ICAB, KL, Study Manual 11. double taxation relief ICAB, KL, Study Manual 11. double taxation relief ICAB, KL, Study Manual 11. double taxation relief ICAB, KL, Study Manual

1. Taxation- I Study Manual
Chapter | |
Double Taxation Relief
Contents
lntroduction
Examination context
Topic List
t i.i' oouute Taiaiion - Some Balii concept
i r I 2 i Alieement io Avoia Douuie tiiition
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| 1.3 Relief In Respect of Income Arising Outside Bangladesh
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Meihod: of avold nS JouUle taiit onl How ihe methodi work
: | 1.5 : Tax Treaty
:
i | 1.6 r Some other concepts used in DTAA
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2. Taxation- | Study Manual
| 0.9 Bar to lmposition of Penalty without Hearing: Sec 130
No order imposing a penalty under this Chapter shall be made on any person unless such person
has been heard or has been given a reasonable opportuniry of being heard.
10. | 0 Previous Approval of Inspecting Joint Commissioner for tmposing Penatty: Sec l3 I
The Deputy Commissioner of Taxes shall not impose any penalty under rhis Chapter without the
previous approval of the InspectingJoint Commissioner except in the cases referred to in secrion
t24.
10. | | Penalty to be without Prejudice to other Liability: Sec | 33
The imposition on any person of any penalty under Chapter XV shall be without prejudice to any
other liability which such person may incur, or may have incurred, under the Ordinance or under
any other law for the time being in force.
10. 12 orders of Appellate Joint commissioner, commissioner (Appeal) or Appellate
Tribunal to be sent to Deputy Commissioner of Taxes: Sec | 32
The Appellate Joint Commissioner or the Commissioners (Appeals) or the Appellate Tribunal
making an order imposing any penalty under this chapter shall forthwith send a copy of the order
to the Deputy Commissioner of Taxes, and thereupon all the provisions of the Ordinance
relating to the recovery of penalty shall apply as if such order were made by the Deputy
Commissioner of Taxes.
OThe Inscitute of Chartered Accounrants of Bangladesh

3. Taxation-l StudyManual
Introduction
Learning objectives
. Define the agreement to avoid double exation.
. Recognise the relief in respect of income arising outside Bangladesh.
Practical significance
The Government of Bangladesh may enter inro an agreemenr with the Government of any
other countD/ for the avoidance of double taxation and the prevention of fiscal evasion with
resPect to income taxes. The agreement can provide some provisions for implemen&ltion
such as relief from the tax payable, recoveD/ of tax leviable under the Ordinance and under
the corresponding law in force in that country etc.
lf any person who is resident in Bangladesh in any year proves that he has paid tax on any
income for any income year outside Bangladesh in any country with which there is no
reciprocal aSreement for relief or avoidance of double taxation, tax shall be deducted from
the tax payable by him under the Ordinance, a sum equal to the tax catculated on such
doubly taxed income at the average rate of tax of Bangladesh or the average rate of tax of
the said country, whichever is the lower.
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Stop and think
Do you realize the impact of agreement to avoid double taxationl Do you know the list of
countries with whom Bangladesh has agreement to avoid double taxationl Do you know about
the relief in respecr of income arising outside Bangladeshl
Working context
Accountant can help their clients by giving advice with procedures to avoid double taxadon. They
should have the updated knowledge on various agreement for avoidance of double axation with
different countries. Based on the provisions of these atreement they can support their clients in
this regard.
Syllabus links
You will be using this knowledge again when you tackle the Taxation paper tater on in the
Professional Stage and it will also underpin the technical aspecrs ar rhe Advanced Stage.
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4. Taxation-l Study Mantral
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Exam requirements
ln the examination, candidates may be required to:
Define the agreement to avoid double taxation.
Recognise the provision mentioned in agreement to avoid double taxation.
ldentify the relief in respect of income arising outside Bangladesh.
List the name of countries with whom Bangladesh has agreement for avoidance of double
axation.
Question practice
For question practice on these topics go to the suggested answers covering this chapter.
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5. Taxation- | Study Manual
I I.O DOUBLE TAXATION RELIEF INCLUDING TAX TREATIES
Section Overview
) For the avoidance of double taxation Bangladesh enters into atreement with many countries.
) Double axation aSreement also prevent the fiscal evasion with respect to income hxes.
) Under double taxation relief system, the payable tax will be the sum equal to the tax
calculated on such doubly taxed income at the averate rate of tax of Bangladesh or the
averate rate of tax of the agreed counrry, whichever is the lower.
I l. I Double Taxation - Some Basic Concept
What is double taxation
Double taxation means taxint the same income twice, once in the home countr/ and again in the
host country.
How does double taxation arise
It may arise in two ways
(i) The iurisdictional connections used by different countries may overlap with each other. For
example' Mr. X, a resident under the Bangladesh Income Tax Ordinance 1984 has to pay tax on
his total world income as citizen in USA (Residential jurisdiction).
(ii) The axpayer or his income may have connections with more than one country. For example,
Mr. X gets income from UK and dividend income from France. He has to pay rax on his total
world income in Bangladesh and also on income earned in UK and France (Source jurisdiction).
What are the broad obiectives of Bangladesh DTA
r To obtain a more effective relief from double taxation compared to relief altowed under
unilateral measures.
. To create a favorabld climate for the inflow of FDI in Bangladesh.
' To make special tax incentives provided by Bangladesh Fulty effective for the taxpayers ofthe
capial exporting countries.
I To prevent evasion and avoidance oftax.
r. To foster long term, mutually beneficial economic relationship with others specially the
developed countries.
Bangladesh generally follows UN model of Avoidance of Doubte Taxation Agreement which
consists of the following 29 Articles.
What imoact double taxation in seneral. woutd have on slobal economic arriwirio<
(i) lt hampers free flow of capital and technology across borders and
(ii) lt becomes
-a
prohibitive burden on concerned &xpayers leading to decline in foreign
investments.
What are the effects of Double Tax Avoidance Agreements (DTAA) in Bangladesh
Theeffectsof anagreemententeredintobyvirtueof section l44of IncomeTaxordinance l9g4
would be:
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(i) if no tax liability is imposed under the Ordinance, the question of resorting to DTAA would
not arise. No provision of DTAA can possibly fasten a tax liability which is not imPosed by the
Ordinance. The treaties with all intent and purposer can lessen the vigor of double taxation
cannot however, enhance it.
(ii) In case of a difference in the provisions of the Ordinance and those of the DTAA, to the
exrenr they are more beneficial to the provisions of the Ordinance, will override the ordinance
which is the fundamental concept in treaty override'
Agreement to Avoid Double Taxation: Sec 144
This section confers the right to GOB to enter into an agreement with the government of any
other country for the avoidance of double taxation and the Prevention of fiscal evasion with
respect to income tax and may, by Gazette Notification, make such provisions as may be
necessary to implement the agreement.
Income tax policy secrion of NBR is entrusted to negotiating the Double Taxation Agreement
(DTA) with foreign countries to promote foreign direct investment in Bangladesh. DTA is an
agreemenr between two countries seeking to avoid double taxation by defining the taxing rights
oi each counrry wirh regard ro cross border flows of income, providing for tax credits or
exemptions to eliminate double taxation.
At present, Governmenr of Bangladesh has entered into Double Taxation Avoidance
Agreement (DTAA) with the following countries:
UK, Singapore, South Korea, Canada, Romania, Pakistan, Srilanka, France, Malaysia, Japan, India'
Netherland, Germany, ltaly, Denmark, China, Belgium, Poland, Thailand, Philippines' Vietnam,
Turkey and NorwaY.
I 1.3 Relief In Respect of Income Arising outside Bangladesh: sec 145
This section empowers DCT to allow relief to an assessee in respect of any income accrued or
arisen in any orher counrry with which Bangladesh does not have DTA. The assessee must Prove
that he has suffered rax on rhar income by way of deduction or otherwise the DCT may deduct
from the tax payable by the assessee a sum equal to tax calculated on such doubly taxed income
at the average rare of iax of Bangladesh or the average rate of tax at the said country' whichever
is lower.
Average rate of rax. means the rate arrived at by dividing the amount of tax calculated on the
total income bY such income.
Example:
Mr. A, a Bangladeshi resident received property income of Tk. 630,000 from US after deduction
of | 0% of tai at source during the year ending on 30 June, 20 | 0. His other income in Bangladesh
amounts to Tk. 300,000 for the same year.
Mr. A -Assessment Year 20 l0-20 | |
Income from Bangladesh sources
Income from foreign sources (grossed up)
Total income
Tk.
300,000
700.000
t.000.000
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Computation of Tax:
Slab
First
Next
Next
Next
Amount Tk.
t65,000
275,000
325,000
235.000
r,000,000
Tax Tk.
Nil
27,500
48,750
47.000
r23,250
Average Tax on Foreign Income:
123250X70Q000
= Tk.80275
1,00q000
Tax paid in US (700,000 - 630,000) = Tk. 70,000
Since, foreign average tax paid is lower than average income on thar tax in Bangladesh, DCT
would allow whole of it as foreign tax relief and the resultant tax liability of Mr. A would be
( | 23,250-70,000) = Tk. 53,250.
| 1.4 Methods of avoiding double taxation? How the methods work
The methods are as follows:
(i) Unilateral relief
(ii) Bilateral relief
(iii) Multilateral relie{
(iv) Non-tax treaties
Unilateral relief
Under this system whether the income is subject to tax abroad or not is immaterial, relief is
given by way of tax credit for the rax paid abroad.
Under Section 145 of the lncome Tax Ordinance 1984, taxcreditmethod is iollowed. A resident
in Bangladesh who has paid income tax in any country with which Bangladesh does not have a
treaty for the relief or avoidance of double taxation is allowed credit against his Bangladesh
income tax for an amount equal to Bangladeslr coverage rate i.e. average rate or the foreign rate
whichever is lower, applied to the doubly taxed income. This is done as follows:
a. Where the foreign tax is equal to Bangladesh tax, full amounr of foreign tax will be given
credit.
b. Where the foreign tax exceeds the Bangladesh tax, the liability to Bangladesh tax is nil.
However, no refund in respect of the excess amount is allowed.
c. Where foreign tax is less than Bangladesh tax, the difference would be payable by the
taxPayer.
The basic principle to remember is that credit/relief will never exceed the Bangladesh income tax
on the concerned income calculated at average rate.
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8. Bilateral relief
It may take one of the following two forms:
Firstly the treaty may apply exempting method, the country in question refraining from exercising
jurisdiction to tax a Particular income.
For instance, the country of source where PE is located is assigned an exclusive iurisdiction to
tax the profits of the esrablishmenr. In turn it may agree to refrain from exercising its iurisdiction
to tax the owner of these Profits.
Alternatively, the treaty may provide relief from double taxation by redacting the tax ordinarily
due in one or both of the contracting states on that income which is subiect to double taxation.
For instance, the country, which is the source of a dividend, often agrees to reduce the
withholding rate normally applicable to dividends paid to non-resident and the country of
residence agrees to give tax credit or similar relief for the tax Paid in the source country. In
such a case, both the counrries exercise the rights to jurisdiction, while mutually agreeing for
adjustments, many DTAAs combine both the methods of relief.
Multilateral treaties
These are similar to bilateral rrearies achieved through agreem-ent between many countries i.e.
EEC.
Non-tax treaties
These are not direct rreaties oftax but are offriendship, co-operation cultural exchange, political
and diplomatic relations, but which consequently may reflect uPon tax matters.
| 1.5 Tax TreatY
What is a tax treaty and how does it work
.Treaty' as commonly understood is a formally concluded and ratified atreement between
independent narions. Tax treaties are generally a matter of bargin and prolonged netotiations
centering around economic interests of the countries involved.
What is the scoPe of tax treaties in determining iurisdiction
Normally tax treaty between two countries covers'
(i) Persons (ii) Taxes (iii) Territory (iv) Time
The treaty, generally applies to residents of the contracting shtes. Each country retains the
power to tax its citizens and residents on their total world income (Status iurisdiction) and tax
others, non citizens, non-residents only on their income in the country (Source iurisdiction).
However, the treaty provisions protect the taxpayer from suffering double taxation on the same
income.
How does a treaty become law
The agreement entered into becomes a part of domestic law only when it has sanction of the
constitulions of the nations which are parties to it. The power to legislate is conferred on our
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9. Taxation- | Study Manual
Parliament and therefore, the Government has aurhority to enrer into DTAA. However, all
treades are also required to be formally approved by official tazece nodfication.
| 1.6 Some other concepts used in DTAA
Treaty Override
The executive of the state has been given rights under our Constitution to enter into DTAAs.
This is an executive power exercisable by the Govt. like legislative and judicial powers. As the
Power to enter into DTAAs comes from the Constitution, the relevant article thereof, will have
the effect of the DTAA overriding the Ordinance, as the executive also has to exercise
iurisdiction keeping in mind DTAA obligations and commitmen$ made thereon. lt is now an
undisputed proposition that DTAA overrides the Ordinance.
. Tax Havens
Tax haven nations are those with nil or moderate level of taxation and/or offering liberal tax
incentives for export activities, shipping business. These tax havens attract investments as the
corPorate tax rate is low. They may also exempt dividends and capital gains on the transfer or
exchange of movable assets like shares and sometime immovable properties like land, building,,
plants etc. Besides tai haven countries may also pursue absolute secrecy and easy exchanie
control policies to attract offshore investors.
There are two types oftax haven
l. Nil tax haven
2. Nil tax outside haven countries
Treaty shopping
Just as the domestic law can, sometimes, be used more than fairly to the ailvantage of a taxpayer,
the DTAA roo can be exploited thlolsh popurarry known means of
..Treaty
Shlpping". A non-
resident seeking shelter under a DTAA is still open to domestic assessment when the tax
authorities feel thag he is taking an undue advantage of provisions of the DTAA or has
structured the commercial arrangement in such a way so as to avail the DTAA benefit otherwise
not available to him. The authorities may then deny the benefis of the DTAA. The most
common form of rreaty sh_opping is setting up of a dummy enterprise. This is set up by say,
Company A, in one of the Contracting States, io avail DTAA benefits, which the company, nor
being a resident of either Contracting itates, would orherwise not be entitled to. In such a case,
the Court can lift the corporate veil.
Attribution Rule
The basic requirement to bring the business profits to rax rhey should be capable of being
attributable to the permanent Establishment(PE) or residency. The question to be asked is the
enterprise trading with the country on a regular basisl lf y..i, whrt is the nature of
establishment in Bangladesh. lf the income arisei out of the business activity carried on in that
state and if it can be attributed to the PE, it can be taxed in that extent of attribution. Certain
established and accepted rules are to be followed in the determination of such income. Generally
the exPenses tha:t can or cannot be considered will depend upon the taxation laws of each state.
Force of attraction rule
It means all income arising from all source in a country where the foreign enterprise maintains a
PE is subiect to tax in that country irrespective of whether the said incJme is artributable to the
PE or not Therefore, profits arising from transactions outside PE are also taxable. As per this
rule not only the profits attributable to the sale of same or similar kind of goods is brought to
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10. Taxation-l Study Manual
tax and any other income from sources within the country are also regarded income attributable
to the PE.
Students should carefully note the following main obiectives of Double Taxation
Agreemenfi
a) Any income earned by a resident of a contracting state in the other contractinS state cannot
escape from tax assessment in both the contracting states.
b) Any income earned by a resident of a contracting state in the other contracting state cannot
be taxed in the both the contracdnt states'
c) Conditions of taxability and rates of tax payable of a resident of a contracting state in
respect of incomes frdm various heads earned in the other contracting state.
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