International Taxation - To begin with


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This presentation gives an overview of taxation of non resident indians and gives a basic understanding of Double Taxation Avoidance Agreements between countries. This is meant only for amateurs in the field of taxation and gives only a very basic and bird's eyeview on the subject.

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International Taxation - To begin with

  1. 1. BASICS OF INTERNATIONAL TAXATION  An overview of Indian Income Tax Provisions applicable to Non- Residents.  Important Concepts to understand Double Taxation Avoidance Agreements.CA.P.R.Sreenivasan, PSDY & Associates
  2. 2. Introduction Growing importance and emphasis on International Taxation Taxation of Non Residents & NRIs Taxation of foreign nationals Cross border taxation of MNCs Issues related to black moneyCA. P.R.Sreenivasan,PSDY & Associates
  3. 3. Contents1. Indian Income Tax Provisions related to Non Residents.2. Double Tax Avoidance Agreements (i) DTAA – Purpose and objectives (ii) OECD MC vs. UN MC3. Basic Important DTAA Concepts.CA.P.R.Sreenivasan, PSDY & Associates
  4. 4. Indian Income Tax Provisions related to Non ResidentsCA.P.R.Sreenivasan, PSDY & Associates
  5. 5. Income Tax Provisions related to Non Residents Taxation of Non Resident Definitions Scope of Special Presumptive Sec. 2(30), 6 Taxation provisions taxation Sec. Section 4,5,9 Chapter XII-A 44B/BB/BBA/ BBB TDS DTAA Sec 90 Anti- Agent Sec.195, 197 & 91 Avoidance Section Provision 160, 163 Sec 92, 94ACA.P.R.Sreenivasan, PSDY & Associates
  6. 6. Income Tax Provisions related to Non Residents Types of Income R R & NR OR Received or deemed to be received in India    by or on behalf of the assessee Income that accrues or arises or is deemed    to accrue or arise in India Income that accrues or arises outside India    and is not derived from business controlled in or a profession set up in India Income that accrues or arises / received    outside IndiaCA.P.R.Sreenivasan, PSDY & Associates
  7. 7. NR & NOR is taxable in India if INCOME EARNED Received or Accrues or Deemed todeemed to be Arises in Accrue or Arise received in India In India IndiaCA. P.R.Sreenivasan,PSDY & Associates
  8. 8. CHAPTER XII-A Taxation of NRIs – Special Provisions Meaning of NRI – Non Resident Indians i.e Indian Citizen or PIO who is NR Type of income – Income from investment in “foreign exchange assets” – L.T Capital Gain on sale of “foreign exchange assets”CA.P.R.Sreenivasan, PSDY & Associates
  9. 9. Taxation of NRIs – Special Provisions “Foreign Exchange Assets” means – Shares in an Indian Company – Debentures / Deposits in an Indian company other than a private company – Central Government Securities – Purchased using convertible foreign exchangeCA.P.R.Sreenivasan, PSDY & Associates
  10. 10. Taxation of NRIs – Special Provisions Rate of tax Investment LTCG on sale of Income Forex Assets 20% 10%CA.P.R.Sreenivasan, PSDY & Associates
  11. 11. Taxation of NRIs – Special Provisions Other benefits available under Chapter XII-ANo need to file return if TDS is deductedOption to continue availing the benefit even after becoming resident on application made to the assessing officer.Chapter XII-A shall not apply if assessee so choosesCA.P.R.Sreenivasan, PSDY & Associates
  12. 12. Tax Deduction at Source for Non Residents Section 195 (1)  Any person responsible to pay to a Non resident to withhold tax  In respect of interest or any other sum chargeable under Income tax Act, 1961  At the time of credit or payment, whichever is earlier  At the rates in forceCA.P.R.Sreenivasan, PSDY & Associates
  13. 13. Tax Deduction at Source for Non ResidentsExceptions Interest payable by the Government or a PSU Bank or a PFI, TDS shall be deducted only at the time of actual payment. No TDS required for payment of dividend distributed by a domestic company referred to in Sec 115-O.CA.P.R.Sreenivasan, PSDY & Associates
  14. 14. Tax Deduction at Source for Non Residents Application for non deduction or lower deduction of tax  The payer may apply to the AO for determination appropriate portion of the sum to be paid on which tax has to be deducted – Sec 195(2)  The payee may also apply to the AO for grant of a certificate authorizing him to receive the amount without deduction of tax at source – Sec 195(3)  The assessee (i.e payee) may also apply to the AO for a certificate for deduction of tax at lower rate U/s.197CA.P.R.Sreenivasan, PSDY & Associates
  15. 15. Tax Deduction at Source for Non Residents Remittance of money abroad Sec 195(6) Formalities Before Outward Remittance Information to be Certificate from CA to be furnished in Form 15CA obtained in Form 15CB - To be filed electronicallyCA.P.R.Sreenivasan, PSDY & Associates
  16. 16. Anti Avoidance Provisions Transfer Pricing – Sections 92 to92F – Applies to “International Transactions” carried out between two or more “Associated Enterprises”. – Meaning of “Associate Enterprise” – One enterprise participates directly / indirectly in the management / control / capital of the other. – Pricing of transactions shall be at “Arm’s length”. – 5% variation between the ALP and the actual price is allowedCA.P.R.Sreenivasan, PSDY & Associates
  17. 17. Anti Avoidance Provisions Sec 94A - Black listing of “Tax Havens” Inserted by Finance Act 2011 w.e.f 1st June 2011 Referred to as “Tool box of counter measures” To prevent “Tax Avoidance” Authorizes Government to black list non- cooperative jurisdictions Penalize both Indian Assessee as well as the Non Resident concernedCA.P.R.Sreenivasan, PSDY & Associates
  18. 18. Anti Avoidance Provisions Salient features of Section 94A Government may specify certain non - cooperative jurisdictions as “Notified Jurisdictional Areas” (NJA). If an assessee enters in to a transaction with a person in an NJA – All parties to the transaction will be regarded as “Associated Enterprises” – The transactions will be considered as an “International Transaction” – All provisions of Transfer Pricing will apply – Additional records may be prescribed by CBDTCA.P.R.Sreenivasan, PSDY & Associates
  19. 19. Anti Avoidance Provisions Tax Information Exchange Agreements – About 13 TIEAs have been signed in recent past – Objective is to prevent round tripping of black money Amendments to existing DTAAs – Attempt is being made to amend DTAAs already entered in toCA.P.R.Sreenivasan, PSDY & Associates
  20. 20. Anti Avoidance Provisions ROUND TRIPPINGUsing tax heavens and benami Non Residents Mr.A an Indian BC Ltd in India resident AB Ltd Sends funds invests by hawala shares / Rs.100 cr to debt in Indian A tax haven Invests in a Tax Haven company – Deposits in AB Ltd. Rs.100 cr as loan and Rs.10,000/-in equity owned by one Local bank / more non residentsCA. P.R.Sreenivasan,PSDY & Associates
  21. 21. Double Tax Avoidance Agreements 1. DTAA – Purpose and objectivesCA.P.R.Sreenivasan, PSDY & Associates
  22. 22. Need for DTAA Reason for Double Taxation Also taxed on Resident of India same income Taxed on his in the country where Global Income it accrues / arisesCA.P.R.Sreenivasan, PSDY & Associates
  23. 23. Need for DTAA Basic rule for taxation Source Rule Residence Rule “Principle of Situs”Resident of a country Non Resident is taxed inis taxed on his global the country where the income income accrues / arisesCA.P.R.Sreenivasan, PSDY & Associates
  24. 24. Need for DTAA Types of Double TaxationJuridical Double Taxation Economic Double TaxationSame person taxed on Two entities subject tosame income in more tax on the same income than one countries in two more countriesCA.P.R.Sreenivasan, PSDY & Associates
  25. 25. Need for DTAA Juridical double taxations Example Company A resident in USA USA Branch In India India Company A’s branch profits are subject to tax in two countries: (i) in USA, due to residence; and (ii) in India, due to source.CA. P.R.Sreenivasan,PSDY & Associates
  26. 26. Need for DTAA  Economic double taxation Arises where one country applies its transfer pricing rules.Example Taxable profits Company A = US$ 5 million USA Loan ($100 Interest @ 5% p.a. Million) ($ 5 million) India Taxable profits = $ 2 million Company B •If as per TP rules in India the arm’s length rate of interest should be 4% p.a., it will reduce Company B’s interest deduction by $1 M. • Company B’s taxable profits increase by $ 1 M to $ 3 M. CA. P.R.Sreenivasan, PS DY & Associates
  27. 27. Purpose of DTAA – Sec 90(1) Sec 90(1) Purpose of DTAA Provide Promote Exchange Collection To avoid relief to mutual of & double doubly Economic informatio Recovery taxation taxed & Trade n of Taxes income relationsCA.P.R.Sreenivasan, PSDY & Associates
  28. 28. Applicability of DTAA Applicability and effect of DTAA vis-à-vis Income Tax ActAssessee who Income is Conflictingis resident of taxed / provisions ineither or both taxable in both IT Act and countries countries DTAA More beneficial DTAA would provision to override to apply - assessee’s favor Cir 333 02.04.1982 CIT v. ITC LtdCA.P.R.Sreenivasan, PSDY & Associates
  29. 29. Double Taxation Avoidance Agreement (DTAA) Legal effect of DTAAAgreement between Becomes part of law two countries Binding on both Gives rights to the countries tax payerCA.P.R.Sreenivasan, PSDY & Associates
  30. 30. Double Taxation Avoidance Agreement (DTAA) Modes of granting relief in DTAAsExemption method Credit MethodEither of the countries Both countries will tax, but resident country will only tax the would give credit to income foreign taxCA.P.R.Sreenivasan, PSDY & Associates
  31. 31. Double Taxation Avoidance Agreement (DTAA) Importance of protocols and notes Amendments to existingClarify / expand / restrict treaties are madeapplication of the treaty through protocolsCA.P.R.Sreenivasan, PSDY & Associates
  32. 32. Double Taxation Avoidance Agreement (DTAA) In absence of DTAA – Sec 91AUnilateral relief Conditions to assessee applyCredit method applied Income must have Taxes should havei.e deduction from tax accrued / arisen o/s been paid as per is allowed India law of other countryCA.P.R.Sreenivasan, PSDY & Associates
  33. 33. Double Tax Avoidance Agreements Organization for Economic Cooperation & Development (OECD) Model Conventions (MC) vs. United Nations (UN) Model ConventionsCA.P.R.Sreenivasan, PSDY & Associates
  34. 34. 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).CA.P.R.Sreenivasan, PSDY & Associates
  35. 35. Double Taxation Avoidance Agreement (DTAA) Model treaties and commentaries  Commentaries on OECD model treaty: • Starting with the 1963 edition, the OECD model treaty has been published with a commentary to each article. • The Commentaries have been referred to as an aid to interpretation by the courts in many OECD countries and in some non-OECD countries (e.g. Malaysia).CA.P.R.Sreenivasan, PSDY & Associates
  36. 36. Double Taxation Avoidance Agreement (DTAA) Model treaties and commentaries  Other international model treaties –e.g. • ASEAN model. • Andean model  Some countries have published their own model treaty – e.g. • US model • Netherlands modelCA. P.R.Sreenivasan,PSDY & Associates
  37. 37. Double Tax Avoidance Agreements ArticlesCA.P.R.Sreenivasan, PSDY & Associates
  38. 38. Model DTAA - Articles Table of Contents of OECD and UN-MC UN Scope of Convention Article 1 – Persons covered Unchanged 2 – Taxes covered. Unchanged Definitions Article 3 – General definitions 4 – Resident 5 – Permanent establishment. Taxation of income Article 6 – Income from immovable property Unchanged 7 – Business Profit 8 – Shipping, inland waterways & air transport 9 – Associated enterprises 10 – Dividends Unchanged 11 – InterestCA.P.R.Sreenivasan, PSDY & Associates
  39. 39. Model DTAA - Articles Table of Contents of OECD and UN-MC UN Taxation of income Article 12 – Royalties / Fee for Technical Services 13 – Capital Gains 14 – Independent personal services Deleted in OECD–MC 2000 15 – Income from employment Unchanged 16 – Director’s Fees 17 – Artistes and Sportsmen 18 – Pensions 19 – Government Service Unchanged 20 – Students 21 – Other Income. Taxation of Capital Article 22 – Capital.CA. P.R.Sreenivasan,PSDY & Associates
  40. 40. Model DTAA - Articles Table of Contents of OECD and UN-MC UN Methods for elimination of double taxation Article 23A– Exemption method 23B– Credit method. Unchanged Special provisions Article 24 – Non-discrimination Unchanged 25 – Mutual agreement procedure 26 – Exchange of information 27 – Assistance in the collection of taxes Missing in UN-MC 28 – Members of diplomatic mission and consular posts Missing in UN-MC 29 – Territorial extension. Final Provisions Article 30 – Entry into force 31 – Termination.CA.P.R.Sreenivasan, PSDY & Associates
  41. 41. Important Concepts to Understand DTAACA.P.R.Sreenivasan, PSDY & Associates
  42. 42. Important Concepts to Understand DTAA’s A Business carried on by a corporation, usually through an office Branch or other fixed place of business. The situation in which resident investors bear the same tax Capital-export burden whether they invest at home or abroad. neutrality Capital-import The situation in which residents investing in a source country bear neutrality the same tax burden as other investors in that country. The Commentary to the OECD Model Treaty or to the UN Model Treaty. It explains the provisions of the Model Treaty and records the reservations and observations of the member countries to Commentary those provisions. The Commentary to the OECD Model Treaty is very influential for the interpretation and application of tax treaties. An official of a treaty country who is responsible for the resolution Competent authority of disputes and issues of interpretation arising under a tax treaty.CA. P.R.Sreenivasan,PSDY & Associates
  43. 43. Important Concepts to Understand DTAA’s Contracting The Countries that are parties to a tax treaty. States Foreign taxes paid by a resident of a country are Credit Methods credited against the residence country’s tax on the resident’s foreign-source income. Exemption Exemption from domestic tax of some or all foreign- method source income derived by residents. An exemption method under which certain foreign- Exemption with source income is exempt from tax but is taken into progression account in determining the rates of tax applicable to other income. Foreign affiliate A foreign corporation in which a domestic tax-payer has a significant direct or indirect ownership interest (usually 10 percent or more of the shares).CA. P.R.Sreenivasan,PSDY & Associates
  44. 44. Important Concepts to Understand DTAA’s Tax practices that are adopted by a tax-haven country to Harmful tax poach on the tax base of other countries by exploiting competition the weaknesses in the international tax rules of those countries. An entity that is treated as a separate taxable entity (usually as a corporation) in one country and as a Hybrid entity transparent or flow-through entity in another country. The treatment by one country of the residents or citizens Most-Favoured- of another country not less favourably than the nation treatment treatment of the residents or citizens of any other country (but not its own residents or citizens). The treatment of non residents or foreigners by a National country not less favourably than the treatment of its own treatment residents or citizens.CA. P.R.Sreenivasan,PSDY & Associates
  45. 45. Important Concepts to Understand DTAA’s A generally-accepted notion that a country should tax non residents, foreigners and foreign-owned domestic Non- corporations in a manner that is the same as or is discrimination functionally equivalent to the treatment afforded to residents, citizens or domestically-owned corporation in similar circumstances. A rule under which a corporation is considered to be a Place-of- tax resident of the country in which it is incorporated. incorporation test A rule under which a corporation is considered to be a Place-of- tax resident of the country in which it is controlled or management test managed (usually where the board of directors meets and exercise control over the affairs of the corporation).CA. P.R.Sreenivasan,PSDY & Associates
  46. 46. Important Concepts to Understand DTAA’s The deferral avoidance, or reduction of tax by lawful Tax avoidance means. The reduction of tax by illegal means, usually involving Tax evasion fraudulent non disclosure or willful deceit. Countries which subject income (or some forms of Tax havens income) or entities (or certain entities) to low or no taxation. The allowance of a credit for the amount of foreign Tax Sparing taxes that were not paid because of a tax incentive or holiday in the foreign country. Thin Restriction on the deductibility of interest payments capitalization made by corporations with excessive debt to equity rules ratios to their substantial non resident shareholders.CA. P.R.Sreenivasan,PSDY & Associates
  47. 47. Important Concepts to Understand DTAA’s Rules in tax treaties that establish the residence of a Tie-breaker rules dual-resident taxpayer in one country for treaty purposes. The use of a tax treaty by a person who is not resident in either of the treaty countries, usually through the use of Treaty shopping conduit entity resident in one of the countries. A tax levied by the source country at a flat rate on the gross amount of dividends, royalties, interest, or other Withholding tax payments made by residents to non residents. The tax is collected and paid to the government by the resident payer.CA. P.R.Sreenivasan,PSDY & Associates
  48. 48. CA. P.R.Sreenivasan,PSDY & Associates