2. Introduction to Tax TreatiesPage 2
Domestic Law Charging Provision - Sec 4, 5
R & OR R but NOR NR
Indian Income:
► Accrued / sourced in India Taxable Taxable Taxable
► Received in India Taxable Taxable Taxable
Foreign Income :
► Accrued outside India but
deemed to accrue in India by
virtue of Section 9
Taxable Taxable Taxable
► Accrued outside India - First
receipt in India
Taxable Taxable Taxable
► Any other income accruing
outside India and received
outside India
Taxable Not taxable Not taxable
3. Introduction to Tax TreatiesPage 3
Overview
► Nation has sovereign right of imposing tax at its discretion, subject to
territorial nexus
► Territorial nexus connect may be qua the taxpayer or qua his income
► India : Residence, extensive Source Rule
► USA : Citizenship
► Hong Kong : Territorial
4. Introduction to Tax TreatiesPage 4
Potential exposure of multi country taxation
US CO
Deputation of Mr A
to work in the project
of I Co
Tax Resident Sweden
Citizenship UK
Employer US Company
Project of US Co India
Receipt of salary Netherlands
► Fact pattern of Mr A who is deputed by US Co to
work in a project of I Co for six months
Project of
I Co
5. Introduction to Tax TreatiesPage 5
Need for Rational Cross Border Taxation
► Multi country taxation injures flow of cross border activities
► Double Tax Avoidance Agreement (DTAA) eliminates or mitigates hardship
caused by multi level taxation
► Home country tax is obligation; host country tax is a cost
► Home country is country of residence (COR)
► Host country is country of source (COS)
► Usual for COR to provide unilateral relief
► Mitigation can result in relief from double taxation, but, not refund by
COR
6. Introduction to Tax TreatiesPage 6
► Economic double taxation
► Same economic stream of income taxed in two or more states but in the
hands of different taxpayers [E.g. business profit and dividend in different
countries].
► Juridical double taxation
► Two or more states levy taxes on same entity on same income for
identical periods
► Arises due to overlapping claims of tax jurisdictions
► Tax treaties largely prevent/mitigate juridical double taxation
Types of double taxation
7. Introduction to Tax TreatiesPage 7
► Section 90
► Regulates a case where India has a tax treaty
► Taxpayer has the option to be taxed as per tax treaty or domestic tax
laws, whichever is more beneficial [S.90(2)]
► Subject thereto, domestic law has full force
► Domestic law provisions can, at times, be more beneficial
► Section 91
► Relief from double taxation if India has no tax treaties
► Person resident in India is allowed credit of foreign taxes paid against
amount of Indian taxes
Relief in India from double taxation
8. Introduction to Tax TreatiesPage 8
Tax Residency Certificate (S.90(5) & S.90A(5)
w.e.f. 1 April 2013)
► Section 90A(4) provides that treaty benefit will not be available to any NR
unless he furnishes TRC from Government of other country including
therein particulars as may be prescribed.
► Rule 21AB notified on 17 September 2012 w.e.f 1 April 2013
► Explanatory Memorandum of FB 2012 had stated that submission of TRC
is ‘necessary but not a sufficient condition’ for claiming benefits under
DTAA. This is now proposed in S.90(5) of the Act
► Amendment to apply retroactively from A.Y 2013-14
9. Introduction to Tax TreatiesPage 9
Meaning of treaty
► Vienna Convention on Law of Treaties 1969 :
“an international agreement concluded between States in written form
and governed by international law, whether embodied in a single
instrument and whatever its particular designation.”
► The Oxford Companion to Law definition of treaty: "an international
agreement, normally in written form, passing under various titles (treaty,
convention, protocol, covenant, charter, pact, statute, act, declaration,
concordat, exchange of notes, agreed minute, memorandum of agreement)
concluded between two or more States, on subjects of international law
intended to create rights and obligations between them and governed by
international law".
Can extend to all walks of national and international life
10. Introduction to Tax TreatiesPage 10
Genesis of authority; Article 51 of constitution
► Article 51 of the constitution sets out the following as one of the Directive
Principles of State Policy.
"The State shall endeavour to -
(a) promote international peace and security;
(b) maintain just and equitable relations between nations;
(c) foster respect for international law and treaty obligations in the
dealings of organised people with one another;
(d) encourage settlement of international disputes by arbitration".
11. Introduction to Tax TreatiesPage 11
Genesis of authority: Grant of legislative power
► Power to legislate treaties conferred on the Parliament by Entries 10 and 14
of List I of the Seventh Schedule.
"10. Foreign affairs; all matters which bring the Union into relation
with any foreign country.
14. Entering into treaties and agreements with foreign countries
and implementing of treaties, agreements and conventions
with foreign countries“.
12. Introduction to Tax TreatiesPage 12
Delegation of power to Central Government
► S. 90(1) authorises Central Government to enter into agreement with
Government of other country
► S. 90A(1) authorises entering into an agreement with any specified
association in specified territory outside India
► Objectives of the agreement could be :
► Elimination of double taxation
► Promotion of mutual economic relations, trade and investment
► Certainty on nature of income and quantum of tax payable irrespective of tax
laws of overseas state
► Establishing the right of a country to tax any income stream
► Exchange of information to combat tax avoidance / tax evasion
13. Introduction to Tax TreatiesPage 13
Delegation of power to Central Government
► “The Government cannot bind India in a manner that derogates from
Constitutional provisions, values and imperatives.” (SC in Ram Jethmalani)
► “Because treaty negotiations are largely a bargaining process with each
side seeking concessions from the other, the final agreement will often
represent a number of compromises, and it may be uncertain as to whether
a full and sufficient quid pro quo is obtained by both sides.” (SC in ABA)
14. Introduction to Tax TreatiesPage 14
Treaty: Agreement between Governments
► Treaties are signed by two national jurisdictions to regulate matters
concerning taxes
► Taxpayer is not a party to a tax treaty
► Desire of signatories to make business environment in their jurisdictions tax
friendly
► Treaty represents understanding as to rights and obligations of respective
country
► to forego its right to tax,
► to limit scope or rate of taxation,
► to grant credit of tax paid directly or indirectly in other jurisdiction/s etc. etc.
► Understanding between Governments is to share tax revenues equitably as
between themselves, while mitigating hardship for taxpayers
15. Introduction to Tax TreatiesPage 15
Treaty: Agreement between Governments
► Treaties can only relieve tax burden
► Treaties do not create any charge
► Vogel :
“A tax treaty neither generates a tax claim that does not otherwise exist under
domestic law nor expands the scope or alters the type of an existing claim”
16. Introduction to Tax TreatiesPage 16
Categories of Tax Treaties
► Limited treaties –
► Deals with specific subject matter
► DTAA between India and Pakistan is limited to air transport only
► Exchange of information with British Virgin Islands
► Comprehensive treaties – Deals with most sources of income
► Multilateral treaties vs. Bilateral treaties
► EU Directives
► SAARC Income Tax Agreement - Bangladesh; Bhutan; India; Maldives; Nepal;
Pakistan; Sri Lanka ( sharing of tax policies, training to tax administration,
teachers, students taxation, etc. )
17. Introduction to Tax TreatiesPage 17
Formulation of tax treaty
► Negotiation of a tax treaty (by Ministry of Finance – Department of
Revenue)
► Drafting of the articles (by Ministry of Finance – Department of Revenue)
► Signing (typically, by the Chairman of CBDT)
► Ratification (by Ministry of Finance – Department of Revenue)
► Notification (by CBDT)
18. Introduction to Tax TreatiesPage 18
► Organisation for Economic Co-operation and Development (OECD)
► Established in 1961 with developed countries as its members
► Essentially a model treaty between two developed nations with comparable tax
systems and tax objectives
► Advocates residence principle
► Lays emphasis on the right of state of residence to tax
► Royalty taxation in the state of residence
► Excludes taxation on services in the name of service PE
► Currently 34 countries including Australia, US, UK, France, Germany etc are
OECD members
► India not a OECD member
► Currently has been granted the “Observer” status
Texture of Treaty: OECD Model
19. Introduction to Tax TreatiesPage 19
Texture of Treaty: UN model
► Tax treaties between countries with unequal economic status - Developed
and lesser developed countries, or between developing countries
► Drafted in 1980, designed to encourage flow of investments from the
developed to developing countries
► Is a compromise between source principle and residence principle
► Gives more weightage to source principle, i.e., income should be taxed
where it arises
► Payer of income is considered as the source of taxation
► Reduced threshold of construction PE
20. Introduction to Tax TreatiesPage 20
Tax treaties are not uniform
► Each treaty codifies respective understanding between parties.
► Parties may adopt a standard draft : Say, UN Model, OECD Model
► This is hardly the case
► Conditions need not be uniform in all treaties
► E.g. LOB covenants in different treaties
► There are no constraints on terms of agreement
► E.g. Absence of equipment royalty source taxation
► E.g. India Finland treaty : Restrictive scope of source of income
► There are no strings to originality
21. Introduction to Tax TreatiesPage 21
What is an MFN Clause?
► Most Favoured Nation Clause
► Extends similar benefits to one country as extended to certain
other countries
► Ensures equal treatment between a subset of countries
► Examples of MFN-in terms of
► Rates of taxes
► Liability to tax
► Deductions permissible
22. Introduction to Tax TreatiesPage 22
Example : MFN and the Indo-France DTAA
► MFN CLAUSE IN THE PROTOCOL:
“In respect of Dividends, Interest, Royalties, FTS and payment for use of
equipments, if under the Convention, Agreement or Protocol signed after 1st
Sept 1989 between India and a third State which is a member of the OECD,
India limits its taxation at source to a rate lower, or a scope more restricted
than the rate or scope provided for in this Convention on the said items of
income, the same rate or scope as provided for in that Convention on the
said items of income shall also apply under this Convention …”
23. Introduction to Tax TreatiesPage 23
Effectiveness of Treaty
► If there is no tax liability under domestic law – treaty cannot impose it
► Treaty, to the extent it is more beneficial in any respect, can override the
domestic law
► Payer can consider lower withholding rate in terms of treaty
► Treaty need not always be more favourable than the domestic law
► Dividend exemption in hands of shareholder
► Long term capital gain exemption on sale of listed shares
► Proposed Lower withholding on external borrowing by specified company (FA
2012)
24. Introduction to Tax TreatiesPage 24
Effectiveness of Treaty
► Use of treaty by taxpayer is optional
► Choice could be qua each source of income
► Choice available on year on year basis
► Whether a person in India can take advantage of treaty for determining his
local tax liability in India?
Effectiveness is proposed to be subject to GAAR
26. Introduction to Tax TreatiesPage 26
Vienna convention on interpretation
Article 26 : Every treaty in force is binding upon the parties to it and
must be performed by them in good faith
Article 31(1) : A treaty shall be interpreted in good faith in accordance
with the ordinary meaning to be given to the terms of the
treaty in their context and in the light of its object and
purpose
Article 31(2) : Context is defined to include texts and subsequent
agreements/instruments related to the treaty
27. Introduction to Tax TreatiesPage 27
Vienna convention on interpretation
Article 31(4) : Special meaning only if specifically intended by parties
Article 32 : Supplementary means to be used only to confirm the
meaning
Article 34 : A treaty does not create either obligations or rights for a
third state without its consent
Unilateral treaty override needs strong justification
28. Introduction to Tax TreatiesPage 28
Guide to treaty interpretation
► Extracts from SC decision in Ram Jethmalani
“While India is not a party to the Vienna Convention, it contains many principles
of customary international law, and the principle of interpretation, of Article
31 of the Vienna Convention, provides a broad guideline as to what could
be an appropriate manner of interpreting a treaty in the Indian context also.”
………..
“the words ( in the treaty) are to be given their general meaning, general to
lawyer and layman alike…….. The meaning of the diplomat rather than the
lawyer…………….. The broad principle of interpretation, with respect to
treaties, and provisions therein, would be that ordinary meanings of words
be given effect to, unless the context requires or otherwise.”
29. Introduction to Tax TreatiesPage 29
Guide to treaty interpretation
► Extracts from SC decision in Ram Jethmalani
“the fact that such treaties are drafted by diplomats, and not lawyers, leading to
sloppiness in drafting also implies that care has to be taken to not render
any word, phrase, or sentence redundant would lead to a manifestly absurd
situation, particularly from a constitutional perspective. “The Government
cannot bind India in a manner that derogates from Constitutional provisions,
values and imperatives.”
30. Introduction to Tax TreatiesPage 30
► OECD/UN MC or Commentary represents “international tax language” and
has generally received ‘due respect’
► India reservation on OECD Commentary
► References by Courts to “reinforce” or “confirm” conclusion; in some cases,
even “followed” the commentaries
► Foreign Court decisions
► Protocols / MOUs
► Generally provides amendments to the existing treaties, or, explanations to the
Treaty Provision
► Parallel treaty interpretation
Aids to Interpretation
32. Introduction to Tax TreatiesPage 32
Articles of a Treaty
SCOPE PROVISIONS
1. Article 1 - Personal Scope
2. Article 2 - Taxes covered
3. Article 29 - Entry into force
4. Article 30 - Termination
ANTI-AVOIDANCE
1. Art 9 - Associated Enterprise
2. Art 26 - Exch of Info
ELIMINATION OF DOUBLE
TAXATION
1. Article 23 - Elimination of double
taxation
2. Article 25 - Mutual Agreement
DEFINITION PROVISIONS
1. Article 3 - General definitions
2. Article 4 - Residence
3. Article 5 - Permanent
Establishment
SUBSTANTIVE PROVISIONS
1. Article 6 - Immovable property
2. Article 7 - Business Profits
3. Article 8 - Shipping, etc
4. Article 10 - Dividends
5. Article 11 - Interest
6. Article 12 - Royalties & FTS
7. Article 13 - Capital gains
8. Article 14 - Independent Personal Services
9. Article 15 - Dependent Personal Services
10. Article 16 - Directors
11. Article 17 - Artistes & Sports persons
12. Article 18 - Pensions
13. Article 19 - Government service
14. Article 20 - Students
15. Article 21 - Other income
16. Article 22 - Capital
MISCELLANEOUS PROVISIONS
1. Article 24 - Non-discrimination
2. Article 27 - Diplomats
3. Article 28 - Territorial Extension
33. Introduction to Tax TreatiesPage 33
Scope of convention
To whom does the treaty apply?
► Article 1 provides for application of tax treaty to persons resident of one or
both the Contracting States
► Does not apply to person who is not resident in both the Contracting States
► Permanent Establishment (e.g. branch) is not a person
► “Persons” defined in Article 3 of the Model Convention
► See India-UK DTAA article 3(1)(f)
34. Introduction to Tax TreatiesPage 34
Tax treaty – Residency Rules
► A person is a resident of a country if it is ‘liable to tax’ in the country by
virtue of :
► Domicile
► Residence
► Place of management
► Any other criterion of a similar nature
► Term ‘liable to tax’ is not same as actual payment of tax [SC in ABA]
► In case a person is resident of both countries
► In case of an individual – tie breaker rule determines residency
► In any other case – the place of effective management
35. Introduction to Tax TreatiesPage 35
Illustrative allocation of Distributive Rights :
Exclusive right to Country of Residence
(COR)
► Capital gains Article, other income
Article, India-Mauritius DTAA
Exclusive right to Country of Source (COS) ► PE income in India-Bangladesh
Treaty
Exclusive right to COR – but, restraint by
COS on subject to tax condition
► Capital gains Article in India-Sweden
DTAA
Concurrent right of taxation to both the
countries :
► Subject to upper cap on rate of tax in
COS
► Passive sources of income (i.e. say,
royalties, interest)
► Without any limitation as to rate of tax
in COS
► Say, PE taxation
Exclusive right to country of effective
management
► Shipping income
36. Introduction to Tax TreatiesPage 36
Concluding thoughts
► International Taxation has emerged as a robust area of Practice in recent
times
► Unlike Act, law does not change frequently – challenge lies in interpreting
law to modern ways of doing business
► To sum up :
"Any piece of knowledge I acquire today has a value at this moment exactly
proportioned to my skill to deal with it. Tomorrow, when I know more, I recall
that piece of knowledge and use it better."
- Mark Van Doren
37. This Presentation provides certain general information existing as at the time of production. This Presentation
does not purport to identify all the issues or developments pursuant to the transaction. Accordingly, this
presentation should neither be regarded as comprehensive nor sufficient for the purposes of decision-making.
Presenter does not undertake any legal liability for any of the contents in this presentation. The information
provided is not, nor is it intended to be an advice on any matter and should not be relied on as such.
Professional advice should be sought before taking action on any of the information contained in it.
Thank you
