International taxation

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The Easiest way to understand International taxation , Concept of Double taxation and its avoidance agreements (DTAA) and its types . Tax implication of activities of foreign enterprise in India: Mode of entry and taxation respectively.

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International taxation

  1. 1. INTERNATIONAL TAXATION By Anam Shahid 9th December,2013
  2. 2. What is International taxation? International taxation refers to tax levied on the cross –border transaction. The transaction may take place between two or more persons or entity in two or more countries or tax jurisdiction .Such a transaction may involve a person in one country with property and income flows in another.
  3. 3. Types of international taxation   Residence based taxation :residents of the country are taxed on their worldwide (local and foreign) income. Source Based Taxation :only local income income from a source inside the country is taxed. Usually nonresidents are taxed only on their local income
  4. 4. Concept of double taxation   The transaction taking place in more than one country such a transaction may be subject to more than one tax authorities or taxed twice by same or different tax authorities such taxation is referred to as “double taxation.” Such a factor can Impair the economic development of a person and entity therefore avoidance is required.
  5. 5. Double Taxation Avoidance agreement (DTAA)   To avoid the incidence of double taxation DTAA (Double taxation Avoidance agreement) among countries are signed. There are treaty models developed on which the agreements are drafted such as the OECD model (organization for economic cooperation and development ) and UN model.
  6. 6. DTAA Double taxation agreement are classified on the basis of 1) Parties: a) Bilateral treaties: the agreement on double taxation entered between two countries b) b) Multilateral Treaties: the agreement on double taxation entered between a groups of countries . 2) Scope : a) Comprehensive DTA: The taxes on income and capital gains .the taxpayers in both the countries would be treated equally in respect of issues related to Double taxation . b) Limited DTA: the specified limit to the tax on income from shipping, air, transport or estates, inheritance and gifts.
  7. 7. Taxability of foreign income India has signed DTAA with 88 countries out of which 85 have been entered into force which specifies the agreed rates of tax and jurisdiction on specific types of incomes levied in a country to a tax resident of another country . the income earned outside India will be subject to taxes on the basis of residential status. 1)Resident : If resident a)DTAA with foreign country exists then the tax will be levied under section 90 and 90A the DTAA rate or the income tax rate whichever is low . b) If DTAA does not exist no taxes will be levied 2) Nonresident: not subject to any taxes.
  8. 8. Relief to the tax payer   Bilateral relief under section 90& 90A of income tax act for taxpayers who have paid tax to a country in which India has signed DTAA Unilateral relief under section 91 of income tax act provide relief to taxpayers who have paid tax to a country with which India has not signed DTAA
  9. 9. Tax implication of activities of foreign enterprise in India: Mode of entry and taxation respectively
  10. 10. Mode of entry There are two types of entry which a foreign firm may find suitable Equity and non equity .the forms of equity are:  1) joint venture company  2) Wholly owned subsidiaries  3) Acquisition  4) Foreign technology collaboration while the forms of non equity are : exports and contractual agreements (other types on a temporary basis may be liaison office, project office and Branch office.)
  11. 11. Tax on foreign entities in India The tax being levied on each type depend on the residential status of the company and its control & management of affairs of the tax payer (foreign company ) 1)If the Control & management of affairs of the company is wholly in India the company is resident and entitled to pay tax. 2) Control & management of affairs of the company is wholly outside India the company is nonresident & not entitled to tax 3)Control & management of affairs of the company is partly in India partly outside India the company is regarded as nonresident therefore not entitled to tax
  12. 12. Tax liability A foreign company is liable to tax, in respect of income deemed to accrue in India. The incomes which are deemed to accrue or arise in India are prescribed in section 5 to section 9 following: (a) Income arising from a business connection in India, which is reasonably attributable to operations carried out by foreign company in India (b) Income arising from any property in India; (c) Income arising from any asset or source of income in India; or (d) Income arising from transfer of a capital asset situated in India; (e) Royalty payable from India; (f) Fees for technical services payable from India, etc.
  13. 13. Other sources The income of a non resident foreign company shall be subject to tax at the following rates : Income from special sources. (i) Interest 20% (ii) Dividend on which DDT has not been paid in India @20% (iii) Royalty/Fees for technical services @ 20% (iv) Income by way of winnings from lottery, races, games, etc.@30% Balance income – Income from ordinary sources@ 30%
  14. 14. Tax on receipts Schedule 14 of the Code provides for a presumptive taxation at specified rates on receipts Earned from India in case of following businesses: 1. Business of civil construction in connection with a turnkey power project approved by the Central Government in this behalf @10% 2. Business of erection of plant or machinery or testing or commissioning thereof, in connection with a turnkey power project approved by the Central Government in this behalf @10% 3. Business of provided services or facilities in connection with the prospecting for, or extraction or production of, mineral oil or natural gas @14% 4. Business of supplying plant and machinery on hire, used or to be used, in the prospecting for, or extraction or production of, mineral oils or natural gas@ 14% 5. Business of operation of ships (including an arrangement such as slot charter, space charter or joint Charter) 10% 6. Business of operation of aircraft (including an arrangement such as slot charter, space charter or joint charter) @ 7% The specific rates on the income shall be payable without any other Deductions on the gross receipts collected in relation to business carried out at India.

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