International Taxation - WordPress.com › 2013 › 01 › basics-of... · 2013-01-14 · Income...

Presentation by: CA Amit MaheshwariPartner, Ashok Maheshwary & Associates

Chartered Accountants, Gurgaon

(Independent Member of the Leading Edge Alliance)E-Mail : [email protected]

Gurgaon

1515thth December 2012 December 2012

International Taxation

Contents

1. Indian Income-tax Provisions related to NonResidents

2. Double Tax Avoidance Agreements DTAA – Purpose and objectives OECD MC vs. UN MC

Indian Income-tax ProvisionsRelated to Non Residents

Income Tax Provisions related to Non Residents

Taxation of Non Resident

Definitions Sec.6

Scope of Taxation Section

4,5,9

Special provisions

Section 44C, 44D, 115A

Presumptive taxation Sec.

44B/BB/BBA/ BBB

TDS Sec.195, 197

DTAA Sec 90 & 91

Anti-Avoidance Provision Sec 92

Agent Section 160, 163

Income Tax Provisions related to Non Residents –Brief Outline

Definition • Section 2(30): Defines “non-resident”• Section 6(1): Defines “resident”• Section 6(6): Defines “not ordinarily resident”

Which income to tax?• Section 4: Charging section• Section 5: Scope of taxation


Types of Income R R & OR

NR

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

Income that accrues or arises or is deemed toaccrue or arise in India

Income that accrues or arises outside India andis not derived from business controlled in or aprofession set up in India

Income that accrues or arises / received outsideIndia


Which income to tax?• Section 9: Income deemed to accrue or arise in India• Section 9(1): Business connection• Section 9(1)(ii): Salary, if it is earned in India• Section 9(1)(iii):Salary payable by the Government to a citizen of India for

services outside India• Section 9(1)(iv): dividend paid by an Indian company outside India• Section 9(1)(v): Interest• Section 9(1)(vi): Royalty• Section 9(1)(vii): Fees for technical services

As per the retrospective amendment in section 9(1) by the FinanceAct, 2010, the income of a non-resident shall be deemedto accrue or arise in India under clause (v) or clause (vi) or clause(vii) of sub-section (1) of section 9 and shall be included in his totalincome, whether or not,

• non-resident has a residence or place of business or business connection in India; or

• the non-resident has rendered services in India.


How is business income taxed?• Section 28 to 44C• Presumptive determination of income

― Section 44B - Shipping business― Section 44BB - Exploration of mineral oil― Section 44BBA - Operation of aircrafts― Section 44BBB - Civil construction in turnkey

projects ― Section 44C: Head office expenses


Tax deduction at source Section 195

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

withhold tax Only in respect of sum chargeable under Income

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

earlier At the rates in force

Non resident does not include not ordinarily resident


Relief provisionsSection 195 (2) If whole of the sum to be paid is not income chargeable to

tax, Payer to apply for order for determination of taxableportion Application by recipient – Section 195(3)/197

Section 195 (3) Payee can also apply for receiving payment without

deduction of tax

Section 197 Recipient Non-resident can apply for determination of

taxable income/ withholding tax rate


“Source” & “Residence”: The Conflict

Tax treaties: framework between the two or more contracting states/ countries on bilateral basis to prevent double taxation.

Almost all treaties are bilateral, although there have been some ventures into concluding multilateral treaties.

Role of Tax Treaties

Increased cross border economic activity by limiting double taxation

Bilateral Economic Assistance through beneficial treaty provisions

Non discrimination in Tax matters

Exchange of information leading to better enforcements of tax laws

Income Tax Provisions related to Non Residents DTAAs aim to remove the international double taxation. However the concept of the tax treaties by which treaties aim

to achieve this is broader than the simply defined concept of double taxation.

It attempts to address the whole host of related issues based on the economic double taxation- that is, taxation of something already taxed under another country's law whether or not it is formally subject to multiple levels of taxation.

Double Tax Avoidance Agreements

Purpose and objectives

Double Taxation Avoidance Agreement (DTAA)

Need of a DTAA explained Through Concept of Juridical Double taxation. Concept of Economic Double taxation.

Double Taxation Avoidance Agreement (DTAA)Juridical double taxations Juridical double taxation (or International Double taxation)

Same legal entity is subject to tax, on same income, in two (or more)countries for the same taxable year.

This may arise because most countries: tax residents on global income (i.e. regardless of source); and tax non-residents on domestic-source income.

Example

Company Aresident in Country U

Branch

Country U

Country I

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


Economic double taxation Two legal entities are subject to tax, on (economically) the

same income, in two (or more) countries. Arises where one country applies its transfer pricing rules.

Taxable profits = US$ 5 million

Taxable profits = $ 2 million

If Country I considers that the arm’s length rate of interest on the loan should be 4% p.a., it will reduce Company B’s interest deduction by $1 million

• Company B’s taxable profits increase by $ 1 million to $ 3 million• Unless Country U provides some relief for Company B, economic double taxation will occur in respect of the $ 1 million.

Example

Company A

Company B

Loan ($100million

Interest @ 5% p.a. ($ 5 million)

Country U

Country I


Purpose of double tax treaties To Eliminate such double taxation (i.e. juridical and economic) in order

to prevent discouragement of international trade and investment whichwould otherwise be caused

To provide certainty to tax regime faced by investors and traders. To provide for co-operation between tax administrations to combat tax

avoidance and tax evasion. To provide for exchange of information, in order to:

combat tax avoidance and tax evasion; and

ensure the treaty operates properly

To eliminate certain forms of discriminatory taxation

Also Refer to Section 90(1) which lays down in the Indian Income taxAct, the object and purpose of Indian Government for entering into aDTAA.


Types of double tax treaties Subject matter

• Income (this is our focus)• Inheritance, estates and gifts• Social security

Comprehensive vs. limited• Comprehensive (this is our focus)• Airline and/or shipping operations

Bilateral vs. multilateral• Bilateral (i.e. between 2 countries): most common (and our

focus)• Multilateral (i.e. between 3 or more countries) For example:

Nordic multilateral treaty (Denmark, Faroe Islands, Finland,Iceland, Norway and Sweden)

Structure of a typical tax treaty

Scope of Convention Article 1 and 2

Definitions Article 3, 4 and 5

Taxation of Income Article 6 to 21

Taxation of Capital Article 22

Provisions for elimination of Double Tax Article23A and 23B

Special provisions such as Anti Avoidance Provisions Article 24 to 27 (e.g. LOB)

Miscellaneous Provisions Article 28 to 31

Protocols and Termination


Legal effect of a double tax treaty

Tax treaty is an agreement between two governments

Treaty becomes part of the tax law of each country, andthereby creates rights for taxpayers


Treaty is an agreement between two governments Process of concluding agreement involves following

steps:• Negotiations (one or more rounds)• Agreed text is initialed by negotiators

If there is more than one language for treaty:translations are prepared and agreed

Signature of the agreement (usually by high-rankinggovernment officers)


Treaty is an agreement between two governments

Completion of domestic procedures (if any) toincorporate treaty into domestic tax law.

Exchange of instruments of ratification (or letters ofnotification) Agreement enters into force

Agreement becomes effective in regard to specific income


Treaty becomes part of tax law of each country

Till the treaty becomes part of tax law of each country,taxpayers have no rights in respect of treaty

Each country has different rules by which a treatybecomes part of tax law


Importance of Protocols and notes The double tax treaties are generally accompanied by one or

more exchanges of notes and/or protocols, which clarify/expand/restrict application of main treaty

When two countries want to change their double tax treaty, they can do so in either of two ways:

I. enter into a new treaty and terminate the old treaty; or

II. make amendments to the existing treaty

If (ii) is followed, a protocol is used to make the relevant amendments

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 modeltreaty has been published with a commentary to eacharticle.

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


Model treaties and commentaries

UN model treaty

› Based on, and very similar to, OECD model treaty.

› Is focused on double tax treaties between developedand developing countries.

› Allows greater source country taxation than theOECD model.

Commentaries on UN model treaties

› Substantially copy OECD model treaty commentaries.

› Some original commentary.

Section 195(6) – CA Certificate

Requires the person making payment to NR to furnish the information relating to payment

• Furnish information to the tax department - Form 15CA

• Obtain CA certificate before making payment to NR - Form 15CB

Section 195(6) introduced by Finance Act 2008 (w.e.f. 1 April 2008)

Furnishing of information - Rule 37BB (w.e.f. 1 July 2009)

Procedure - Form 15CA and 15CBRemitter

Obtains certificate from Accountant

(Form 15CB)

Electronically upload the

remittance details in Form 15CA on www.tin-nsdl.com

Take printout of filled undertaking form (15CA) with system generated acknowledgement

number

Printout of the undertaking form (15CA) is signed

Submit the signed paper undertaking

form to the RBI/ AD along with

certificate of an Accountant in

duplicate

RBI/ AD remits the amount

A copy of undertaking (15CA)

& Certificate of Accountant (15CB)

forwarded to AO

• Applicable only for remittance purposes

• Not a conclusive proof

• Every remittance required to follow procedure even if not chargeable to tax in India

• Requires the payer to provide PAN of the non resident

• Form 15CB need not be filed with the tax department –information requirement is same as Form 15CA

Key Takeaways/Checklist1. What is the position / taxability under domestic law?2. Is there a tax treaty with the country of the NR?3. Is the treaty / applicable provision in effect? 4. Is the NR a “person” under the treaty?5. Is the NR a “resident” of the foreign country under

the treaty?1. Are other eligibility criteria (e.g. LOB article) met?2. Are the relevant taxes covered in the treaty?3. Read and apply the relevant article4. Check for Protocols / Technical Explanations / MoU5. Is there an MFN Article? If yes, are there

beneficial provisions in qualifying later treatiesthat can be applied?

Existence of Treaty

Eligibility for treaty Benefits

Applicability of Treaty

Amendments/MFN etc.

New Domains for Chartered Accountants Taxability of NRI after section 206AA Cross border transactions Permanent Establishments in India 15CA/CB- Certifications by a CA

Thank You

International Taxation - WordPress.com › 2013 › 01 › basics-of... · 2013-01-14 · Income...

Documents

Transcript of International Taxation - WordPress.com › 2013 › 01 › basics-of... · 2013-01-14 · Income...