OECD MC

Article 23 to 26

Arpit Jain

Diploma in International Taxation Course

Ahmedabad, January 2017

Elimination of Double TaxationArticle 23

• 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]

Taxation Systems

• 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

– 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

Double Taxation

INDIA R USA

USAIndiaX

CoSource Residence

• 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.

Types of Double Taxation

Typically DTAA eliminates Juridical Double Taxation

• Unilateral Relief

– Under Domestic Laws

– Section 91

• Bilateral Relief

– Under DTAAs

– Section 90 / 90A

Elimination of Double Taxation

• 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 IT Act 1961

• GAAR overrides !! [GAAR postponed to A.Y. 2018-19]

• Tax Residency certificate (TRC) must for an NR to claim treaty benefits

in India [w.e.f. 1.4.2013]

Section 90 / 90A

• 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?

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

..Unilateral Tax Credit..

• Foreign tax rate

– “(iii) the expression "rate of tax of the said country" means income-

tax 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;”

..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?

..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

..Unilateral Tax Credit

• 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

Bilateral Relief

Bilateral Relief Methods

Bilateral Relief

Exemption Method

Full Exemption

Bangladesh (PE Profits)

Brazil (dividend)

Exemption with

progression

Credit Method

Full Credit

India-Namibia DTAA

India-Canada DTAA (for

Canada)

Ordinary Credit

Most of Indian DTAA

Underlying tax credit

Singapore DTAA, -Mauritius

DTAA

Tax sparing credit

UK, Singapore, Italy

• 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

Exemption method

• Article 23A : Exemption method

• Para 1 – basic provision

• Where a resident of a Contracting State (say, Indian R.) derivesincome or owns capital which, in accordance with the provisionsof this Convention, may be taxed in the other Contracting State(say, Egypt), the first-mentioned State (i.e. India) shall, subject tothe provisions of paragraphs 2 and 3, exempt such income orcapital from tax.

• Exemption granted by the Resident State

• Exemption granted only if income is taxable in other Stateunder the treaty

Para 1 of Art. 23A

Resident State completely exempts the income

• 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

Para 2 of Art. 23A

Dividend and Interest always follow TC method

• 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

Para 3 of Art. 23A

Exempt income included for rate purpose

• 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

Para 4 of Art. 23A

This provision not there in any Indian treaty

• 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

Tax Credit method

• Where an Indian Resident derives income or owns capital which,in accordance with the provisions of this Convention, may betaxed in UK, India shall allow:

a) as a deduction from the tax on the income of that Indianresident, an amount equal to the income tax paid in UK;

b) as a deduction from the tax on the capital of that Indianresident, an amount equal to the capital tax paid in UK.

Such deduction in either case shall not, however, exceed thatpart of the income tax or capital tax, as computed before thededuction is given, which is attributable, as the case may be, tothe 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 onthe income so taxed in UK

Para 1 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.

Para 2 of Art. 23B

• 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?

Questions

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

Credit of tax paid on incremental basis (1) or on the basis of rate of

tax (2) ?

Computation issues 1

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

• 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

Computation Issues 2

• 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!!

Underlying Tax Credit..

• USA (UTC only for US residents)

• ARTICLE 25 - Relief from double taxation - 1. In accordance withthe provisions and subject to the limitations of the law of theUnited States (as it may be amended from time to time withoutchanging the general principle hereof), the United States shallallow to a resident or citizen of the United States as a creditagainst the United States tax on income—

• (a)… ; and

• (b) in the case of a United States company owning at least 10 percent of the voting stock of a company which is a resident of Indiaand from which the United States company receives dividends,the income-tax paid to India by or on behalf of the distributingcompany with respect to the profits out of which the dividends arepaid.

..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

..Underlying Tax Credit..

..Underlying Tax CreditParticipation 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

• 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

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.

..Tax Sparing

• Inter-play of various Factors

– Underlying Tax Credit

– Tax Sparing

• Foreign Tax Credit

– Tax Relief or Mode of Payment of Tax

Tax Credit

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 $ 10.00 Million

Tax @ 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

- 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

Dividend Received in India US $ 9.70 Mi

Grossed up [UTC] US $ 10.00 Mi

Tax U/s. 115 BBD 15 % US $ 1.50 Mi

Tax Credit [Mauritius] US $ 1.50 Mi [Tax Paid Nil]

• 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.

Participation Exemption

Issues in Claiming Tax Credit

“in accordance with the provision of the Convention

“may be taxed”

Inclusion of surcharge in

calculation of credit

Availability of credit for DDT

Impact of losses in State R

Timing of creditCarry forward/

Carry backward of excess credit

Administrative burden

Foreign Tax Credit

Rules Notified w.e.f.

1 April 2017

Foreign tax credit rules – Rule 128

• 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

Compliance

• In the year when the income offered to tax

• Can be claimed proportionately as and when income offered

When to claim

• 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

Mode of credit

• 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

Taxes covered

Non-DiscriminationArticle 24

• 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

Non-Discrimination

• 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...

Para 1 of Art. 24..

No ban on favourable treatment of foreigners!

• 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 :

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.

Special emphasis is

provided

..Para 1 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

Para 2 of Art. 24

• Para 3 : Permanent establishment (PE)

• The taxation on a permanent establishment which a UK enterprise has inIndia shall not be less favorably levied in India than the taxation leviedon Indian enterprises carrying on the same activities. This provision shallnot be construed as obliging India to grant to UK residents any personalallowances, reliefs and reductions for taxation purposes on account ofcivil 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’

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.

..Para 3 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 (dealingwith expenses not incurred at Arm’s length), apply, interest,royalties and other disbursements paid by an Indian enterprise toa UK resident shall, for the purpose of determining the taxableprofits of such Indian enterprise, be deductible under the sameconditions 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 Indianenterprise, be deductible under the same conditions as if theyhad been contracted to an Indian resident.

Para 4 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.

Para 5 of Art. 24

• 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]

Para 6 of Art. 24..

• Example:

• Austria

• ARTICLE 2 : Taxes Covered -

3. The existing taxes to which the Convention shall apply are in particular:

(a) in Austria :(i) the income-tax (die Einkommensteuer);(ii) the corporation tax (die Korperschaftsteuer);

(hereinafter referred to as ‘Austrian taxes’)(b) in India :

the income-tax, including any surchargethereon imposed under the Income-tax Act,1961 (43 of 1961); (hereinafter referred to as‘Indian tax’)

..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.

..Para 6 of Art. 24

• 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

A typical tax treaty

• 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.

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

..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 byan enterprise of a Contracting State to a resident of theother Contracting State shall, for the purpose ofdetermining the taxable profits of such enterprise, bedeductible under the same conditions as if they had beenpaid to a resident of the first-mentioned State. Similarly,any debts of an enterprise of a Contracting State to aresident of the other Contracting State shall, for thepurpose of determining the taxable capital of suchenterprise, be deductible under the same conditions as ifthey had been contracted to a resident of the first-mentioned State.

..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.

..Indo Denmark DTAA..

• 6. In this Article, the term “taxation” means taxes

which are the subject of this Convention.

..Indo Denmark DTAA..

• Exceptions to Non-Discrimination..

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

..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!

..Discrimination..

• Rajeev Sureshbhai Gajwani Vs. ACIT(ITAT Ahd- Special Bench)2011-TII-38-ITAT-AHM-SB-INTLAssessee is a Citizen of America and a non-resident. Exportedsoftware from a PE in India and claimed deduction u/s 80HHE (onlyresidents / domestic cos are eligible for 80HHE). Article-26(2) of theIndia-USA DTAA provides that the taxation of an enterprise of USAresident shall not be less favorable than the taxation of a residententerprise carrying on the same activity. So deductions (in the givencase 80HHE) & exemptions available to Indian Enterprises wouldalso be available to the US enterprises if they are carrying on thesame 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.

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,

..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.

..Rajeev Gajwani (80HHE)

• the ITAT, Bench 'B', Chennai

• 2011-TII-143-ITAT-MAD-INTL

• AY 2002-03 to 2006-07

• 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 2006-07, there was no provision in Act requiring deduction of tax

on payment made to residents [Sec 40(a)(ia) effective AY 2007-08

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 2001-02) and

Peoplesoft are on similar lines.

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 2010-

11 to AY 2014-15)

– 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]

..ABAQUS Engineering [40(a)(i)]

• Section 44C deals with deduction of head officeexpenditure in the case of non-residents

• Sec 44C starts with a non obstante clause:44C. Notwithstanding anything to the contrary contained insections 28 to 43A, in the case of an assessee..

• There is a ceiling limit in respect of deduction of specifiedexpenses:

• Held that the non discrimination provisions are applicable.The scope of deduction under section 37(1) will notstand curtailed by the restriction placed under section44C of the Act.

Metchem Canada (44C)

• Can you think of any examples in the Indian

domestic tax law which contains non

discrimination provisions ??

64

Examples??..

• 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

Food for Thought

• 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

Corporate Entities are Nationals

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?

Entitlement to foreign treaty?

Mutual Agreement ProceduresArticle 25

• Unilateral

– APA

– AAR

– Regular Appellate Proceedings (Appellate or DRP)

– Safe harbours

– Settlement Commission

• Bilateral / Multilateral

– MAP

– Arbitration

– International Litigation – International Court of Justice

Resolving Disputes

• 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 tie-

breaker, etc.

• CAs not obliged to find a solution!

• MAP is a lengthy procedure

What is MAP??

• 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

Para 1 [Assessee presents case]

• 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

Para 2 [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

Para 3 [negotiation between CAs]

• 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

Para 4 [CA communicates directly]

• 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,

Para 5 [Unresolved issues

submitted to Arbitration]..

CA(A) CA(B)CAs unable to

reach consensus

• 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

..Para 5 [Unresolved issues

submitted to Arbitration]

• 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

Benefits

• India

– The approach lacks cooperation

• Expected level of assistance/support absent among the CAs

– Lengthy process with long settlement cycle

• Low probability of actual settlement

• General

– TP Adjustments – Interplay of Article 9(2) and MAP

• For e.g. Indo- Japan DTAA

Issues

• 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

Provisions in Domestic Law

Exchange of InformationArticle 26

• 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.

Para 1 - CAs to exchange relevant

information

.

• (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

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

..Application

• Competent Authorities of CS to

– supply info to carry out provisions of (i) DTAA and (ii) Domestictax 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 taxmatters

• The term ‘information’ to be understood broadly

– it should cover both actual facts and legal relationships

How does it work??

• 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.

Para 2 - Secrecy Element

• 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.

Para 3 - 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.

Para 4 and 5 - No obligation on CS

• 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.

Para 6 - Procedures

• Exchange of information Article in most of Indian treaties

• 19 TIEAs signed by India

TIEAs of 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

• 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

Another Step towards Transparency

EOI - Summarized

Periodic consultation and review

Limitation

Power of cross border

enquiry

Reasonable restraints

Ambit of power not uniform

Protection of confidentiality

March towards global

security

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.

Arpit Jain

Director

Office: +91 79 4032 6400

Mobile: +91 96876 00207

Email: arpit.jain@kcmehta.com