apply if assessee so chooses


Tax Deduction at Source for Non Residents

Section 195 (1) Any person responsible to pay to a Non

resident to withhold tax In respect of interest or any other sum

chargeable under Income tax Act, 1961 At the time of credit or payment, whichever is

earlier At the rates in force



Exceptions Interest payable by the Government or a

PSU Bank or a PFI, TDS shall be deducted only at the time of actual payment.

No TDS required for payment of dividend distributed by a domestic company referred to in Sec 115-O.



Application for non deduction or lower deduction of tax The payer may apply to the AO for determination

appropriate portion of the sum to be paid on which tax has to be deducted – Sec 195(2)

The payee may also apply to the AO for grant of a certificate authorizing him to receive the amount without deduction of tax at source – Sec 195(3)

The assessee (i.e payee) may also apply to the AO for a certificate for deduction of tax at lower rate U/s.197



Remittance of money abroadSec 195(6)


Anti Avoidance Provisions Transfer Pricing – Sections 92 to92F

– Applies to “International Transactions” carried out between two or more “Associated Enterprises”.

– Meaning of “Associate Enterprise” – One enterprise participates directly / indirectly in the management / control / capital of the other.

– Pricing of transactions shall be at “Arm’s length”.

– 5% variation between the ALP and the actual price is allowed


Anti Avoidance Provisions Sec 94A - Black listing of “Tax Havens” Inserted by Finance Act 2011 w.e.f 1st June

2011 Referred to as “Tool box of counter measures” To prevent “Tax Avoidance” Authorizes Government to black list non-

cooperative jurisdictions Penalize both Indian Assessee as well as the

Non Resident concerned


Anti Avoidance ProvisionsSalient features of Section 94A

Government may specify certain non - cooperative jurisdictions as “Notified Jurisdictional Areas” (NJA).

If an assessee enters in to a transaction with a person in an NJA– All parties to the transaction will be regarded as

“Associated Enterprises”– The transactions will be considered as an

“International Transaction”– All provisions of Transfer Pricing will apply– Additional records may be prescribed by CBDT


Anti Avoidance Provisions Tax Information Exchange Agreements

– About 13 TIEAs have been signed in recent past

– Objective is to prevent round tripping of black money

Amendments to existing DTAAs– Attempt is being made to amend DTAAs already

entered in to


Anti Avoidance ProvisionsROUND TRIPPING

Using tax heavens and benami Non Residents

Mr.A an Indian resident

A tax havenDeposits inLocal bank

Invests in a Tax Haven company – AB Ltd. Rs.100 cr as loan and Rs.10,000/-in equity owned by

one / more non residents

BC Ltd in India

Sends funds by hawala

Rs.100 cr to

AB Ltd invests shares / debt in Indian


Double Tax Avoidance Agreements

1. DTAA – Purpose and objectives


Need for DTAA


Need for DTAA


Need for DTAA


Need for DTAAJuridical double taxations

ExampleCompany Aresident in

USA

Branch In India

USA

India

Company A’s branch profits are subject to tax in two countries:(i) in USA, due to residence; and(ii) in India, due to source.


Need for DTAA Economic double taxation

Arises where one country applies its transfer pricing rules.

Taxable profits = US$ 5 million

Taxable profits = $ 2 million

• If as per TP rules in India the arm’s length rate of interest should be 4% p.a., it will reduce Company B’s interest deduction by $1 M.

• Company B’s taxable profits increase by $ 1 M to $ 3 M.

ExampleCompany A

Company B

Loan ($100Million)

Interest @ 5% p.a.

($ 5 million)

USA

India


Purpose of DTAA – Sec 90(1)


Applicability of DTAA


Double Taxation Avoidance Agreement (DTAA)









Organization for Economic Cooperation & Development (OECD) Model Conventions (MC)

vs. United Nations (UN) Model Conventions


Tax Treaty Model Conventions

The most practiced DTAA models are the model treaties framed by -

the Organization for Economic Cooperation & Development [‘OECD’] also referred to as OECD MC.

the United Nations (UN MC).



Model treaties and commentaries Commentaries on OECD model treaty:

• Starting with the 1963 edition, the OECD model treaty has been published with a commentary to each article.

• The Commentaries have been referred to as an aid to interpretation by the courts in many OECD countries and in some non-OECD countries (e.g. Malaysia).



Model treaties and commentaries Other international model treaties –e.g.

• ASEAN model.

• Andean model

Some countries have published their own model treaty – e.g.

• US model

• Netherlands model



Articles


Model DTAA - ArticlesTable of Contents of OECD and UN-MC UN

Scope of ConventionArticle 1 – Persons covered

2 – Taxes covered. UnchangedUnchanged

DefinitionsArticle 3 – General definitions 4 – Resident 5 – Permanent establishment.

Taxation of incomeArticle 6 – Income from immovable property 7 – Business Profit 8 – Shipping, inland waterways & air transport 9 – Associated enterprises 10 – Dividends 11 – Interest

Unchanged

Unchanged



Taxation of incomeArticle 12 – Royalties / Fee for Technical Services

13 – Capital Gains 14 – Independent personal services

15 – Income from employment16 – Director’s Fees

17 – Artistes and Sportsmen18 – Pensions

19 – Government Service 20 – Students 21 – Other Income.

Deleted in OECD–MC 2000Unchanged

Unchanged

Taxation of CapitalArticle 22 – Capital.



Methods for elimination of double taxation Article 23A– Exemption method 23B– Credit method. Unchanged

Special provisionsArticle 24 – Non-discrimination

25 – Mutual agreement procedure 26 – Exchange of information 27 – Assistance in the collection of taxes

28 – Members of diplomatic mission and consular posts

29 – Territorial extension.

Unchanged

Missing in UN-MC

Missing in UN-MC

Final ProvisionsArticle 30 – Entry into force 31 – Termination.


Important Concepts to Understand DTAA


Important Concepts to Understand DTAA’s

Branch A Business carried on by a corporation, usually through an office or other fixed place of business.

Capital-export neutrality

The situation in which resident investors bear the same tax burden whether they invest at home or abroad.

Capital-import neutrality

The situation in which residents investing in a source country bear the same tax burden as other investors in that country.

Commentary

The Commentary to the OECD Model Treaty or to the UN Model Treaty. It explains the provisions of the Model Treaty and records the reservations and observations of the member countries to those provisions. The Commentary to the OECD Model Treaty is very influential for the interpretation and application of tax treaties.

Competent authority An official of a treaty country who is responsible for the resolution of disputes and issues of interpretation arising under a tax treaty.



Contracting States

The Countries that are parties to a tax treaty.

Credit Methods Foreign taxes paid by a resident of a country are credited against the residence country’s tax on the resident’s foreign-source income.

Exemption method

Exemption from domestic tax of some or all foreign-source income derived by residents.

Exemption with progression

An exemption method under which certain foreign-source income is exempt from tax but is taken into account in determining the rates of tax applicable to other income.

Foreign affiliate A foreign corporation in which a domestic tax-payer has a significant direct or indirect ownership interest (usually 10 percent or more of the shares).



Harmful tax competition

Tax practices that are adopted by a tax-haven country to poach on the tax base of other countries by exploiting the weaknesses in the international tax rules of those countries.

Hybrid entity

An entity that is treated as a separate taxable entity (usually as a corporation) in one country and as a transparent or flow-through entity in another country.

Most-Favoured-nation treatment

The treatment by one country of the residents or citizens of another country not less favourably than the treatment of the residents or citizens of any other country (but not its own residents or citizens).

National treatment

The treatment of non residents or foreigners by a country not less favourably than the treatment of its own residents or citizens.



Non-discrimination

A generally-accepted notion that a country should tax non residents, foreigners and foreign-owned domestic corporations in a manner that is the same as or is functionally equivalent to the treatment afforded to residents, citizens or domestically-owned corporation in similar circumstances.

Place-of-incorporation test

A rule under which a corporation is considered to be a tax resident of the country in which it is incorporated.

Place-of-management test

A rule under which a corporation is considered to be a tax resident of the country in which it is controlled or managed (usually where the board of directors meets and exercise control over the affairs of the corporation).



Tax avoidance The deferral avoidance, or reduction of tax by lawful means.

Tax evasion The reduction of tax by illegal means, usually involving fraudulent non disclosure or willful deceit.

Tax havens Countries which subject income (or some forms of income) or entities (or certain entities) to low or no taxation.

Tax Sparing The allowance of a credit for the amount of foreign taxes that were not paid because of a tax incentive or holiday in the foreign country.

Thin capitalization rules

Restriction on the deductibility of interest payments made by corporations with excessive debt to equity ratios to their substantial non resident shareholders.



Tie-breaker rules Rules in tax treaties that establish the residence of a dual-resident taxpayer in one country for treaty purposes.

Treaty shopping

The use of a tax treaty by a person who is not resident in either of the treaty countries, usually through the use of conduit entity resident in one of the countries.

Withholding tax

A tax levied by the source country at a flat rate on the gross amount of dividends, royalties, interest, or other payments made by residents to non residents. The tax is collected and paid to the government by the resident payer.


Economy & Finance

International Taxation - To begin with